The most frequent question that arises is, What is an interim audit? Let us understand this concept in detail.
What is an Interim Audit
Interim means a period that is not a full 12 months. For example, 3 months, 4 months, or 7 months will be the interim period. So, it is an audit of the account balances or Financials that do not cover the whole.
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Table of contents
Main Objective of Interim Audit
The main objective of performing the interim audits is for
- Early identification of potential misstatements or deficiencies, if any
- Reduce the audit testing in the final period
- Facilitates the companies to issue annual reports faster to their stakeholders
- The audit team will have enough time to cover the testing. This results in high-quality audits.
There will not be any issue of opinion regarding the auditing performed during the interim period. The interim period audit is essentially the same as the final year-end audit. It’s just that the team conducts the testing in two phases, like 6 months vs. 6 months or 9 months vs. 3 months.
However, there might be some legal or regulatory, internal (management) requirements for performing interim audits. Such scenarios require reporting on the financials, even for an interim period.
Example
Let’s understand the benefits of performing Interim audits with an example. A Small company manufactures radios and television sets. The average monthly sales are $1 million, which is $14 million. Management appoints the Macro audit firms as the auditors for the current financial year.
The Macro Auditor chooses to perform testing altogether during the Final Year-end Audit, or do a part of testing in the interim and the remaining periods if the team decides to conduct testing in two tranches – Interim and final. So, testing the 9 months’ sales before the year-end will be more effective because the audit team will have only 3 months of testing remaining after the year-end. Instead of doing 12 months of sales testing after year-end, testing the revenue transactions in two phases will reduce the audit staff’s workload and ease pressure on the client (Accountant/audit support team). The turnaround for responding will be longer.
Interim Testing Periods
During the financial year, the team performs Planning work like understanding the entity, Risk Assessment, Project Planning, grooming the Audit team, etc. However, testing for either the interim or final audits will start after the end of the period. So, for example, we can only perform testing for the interim period (January to June) from July. Similarly, auditors perform the final testing after December.
How to decide on the testing approach?
Deciding on the testing approach (Interim & Final vs. Final) involves factors such as
- The Date when the entity under audit plans to issue its annual report. Each entity has different deadlines per the respective regulatory authority.
- The audit team requires help from the Accountants and controllers to provide support, such as agreements, invoices, and bank statements, or respond to inquiries. The client support team needs to provide a quick turnaround time to respond to questions or support requests to perform audits quickly.
- Learnings from the entity’s Prior year’s audits. For example, the client team isn’t responsive in timely sending the financial statements. In such a scenario, discussing all those challenges beforehand is best.
Testing performed as part of the interim audit will not be repeated during the final phase. For example, the auditor conducts journal entry testing for the first nine months of the interim audit. Then, the audit team covers the final audit for the remaining three months only.
Frequently Asked Questions
What’s the period of the Interim Audit?
The answer will depend on the requirement. If it comes from internal management, the appointing authority will decide on the period.
Suppose the requirement is part of the annual audit. In that case, the auditors will generally prefer 6 months or 9 months from the beginning of the financial year.
What are the advantages of the interim audit?
Interim Audit results in the following advantages:
- Effective and efficient performance of the audit due to the availability of more time
- Reduces the workload for the audit team at the final audit phase
- Decide the nature and extent of testing to be performed at the Final based on the results of the interim testing
- Increases auditor revenue in case of interim audit requests from internal management or bank/financial institution requirements
- If errors are found during the interim testing, the auditor can efficiently plan the final testing.
- Gives ample time for the new audit staff to provide necessary training and guidance
Is an Interim Audit Necessary?
Interim Audits are not necessary for every client being audited. For example, if the client is very small (Fewer transactions), performing the Interim audits is not advisable. These audits will not take more than 1-2 weeks to close down. However, suppose the number of transactions and clients’ business is quantitatively high. In that case, the auditor needs to consider performing the interim audits.
Conclusion
An interim audit focuses on testing for less than 12 months. Thus, the Interim audit will be part of the entire year’s final year-end audit. There will not be any requirement to issue an audit opinion here. However, the auditors must perform and report on the interim financials if the appointment is driven by internal management, regulatory requirements, or Lenders.
