The most frequent question that arises is What is an Interim Audit. Lets understand this concept in detail.
What is an Interim Audit
Interim means a period that is not a full 12 months. For example, any period like 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 year. Auditor perform the interim audits for 6 months and 9 months as a general practice.
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 at the final period
- Facilitates the companies to issue annual reports faster to their stakeholders
- Audit team will have enough time to cover the testing and thereby resulting in the high-quality audits
There will not be any issue of opinion for the auditing performed during the Interim Period. The Interim Period audit is essentially the same as the Final year-end. It’s just that the team performs 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.
Let’s understand the benefits of performing Interim audits with an example. For example, a Small Company is in the business of Manufacturing Radio and Television Sets. The average number of sales that occur each month is $1 million. Therefore, the total number of annual sales is $14 Million. Management Appoints Macro Audit firms as the auditors of the current financial year.
The macro Auditor chooses to perform testing altogether during the Final Year end Audit (or) doing a part of testing in the interim period and remaining period if the team decides to perform 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 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 more.
Interim Testing Periods
Team performs the Planning works like Understanding the entity, Risk Assessment, Project Planning, Grooming Audit team, etc., during the financial year. However, testing for either interim audit (or) final audit will start after the end of the period. So, for example, we can perform testing for the interim period (January to June) only from July Month. Similarly, auditors perform the final testing after December month.
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. This is because each entity has different deadlines per the respective regulatory authority.
– Audit team requires help from the Accountants, Controllers for providing support like agreements, invoices, bank statements, or responding to inquiries. The client support team needs to provide a quick turnaround time to respond to the questions asked or support requested to perform audits quickly.
– Learnings from the Prior year’s audits of the entity. For example, the client team isn’t responsive in timely sending the financial statements. In such a scenario, its best to discuss all those challenges beforehand.
Testing performed as part of the interim audit will not be repeated during the final phase. For example, the auditor conducts the journal entry testing for the first 9 months during the interim audit. Then, audit team covers the final audit for the remaining 3 months only .
Frequently Asked Questions
What’s the period of Interim Audit?
The answer will depend. If the requirement is from the internal management, the appointing authority will decide upon 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 audit due to 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 institutions requirement
– If any errors are found during the interim testing, then the auditor can efficiently plan the final testing
Is Interim Audit Necessary?
Interim Audits are not necessary for every client being audited. For example, if the client is very small (Fewer transactions), it’s not advisable to perform the Interim audits. 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 need to consider performing the interim audits.
An interim audit is an audit focused on testing for a period lower than 12 months. So, the Interim audit will be part of the entire year’s final year end audit. So, there will not be any requirement to issue an audit opinion here. However, the auditors need to perform and report on the interim financials if the appointment is driven by internal management, regulatory requirements, or Lenders.