Definition of Interim Audit
An interim audit is defined as an audit that is conducted between two financial years, with the prime objective of checking the transactions that have occurred between the financial year-end of the last year, and the date on which the interim audit is being conducted. An interim audit is conducted in order to compress the period that is needed to conduct the final audit.
Interim Audits also help the organization to ensure that the financial statements are issued in due time in a proper manner. From the auditor’s perspective too, auditors are able to save a substantial amount of time during the final year-end audit. This is because a significant amount of work has already been executed earlier.
Therefore, the interim audit can be referred to as an examination of books of accounts with the main objective being to double-check that the transactions have been recorded correctly and the working of the company is legally acceptable before the statutory audit is conducted. Therefore, it is defined as an audit that is ordered between two financial years and its main objective is the early identification of the underlying threats, as well as taking corrective measures at a reasonable state.
Objectives of Interim Audit
An interim Audit is conducted between two financial years with the following underlying objectives:
- An interim Audit is conducted in order to find out the profit of the said period, along with determining if the company pays interim dividends or not. This is because the interim dividend payment is perceived, along with the value of investors, as well as shareholders.
- Interim Audit helps companies identify and detect fraud or any other inconsistencies at an earlier stage. Since it delves a deeper insight pertaining to the work of the employees, it helps improve the efficiency of employees quite substantially.
Therefore, it can be seen that Interim Audits serve a two-fold purpose: from the perspective of the company, as well as from the perspective of the auditors. From the perspective of the company, interim audits imply that the company is able to get a proper idea pertaining to the extent to which financial statements are well-kept.
On the other hand from the perspective of the auditors, interim audits help them plan and execute the audit process with relative ease. This is because by using the interim audit, they are able to plan the next phase of the audit efficiently, so that resources and conserved, and the final year-end audit is less time-consuming.
Characteristics of Interim Audit
Interim Audit has a few salient characteristics that set it apart from conventional audits that take place across the year. The characteristics of the interim audit are as follows:
- It is conducted between two periods – which are not year-ends. Normally they are conducted after every quarter, or after every 6 months.
- It covers ground similar to the ground that is covered in typical year-end audits, therefore organizations are able to get a clear idea regarding their financial projections over the course of time.
- An interim audit is conducted in order to determine the book value of the existing shares of the company – hence, it helps if the company needs to revalue or reassess its position during the course of time.
- The organization that undertakes the interim audit is conducted and considered to be more reliable as compared to organizations for whom the interim audit is not conducted.
How is the Interim Audit Conducted? (Procedure of Interim Audit)
The procedure of Interim Audit differs across various different business models and cycles. Factually, the scope and extent of an interim audit depend on the volume of transactions of the organization. However, in most cases, an interim audit is conducted using the following strategies:
- Analyzing the organization – estimating the business model, and how it works.
- Analyzing the hierarchy of the organization – analyzing the decision-making tools, a chain of command, and communication within the organization.
- Gathering information from external, and internal persons about the business.
- Having a conversation pertaining to the top management of the audit committee of the organization.
- Once the conversation is carried out with the top management or the audit committee, the audit plan, and scope of work are defined.
- The management representation letter is used in order to fetch the data and the details are then subsequently presented in order to reflect the audit procedures.
- Conducting the actual audit itself in accordance with the standards put forth by the auditing standards committee.
- Documenting the working papers that the auditor gathers when conducting the audit process.
- Considering the impact of material misstatement on the business on the financial transactions.
Importance of Interim Audit
The applications of interim audit from the perspective of the company is as follows:
- Determining the amount of dividend that the management plans on declaring as part of profits that are earned by the company. In other words, an interim audit acts as an aid in deciding on interim dividend payouts by the company.
- The greatest advantage of an interim audit is the fact that it greatly enables organizations to check the status of internal control within the company. Since it hints towards areas that need improvement from the perspective of the company, it can act as an aid in helping companies to rectify their mistakes.
- An interim audit helps organizations in increasing the efficiency, as well as the effectiveness of the management in its operations. This implies that interim audits are able to help companies get better insight into their own functions so that they are able to decide the way forward accordingly.
- Interim Audits are less expensive compared to other financial audits. It also helps the auditor in working and streamlining their operations in a proper manner.
- From the employee’s perspective, interim audits help employees feel confident that their work is being checked by the auditor. Hence, the efficiency, as well as effectiveness in the work increases significantly.
- From an external stakeholder’s perspective, interim audits imply that the operations, as well as financials for the company, are double-checked by a third party. Hence, they feel it safer to invest in the company.
- It significantly reduces the chance of fraud since books are analyzed and subsequently checked for better outcomes.
Limitations of Interim Audit
Despite the fact that interim audit does help companies in numerous different ways, it can be seen that there are certain limitations of interim audit that should also be accounted for. These limitations are as follows:
- Interim Audit is only used by the management, and hence, it does not have any connection with the investors or lenders of the company.
- Interim Audit only covers the financial part of the organization. However, other aspects of the business also need to be accounted for in order to get a complete holistic analysis.
- There is an inherent risk of data manipulation during interim audits, in order to hide things from being reported or detected.
- It might prove to be counterproductive for employees since they are supposed to cooperate with the auditors during the interim audit phase.