How do auditors verify account balances and transactions?

Audit season is a critical time for finance professionals as organizations aim to ensure their financial statements are accurate and compliant. For auditors, gathering substantive evidence is a central part of this process, allowing them to provide an informed opinion on an organization’s financial standing.

If you’re preparing for an audit—or simply curious about how the process works—this guide dives into the key methods auditors use to verify account balances and transactions. From analyzing original source documents to recalculating financial data, understanding these steps can help you streamline your next audit and prepare your team effectively.

Why Understanding Audit Procedures Matters

For business professionals, auditors aren’t the “bad guys” they’re sometimes perceived to be. Instead, they act as trusted advisors, ensuring sound financial practices and helping companies make informed decisions. This blog aims to break down some of the most common ways auditors verify account balances and transactions in a clear, accessible way to demystify the process and create a solid foundation for collaboration.

1. Verifying Through Original Source Documents

Auditors often rely on third-party documentation to verify the accuracy of an organization’s financial records—a process called vouching. But what does this look like in practice?

Here’s an example:

• Fixed Assets: To confirm the existence of assets like vehicles or equipment listed on the company’s balance sheet, an auditor might request an invoice from the seller. This cross-comparison ensures that the asset purchase was documented accurately in the company’s accounting system.

This type of evidence is especially critical in areas where misstatements or errors are common. By leveraging original documents such as invoices, contracts, or receipts, auditors can directly evaluate the validity of reported transactions.

How You Can Prepare:

• Organize and digitize crucial documents so they’re easy to retrieve during the audit fieldwork phase.
• Maintain a clear record of supporting documentation for large purchases, loans, or other significant transactions.

2. Physically Inspecting Assets

The phrase “seeing is believing” holds weight in an audit. Auditors frequently perform physical inspections to ensure the reported existence of tangible assets. Inventory, in particular, is a key focus.

Common Inventory Audit Procedures:

• Physical Inventory Counts: Auditors might observe or participate in inventory counts to verify totals claimed on financial records.
• Recording Process Inspection: Verification of how incoming and outgoing inventory is logged ensures the process is accurate and consistent.
• Obsolescence Reviews: For inventory that may no longer be viable, auditors assess whether it’s properly accounted for in the financial statements.

Pro Tip:

Before an audit, conduct an internal inventory count to reduce discrepancies and identify areas of concern ahead of time.

3. Sending Confirmation Letters

Confirmation letters are a powerful tool in an auditor’s arsenal, used to validate account balances and transactions directly with third parties. These requests typically focus on critical areas like cash accounts, accounts receivable, accounts payable, and employee benefit plans.

Types of Confirmations:

1. Positive Confirmations: The recipient is asked to confirm the information directly, agreeing or disagreeing with the data provided.
2. Negative Confirmations: A response is only needed if the recipient disagrees with the information presented.
3. Blank Confirmations: These requests provide no pre-filled data, asking the recipient to complete the form based on their records.

Modern Advancements:

While confirmation letters were traditionally sent by mail, electronic confirmations have streamlined the process. Today’s methods include:

• Secure email requests submitted directly by the auditor.
• Third-party platforms that automate confirmations (often required by major financial institutions).

Make sure your records match up before these confirmations go out—it reduces back-and-forth and ensures speedier resolutions.

4. Leveraging External Market Data

For assets valued or traded in external markets, auditors turn to publicly available data to verify their reported amounts. This is especially common for investments and inventory.

Examples of Market-Based Verification:

• Marketable Securities: Auditors use current market prices to validate the value of short-term investments reported on the financial statements.
• Inventory Valuation: Comparing prices of sample inventory items to publicly available pricing sheets ensures they’re recorded at the lower of cost or market value.

Tip for Businesses:

Regularly update your records with current market data so you’re prepared to provide substantiated evidence of values during the audit process.

5. Recalculating Critical Figures

Sometimes, the best way for auditors to ensure accuracy is to do the math themselves. Recalculations involve independently verifying a company’s in-house financial schedules or reconciliations.

Common Areas for Recalculation:

• Bank Reconciliations: Ensuring balances align with bank statements and recording any discrepancies.
• Payroll Schedules: Recalculating overtime, benefits, and tax payments to confirm accuracy.
• Depreciation Schedules: Verifying the organization’s methodology aligns with accounting standards.

Accuracy is critical in these calculations—not just for passing the audit but also for maintaining trust with stakeholders.

How to Streamline Your Audit Process

Preparing for an audit doesn’t have to be a headache. By understanding the various ways auditors verify financial information, you’ll be better equipped to anticipate their requests and minimize disruption.

Here are a few best practices:

• Proactive Communication: Meet with your auditors ahead of time to clarify what evidence they’ll need and why.
• Organized Documentation: Build a centralized repository for your team to quickly access receipts, contracts, and other key documents.
• Stay Transparent: If discrepancies or concerns arise, address them openly with your auditors. A collaborative approach leads to a smoother process.

Empowering Your Business with Confidence

Auditing isn’t a task to fear—it’s an opportunity to validate your processes and gain valuable insights. By understanding the methods auditors use, you position your organization to not only meet compliance standards but also improve operational and financial efficiency.

At SD Mayer & Associates, we believe in making financial clarity accessible and intuitive. Whether you’re preparing for an audit or seeking innovative ways to optimize your business, our experts are here to guide you every step of the way.

Reach out today to discuss how we can support your organization through its next audit season and beyond.