Sunday, March 30, 2014

Managerial Accounting : Budgeting - its implication to auditor

We would like to discuss some managerial accounting matters that are related to our audit. The first matter we want to discuss relates to the budgeting process of your audit client. Some blog readers may wonder, given that budgeting is likely to be related to management accounting, hence, not really related to financial accounting. Hence, as auditor, we should not be overly concerned about the budgeting process of the audit client. The truth is, budgeting process is part of the internal controls and assessments carried out / ought to be carried out by management of audit client - this has a significant impact on the extent of our audit and key areas of audit focus.

A comprehensive budgeting process allows management to understand the financial results of the company, identify significant developments not expected, identify key risk areas and identify unusual transactions recorded but not identified. Comparing the actual results against budgeted results and developing understanding on the variance, management is able to make better decision in its resource allocation.

An audit client with no budgeting process in place indicate a relatively higher risk profile of the audit client - as your audit client may not be able to gain the complete picture of the financial affairs of the Company. At this juncture, auditor may have to extend the testing of entity-level controls to review for absence of mitigating controls. Also, a higher level of professional skepticism need to be exercised during the course of our audit to detect any unusual transactions, for which a budgeting process may assist to discover.

The extent of our audit testing may be reduced, if the audit client's entity level controls, including: budgeting process is working effectively. This is because, if the client's process is able to identify risks / unusual transactions - we would be able to rely on the client's process on certain areas.

Please feel free to contact us if you need service on how to develop a comprehensive budget. Please drop us a note at

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