Preliminary audit definition
/What is a Preliminary Audit?
A preliminary audit is fieldwork performed by auditors before the end of the period under examination. By engaging in this advance work, the auditors can reduce the volume of activities that must be completed after the client has closed its books. No audit report is issued as part of a preliminary audit; instead, this work should be considered an early phase of the regular audit that an organization undergoes.
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Preliminary Audit Activities
There are several tasks that can be completed during a preliminary audit, including the following:
Examination of client controls. By gathering information about controls, the auditor can decide how much reliance to place on a client’s system of internal controls. A robust set of controls can allow an auditor to significantly reduce the amount of audit activities.
Preliminary analysis of account balances. This analysis informs the auditor about which account balances are large enough to warrant special attention during the audit, while also highlighting balances so small that they can be safely ignored.
Advantages of a Preliminary Audit
Conducting a preliminary audit has the following benefits:
The auditors shift work out of their core work period, when many clients want to have audits completed.
The audit staff can be kept occupied during slack periods.
The auditors can issue opinions faster than might otherwise be the case. This is a particular concern for public companies, which must issue audited financial statements by mandated deadlines.
The auditors can examine the books and controls for a new client, which helps them to plan for the regular audit later in the year.
Example of a Preliminary Audit
A mid-sized manufacturing company is preparing for its annual financial statement audit. The external audit team begins the preliminary audit by meeting with management to understand the company’s operations, review internal controls, and identify significant risk areas such as inventory valuation and revenue recognition. During this phase, the auditors also examine prior year audit files, industry trends, and regulatory changes that may affect financial reporting.
They perform analytical procedures—such as comparing current period financial ratios to prior periods or industry benchmarks—to detect unusual fluctuations that warrant closer inspection. Additionally, auditors assess the company’s control environment, evaluating the tone at the top, segregation of duties, and the effectiveness of the internal audit function if present. Based on this information, the audit team develops a risk-based audit plan, determines materiality thresholds, and allocates staff resources accordingly. They may also request preliminary documentation such as trial balances, key contracts, and board meeting minutes. The preliminary audit sets the foundation for efficient, focused fieldwork by identifying high-risk areas early and ensuring auditors are adequately prepared to test controls and validate balances.