Going through a financial statement audit can sound like a daunting task, especially if your company has never been audited before. Why are we being audited? What does the process entail? What do we do once the audit is complete?
These are all valid and common questions asked by first-time audited companies. The process may seem intimidating, but it doesn’t need to be. The tips below can not only make having an audit seem more manageable, but they can also help you maximize the potential benefits to your company after the audit.
Why Do Our Financial Statements Need Audited?
A financial statement audit provides reasonable, but not absolute, assurance that the financial balances your entity is reporting for the period are materially correct.
There are various reasons you may need an audit, the most common of which is to provide assurance to an external debtor or investor. If this is your first audit, odds are your company took on debt or an investment from a third party within the last year. Debtors often request financial statements so they can be confident your company will be able to pay back the money you borrowed. Investors also often require financial statements to keep tabs on the profitability of their investment.
While taking on debt or investors are the two most common reasons for an audit, they aren’t the only ones. Companies can also request an audit without any external requirement. Management may want to improve the company’s credibility with customers and vendors, assess the health of internal controls, or simply get an outsider’s perspective on the company’s operations.
In all scenarios, it is vital for the users of the financial statements to be able to trust those statements are materially accurate. An audit provides that assurance.
How Does the Financial Statement Audit Process Work?
Ok, you have been told — or decided — you will be audited. What’s next?
Finding an Auditor that Fits Your Needs
There are various characteristics that can define what you are looking for in an auditor, and these are prioritized differently for every company, depending on preferences. Consider these initial questions when conducting your search:
- What is the audit firm’s reputation?
- Are the auditors able come to our office if desired?
- Does the firm have the necessary skills, services and industry depth to fit our needs, both now and as we grow?
- Can the firm perform other key services for us, such as tax planning/preparation, M&A advisory, IT strategy, etc.?
It is important to find the right audit firm for you, as the relationship should be a cooperative one rather than simply transactional or, even, worse, adversarial. You should be able to consider your auditor one of your advisers, helping to provide advice to and best practice recommendations for your business.
Preparing for and Conducting an Audit
Once you have selected your audit firm, you can begin preparing. When you think of the audit process, you may have an image of one, sometimes frantic, month of communication back and forth with auditors after year-end, but that should not be the case. Ongoing and strategic communication between your company and the audit firm, before the audit starts and throughout the year, will make for a much smoother and valuable process for both parties.
Planning and Risk Assessment
Your audit starts with the planning and risk assessment phase, usually performed prior to year-end. During this phase, your audit firm will perform inquiries and walk through various processes to best understand your company’s operations — namely its financial control environment — and the areas of the balance sheet and income statement most susceptible to risk of a material misstatement (an error or omission that can impact information for those who use your statements to make decisions).
Audit Testing/Fieldwork
Your auditors will use the findings from the planning and risk assessment phase to develop their audit plan. The plan will detail the testing they will need to perform during the year-end testing phase, often called “fieldwork.”
The year-end testing, or fieldwork, phase will be the heaviest lift for both parties. If your company has a material amount of inventory, the audit team will likely want to observe your year-end physical inventory count. The remaining bulk of the testing will consist of the audit team requesting schedules and listings to support the balances of your various general ledger accounts that the team deems to be material to the financial statements. From there, the team will make sample selections, requesting invoices, check copies and other supporting documentation and test them in a variety of ways. The depth of samples and testing is dependent on the determined risk of material misstatement and materiality of the related financial statement item.
