Many companies contract the services of a public accounting firm to audit their financials. While audits can be expensive and time-consuming, they are sometimes a necessary undertaking for the business. But, how do you know if you fall into this category? If you’re unsure as to whether an audit is right for you, ask yourself these important questions to help you determine how to proceed.
What is an independent audit?
A financial statement audit is a service contracted by a business to have an independent public accounting firm, a third-party, unbiased CPA or a CA examine its financial records and transactions so as to prevent conflicts of interest and ensure the integrity of the audit.
Audits are often initiated or mandated to protect shareholders and potential investors from fraudulent or unrepresentative financial claims. The auditor is typically responsible for:
- Examining financial statements and related data
- Analyzing business operations and processes
- Evaluating company assets for impairment and proper valuation
- Determining tax liability
- Ensuring compliance with tax code and laws
What are the reasons for an audit?
There are several circumstances that would prompt a company to initiate an audit. Consider the following types of businesses and the factors that necessitate independent audits:
- Venture-backed: While not all venture investors require audits, many do. They may want full disclosure of your financial statements conducted by an expert third party.
- Bank-affiliated: Not every bank will mandate an audit of your business financials. However, there are many of a certain size that do require them.
- Seller: Any company planning to sell the business would be wise to arrange for an audit. Virtually all prospective buyers will require one, as they want to ensure your reported results conform to GAAP. Two to three years of audited financial statements may help to increase the sale price.
- Public: If you have aspirations of going public with your business, you’ll need three years of audited financial statements before doing so.
How soon should you think about an audit?
You should initiate an independent audit when:
- An investor or bank requires you to do so
- Your business reaches one to two million dollars in revenue (While many investors may not require an audit initially, they will when the company reaches one to two million dollars in revenue)
- You decide you want or need to raise capital
- You’re thinking about selling the company
If you’re planning to have your 2019 or 2020 financial statements audited, you should be partnering with a financial expert and meeting with your audit team now. It’s imperative that you have adequate time to educate your financial team regarding your business issues, as well as time to deliver on their list of requests for the audit.
What should you do to be audit-ready?
The more prepared you are for an audit, the more quickly and smoothly it can be completed. In fact, preparation begins way in advance of the actual audit and has a lot to do with the way your business handles its financials in the first place. To ensure your business is audit-ready, follow these essential steps:
- Implement a rigorous close process every month. This will help ensure that all transactions, journal entries and financial statements are recorded accurately and in a timely fashion.
- Partner with an experienced financial expert to guide your business efforts. The smartest way to plan, organize and problem-solve your finances is to find the right financial advisor.
- Identify someone who has experience with being audited. In many cases, this will be the company’s CFO. You’ll need to rely on the CFO for coordinating with the audit team, supplying any necessary information and working out potential issues.
- Assimilate all relevant information, documentation and data. A typical audit will require access to the following:
- Major transactions
- Confirmation of large assets (i.e., cash, accounts receivable, etc.)
- Equity documents
- Corporate documents
- Material contracts
- Review of system internal controls
- P&L classification of expenses
What level of service do you need?
Auditing firms provide various levels of service, depending on the needs of your business. It’s critical to understand the value and intrusiveness associated with each level in order to decipher which option is best for you. The Association of International Certified Professional Accountants distinguishes these levels as follows:
- Intended to provide creditors, investors and other outside parties with the highest level of assurance on the accuracy of financial statements
- CPA is required to obtain an understanding of your business’s internal control and assess fraud risk, as well as corroborate the amounts and disclosures included in your financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures and other procedures
- The formal report expresses an opinion on whether the financial statements are presented fairly, in all material aspects, in accordance with the applicable financial reporting framework
- Typically appropriate and often required when seeking high levels of financing or outside investors, or when selling a business
- Intended to provide lenders and other outside parties with a basic level of assurance on the accuracy of financial statements
- CPA performs analytical procedures, inquiries and other procedures to obtain “limited assurance” on the financial statements and provide a user with a level of comfort on their accuracy
- The formal report includes a conclusion as to whether, based on the review, the CPA is aware of any material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework
- Typically appropriate as a business grows and is seeking larger and more complex levels of financing and credit
- Intended for use by lenders and other outside parties who may appreciate the business’s association with a CPA without requiring a level of assurance on the accuracy of financial statements
- CPA is required to read the financial statements in light of the financial reporting framework being used and consider whether the financial statements appear appropriate in form and are free from obvious material misstatements
- Compilation report states that the CPA did not audit or review the financial statements and accordingly does not express an opinion, a conclusion or provide any assurance on them
- Typically appropriate when initial or lower amounts of financing or credit are sought or significant collateral is in place
Ultimately, your company finances require diligent maintenance and expert guidance, regardless of the stage of your business. If you’re not equipped to handle these functions properly, it’s important to seek the expertise of a financial consultant who can provide valuable insight and management.
Begin the conversation by reaching out to our strategic financial professionals. Contact us today.