What small business owners need to know to prepare for their first financial statement audit.
When you hear the word ‘audit’ what comes to mind? For most, it is a word that can quickly invoke feelings of anxiety or fear. We picture an IRS agent in a suit, ready to pounce and take more of our hard-earned money and time. But what many outside of the accounting industry often fail to realize is that auditing is not a task only carried out by the IRS. In fact, there are actually many different types of audits, and they have the potential to help your company save time and money through the business insights that they can uncover.
The key to an efficient audit is communication and preparation. Not only will this result in less time needed from staff, but it also can result in a lower audit cost for you. So whether your business is about to have its first audit or you want to make your current audit process more efficient, this guide can help to empower you with a good general overview of what a financial statement audit entails.
Knowledge is power! So let’s start with the basics…
What is a financial statement audit?
A financial statement audit is an independent examination of a company’s financial records and related disclosures by an independent third-party. The auditor’s goal is to express an opinion as to whether the financial statements are, in all material respects, presented fairly and in conformity with generally accepted accounting principles (GAAP).
Financial statement audits are one of the most common types of auditing. Many companies have an audit as a routine task that their accounting department prepares on a yearly basis.
Why is it necessary?
Generally, companies that are publicly traded on a stock exchange are required to have an annual financial audit. These audits help to provide stakeholders with assurance that the company’s financial statements are fairly presented in conformity with GAAP. It also ensures that stakeholders can make informed decisions based on accurate financial information.
Depending on the size and complexity of the company, other entities, such as private companies and nonprofit organizations, may also either be required or elect to have an audit. For these, an audit can help to identify potential areas of risk, ensure accurate and reliable financial reporting, and provide an independent assessment of the company’s financial position. Having a financial audit can also help to build credibility and trust with potential investors, lenders, and customers.
What is the process?
As a small business owner, it is important to understand the four phases of a financial statement audit and the possible conclusions that the audit could reach. An audit of your financial statements helps to ensure accuracy and provides an independent opinion of your financial reports.
In conducting the audit, the auditor’s primary objectives are to:
- Obtain reasonable assurance regarding whether the financial statements are free of material misstatement.
- Issue a report that expresses an opinion on the fairness of the financial statements.
The four phases of a financial statement audit include:
- Internal Controls
PLANNING: The auditor develops an overall audit strategy and obtains an understanding of your business. This includes a review of your organization’s internal controls and the development of an audit plan. The auditor and their team are able to perform this phase with minimal time required of the company.
INTERNAL CONTROLS: The auditor gathers information regarding the processes and procedures the company currently has in place to ensure the accuracy and integrity of their financial records. This phase is typically the lengthiest and requires a significant amount of resources from the company’s accounting and finance staff.
TESTING: The auditor performs tests to ensure that the financial records are accurate.
REPORTING: The auditor will issue a report with their opinion on the financial statements.
There are four possible conclusions that the financial audit could reach:
- Unmodified Opinion: The auditor has no material reservations about the financial statements and issues an opinion that they are presented fairly.+
- Modified Opinion: The auditor has specific, material reservations about the financial statements and issues an opinion that they are presented fairly, in all material respects, except for the specified area(s).
- Adverse Opinion: The auditor has significant reservations about the financial statements and issues an opinion that they are not presented fairly, in all material respects.
- Disclaimer of Opinion: The auditor is unable to form an opinion on the financial statements due to a lack of evidence or a significant uncertainty.
How can small business owners better prepare for their first audit?
For small businesses an audit can certainly seem like a daunting task, but with the right preparation an audit can uncover key insights to help your business grow.
Maintaining audit readiness throughout the year ensures that your financial data is available and trustworthy at all times, not just in the months leading up to the end of the fiscal year. This allows you to make better budgeting and financial decisions with more accurate information. Monitoring risk levels is much simpler when you are always aware of your financial situation – meaning that any potential risks can be addressed swiftly.
If we could offer small business owners one piece of advice, it would be to start early! An audit takes a lot of work to complete, but can pay in dividends if done well.
Preparing for your first audit? Check out our audit readiness checklist to ensure your company is set up for success.