What Is a Financial Statement Audit and Why Get One?
For most people, the word “audit” doesn’t bring many pleasant thoughts to mind. It’s a word that makes you think about pain, embarrassment and annoyance. But business owners shouldn’t be afraid of financial statement audits at all.
In fact, completing the audit process adds credibility to your company’s stated financial position and performance story, proving that you’re doing things right.
What Is a Financial Statement Audit?
An audit is an examination of a company’s financial statements and accompanying disclosures performed by an independent auditor. At the end of the audit, the auditor produces a report that gives an objective appraisal of the business’s financial position and expresses an opinion on the fairness and completeness of the company’s financial statements and related material.
What Is the Purpose of the Financial Statement Audit?
Businesses have a constant need to prove they are financially healthy. For example, businesses must establish and maintain relationships with lenders, suppliers and other third parties to keep the business running. Typically, lenders will need to see audited financial statements before extending credit.
Many clients seek our auditing services for exactly this reason. Suppliers may occasionally insist on seeing audited financials as well, such as when a business requests a large amount of trade credit.
Large publicly traded companies must regularly file audited reports with the Securities and Exchange Commission (SEC) and give shareholders access to updated, accurate information to guide their investment decisions.
Finally, another purpose of an audit is simply to keep the business in compliance with today’s increasingly complex accounting frameworks. Generally accepted accounting principles (GAAP) are constantly evolving, and audits help make sure companies are keeping up.
Stages of a Financial Statement Audit
1. Planning and Risk Assessment
This initial step is about the auditor gaining an understanding of your company and the landscape and environment in which it operates. The auditor will research the company and understand any regulations or particular risks you face.
With this understanding in mind, the auditor will be able to better assess the risks that might impact your financial statements and reporting. A timeline for completing the audit will also be developed.
2. Understanding and Testing Internal Controls
Internal controls are the rules and procedures a company uses to ensure the integrity of its financial and accounting information, promote accountability within management, and prevent fraud. The auditor will evaluate your internal controls, focusing on key factors such as:
- The personnel involved
- Proper authorization
- Safeguarding of assets
- How duties are assigned
If internal controls are found to be highly effective, then later parts of the audit might be scaled back. But if internal controls are ineffective, there is a higher risk of a material misstatement appearing in the financial documentation. The auditors will need to use other procedures when examining the financial statements.
3. Substantive Procedures (Fieldwork)
This step is the “meat” of the audit. Depending on the complexity of the company, this stage can take anywhere from a single day to several months. Typically, the auditor will send a person or a team to the business to spend time on-site during this phase.
The team will speak with management, including the CEO and board of directors, as well as others within the organization inside and outside the accounting department.
During the fieldwork stage, the auditor will observe and analyze the company from a variety of different angles to determine whether the company’s financial statements line up with reality. Some examples of procedures used to accomplish this include:
- Cash: Review bank reconciliations, count cash-on-hand and issue bank confirmations
- Securities: Confirm tradable financial assets, review securities transactions and verify the company’s market value
- Accounts payable: Search for unrecorded liabilities
- Accounts receivable: Confirm account balances and test year-end sales and cutoff procedures
- Revenue: Analyze sales documents, history of sales returns and transactions
- Expenses: Examine expense documentation, compare it to prior years and confirm unusual expenses
- Debt: Verify debt with lenders and analyze lease agreements
- Inventory: Observe physical inventory at all locations, test shipping procedures, examine invoices, compute overhead and more
- Fixed assets: Observe the assets and review purchase agreements, leases, and appraisal reports, and then calculate depreciation and amortization
After the on-site work is done, the auditing team will go back to their office to wrap things up. Any lingering questions that weren’t answered during the fieldwork will be followed up on.
4. Delivery of the Audit Report
The auditor will deliver a final report that contains the “auditor’s opinion.” This can be thought of as the “bottom line,” or the final conclusion that the auditor makes regarding your financial statements. There are four possible opinions:
- Unqualified opinion: Also called a “clean report,” this means no material problems were found and your accounting and operations are satisfactory.
- Qualified opinion: The auditors found a problem with a specific transaction or aspect of the statements and can’t be fully confident that the accounting for that specific aspect is correct.
- Disclaimer of opinion: This rare opinion is usually given only when the auditors couldn’t determine whether the financial statements were presented fairly or not. This might happen if management didn’t cooperate fully.
- Adverse opinion: The auditors found evidence of serious, material misstatements in the financials, possibly rising to the level of fraud. Adverse opinions are major red flags for investors, lenders and others.
Why Go Through All of This?
This entire financial statement audit sounds like a lot of work, and you’re right, it is. So why do it at all? Aside from lenders and investors requiring it, there are plenty of other reasons why getting a financial statement audit is beneficial.
The audit helps you see the bigger picture of your company. You’ll be able to better understand your financial position, which helps you make better decisions about how you should operate in the future. Audits can also help you spot fraud and neutralize it. Many business owners had no idea that an employee was defrauding the company until an audit uncovered it.
Finally, audits improve your reputation and credibility in the event you want to sell the business. Potential buyers will want to know that the company is stable and profitable, and audited financial statements are the best proof of that.
Talk to Us About Auditing Your Financial Statements
Boeckermann Grafstrom & Mayer provides financial statement auditing services to clients in a wide range of industries. Our audits are designed not just to verify your financials, but to help you improve your procedures and be a proactive business owner.
To request more information, send us a message. We have offices in Minnesota, Colorado and Florida and serve clients around the country.