Financial audits take all kinds of forms. Sometimes, they are a simple review of your financial records so that you can present them to a lender with confidence. Other times, they take an exhaustive look at your finances to ensure regulatory compliance. The approach varies based on the objectives of the audit, but in all cases, you need to be prepared.
Whether you’re getting ready for an annual audit or your first audit ever, here is what you need to know.
What is a Financial Audit?
A financial audit is an assessment of your financial records for accuracy. There are many different types of audits. They range from compiled financial reports to a full-scale analysis of your financial records.
Internal audits help a company get a sense of potential problems with its financial records or accounting processes. Third-party audits give external stakeholders (investors, lenders, shareholders, etc) insights into a company’s financial statements.
Why Are Financial Audits Important?
Financial audits give internal and external stakeholders reassurance about the state of an entity’s financial records. Public companies, retirement funds, and other entities must have audited financial statements, but audit requirements vary for different companies in different industries.
For instance, while public companies are required to submit to audits under the rules of the SEC, private companies don’t have this rule, but they may need audit services to be compliant with insurance, tax, or vendor requirements.
What is the Financial Audit Process?
A financial audit consists of three main stages: preparation, fieldwork, and reporting. During the preparation stage, the auditor plans the audit based on the requester’s needs, and they outline the scope of the audit. Fieldwork is when the auditor assesses the financial records and other relevant information. Finally, at the end of the process, they generate a report. Here’s a breakdown of the steps in these three stages:
- Defining the audit — You let the auditor know what type of audit you need, or you explain your objectives and the professional auditor guides you toward the best option for your situation.
- Getting to know the subject of the audit — The auditor learns about the financial environment by asking about the company’s industry, the regulations it must follow, how it handles accounting, and its internal controls.
- Identifying benchmarks or audit criteria — Generally, the auditor will compare the company’s practices to the Generally Accepted Auditing Standards (GAAS) but if the audit goes beyond financials, they may identify other benchmarks for assessment.
- Calculating the risk assessment — The auditor creates a formula to detect the likelihood of finding inaccuracies and the risk of not detecting material mistakes. They consider the detection process, inherent risk, and control risk. Together, these three elements create the audit risk.
- Outlining objectives — Before moving forward, the auditor ensures they understand the goals of the entity that requested the audit.
- Selecting an audit method — Depending on the objectives, the auditor may sample records, observe processes, interview people, analyze changes in the records, or take a combination of approaches.
- Developing a budget — During this step, the auditor lets the client know how much the audit will cost based on the scope, methods, and goals identified in the previous steps.
- Confirming the plan — This is the last step of preparing for an audit. Once the auditor ensures everyone is on the same page, they start the audit.
- Reviewing information and accounting systems — The auditor assesses the systems you use to track financial information.
- Looking at recording-keeping policies — They also assess how you create your records. Who enters information? When do they do so?
- Assessing internal policies — Do you have policies that put your company at risk for theft or mistake? The auditor looks for those issues at this stage in the game.
- Comparing internal records — They make sure that your records make sense and are accurate. If they discover mistakes, they see if there’s a straightforward way to fix them.
- Analyzing tax returns — Then, they ensure that your tax returns have been prepared correctly.
- Testing controls — Finally, they test your internal controls to make sure that they work. They may develop recommendations for improvement based on the results of this stage.
- Reviewing the audit — The auditor looks through all of the records they have collected during the audit, and they analyze the information in front of them. They lay the groundwork for their report.
- Reporting — Finally, the auditor presents their findings through a report. The report details the accuracy of your financial records. It explains if there are issues. The auditor may also give you ideas or improvements.
The exact audit process varies based on the type of audit you select, the size of your business, and the complexity of your records. Before signing on for an audit, ask your prospective auditor to outline the process so that you know what to expect.
How Do You Prepare for a Financial Audit?
So, how do you get ready for this big process? How do you establish the right foundation to ensure that the audit goes smoothly and the auditor has all the information they need? Here is what you need to do:
- Make sure the numbers on your opening balance sheet match the balance sheet numbers from the previous year. This includes reconciling cash accounts, ensuring equity accounts were moved forward correctly, and fixing inaccuracies on the balance sheet.
- Ask the auditor what information they need. Get a list of what they want to see during fieldwork.
- Update descriptions of internal controls if you have changed any processes since you drafted the controls.
Finally, make sure relevant staff members are available to answer questions as needed. For instance, you don’t want to schedule an audit when your bookkeeper or head accountant is on vacation (unless you suspect them of fraud, of course).
DHJJ is Here to Help!
At DHJJ, we offer a wide range of audit and assurance services for our clients, and we customize our offerings to their unique needs. We can also support your business through bookkeeping, accounting, and CFO services. To learn how we can help you, contact us today.
