A financial statement audit is the examination of your finances and accompanying materials by a third-party auditor. From this audit, a report is created, the purpose of which is to add credibility to the stated financial position and performance of your business. But what exactly goes into these audits and does your business need one? We will answer all your questions below.
Why Do I Need a Financial Statement Audit?
Lenders usually require an audit of your financial statements before finalizing any agreements. Consequently, if you have a business that requires loans or wishes to continue operating, you must complete one of these audits. Audits are also often a result of an ownership group that is not active in the business to gain comfort and reliability on the financial statements of the Company. Private franchisor companies are also subject to a financial statement audit to be included in their franchisor disclosure documents.
Because an audit of this nature is the most expensive type of financial statement exam, many companies attempt to cut corners and undergo a financial review or compilation instead. However, it is important to note these options are only viable replacements if the report recipients find it acceptable.
Be sure to clarify this important aspect with your lender or other parties before deciding. If you choose the wrong option, restructuring your finances may cost you more time, hassle, and difficulties later.
What is the Financial Statement Audit Process?
There are several basic steps required during the process of a financial statement audit that will take place. Below we will outline the steps.
Step 1: Planning and Risk Assessment
This step involves gaining an understanding of your business and the environment in which your business operates. From there, the auditor will use this information to assess whether there may be risks that could impact your financial statements or the validity of your reporting.
Step 2: Understanding Internal Controls
Next, your auditor will perform walkthroughs to gain an understanding of your internal controls, concentrating on key factors such as personnel involved, proper authorization, safeguarding assets, and segregation of duties. Authorization refers to when a person of authority gives permission for an action to take place and segregation of duties is the assigning of different steps in a process.
By gaining an understanding of the internal controls of your business, the auditor can tailor the audit procedures to be most effective.
Step 3: Substantive Procedures
The fieldwork step involves examining many different procedures and financial components, typically at the client location. Your auditor will create an in-depth report of important considerations, such as:
- Cash: Auditor will issue a bank confirmation and verify outstanding items on your bank reconciliation.
- Marketable Securities: Auditors will confirm tradable financial assets, review transactions, and verify the market value of your business.
- Accounts Receivable: When auditing your accounts receivable, account balances will be confirmed while year-end sales and cutoff procedures are being tested.
- Inventory: In addition to observing the physical inventory count, an auditor will confirm other location’s inventories, test shipping and receiving cutoff procedures, examine paid supplier invoices, test the computation of overhead, review current production costs, and more.
- Fixed Assets: Observe assets, review purchase and disposal authorizations, review lease documents, examine appraisal reports, recalculate depreciation, and amortization.
- Accounts Payable: Your auditor will perform a search for unrecorded liabilities.
- Accrued expenses: By examining payments and recomputing accruals, your auditor will compare the current balances to prior years.
- Debt: The auditor will confirm your debt with lenders, review leasing agreements if any exist, and review any references found within your board of directors meeting minutes.
- Revenue: Revenue is determined by looking through sales documents and reviewing transactions, history of sales returns, and allowances.
- Expenses: Finally, your auditor will examine your documentation of expenses, review transactions, and confirm any potentially unusual expenses with your suppliers.
Step 4: Financial Statement Deliverable
The final step involves drafting financial statements, including all required footnote disclosures. Financial statements typically include the balance sheet, income statement, changes in shareholder’s equity, and cash flows. Accompanying the financial statements will be footnote disclosures that discuss accounting policies and summarizes major company activities including but not limited to, information on how revenue is recognized.
Additionally, in the event we uncover internal control suggestions, we will address a separate letter to those charged with governance with our recommendations.
DHJJ: Your Financial Statement Audit Guide
At DHJJ, we want to give you confidence your business is strong. By delivering a complete financial picture, our team can help you make more productive business decisions and plan for the future. If you require a financial audit, DHJJ is here to help you prepare or conduct the audit ourselves. Our efficiency during the planning stages and the quality of delivered financial statements helps make the requirements of financial audits a beneficial tool that uncovers vital information for your business.
You can learn more about our audit and assurance services by visiting us online. To get in touch with us, call 630.420.1360.