Demystifying the Audit Process
A financial statement audit can be a daunting process, especially for companies that have never had one and are unsure what to expect. Despite the anxiety that the word “audit” may incite, it’s important to understand the benefits an independent auditor provides to business owners and management. Along with discovering errors in your financials, they can help identify potentially costly weaknesses in internal controls and give lenders and other stakeholders confidence in your financial reporting. To help our clients, prospects and others feel less apprehensive about their financial statement audit, we have provided an overview of the typical process below.
1. Accepting the engagement
Once your company has selected an audit firm, you must sign an engagement letter. Then your auditor will assemble your audit team, develop a timeline, and explain the scope of the audit inquiries and onsite “fieldwork.”
2. Assessing risk
The primary goal of an audit is to determine whether a company’s financial statements are free from “material misstatement.” Management, along with third-party stakeholders that rely on your financial statements, count on them to be accurate and conform to U.S. Generally Accepted Accounting Principles (GAAP) or another accepted standard.
Auditing rules require auditors to assess general business risks, as well as industry- and company-specific risks. The assessment helps auditors 1) determine the accounts to focus audit procedures on, and 2) develop audit procedures to minimize potential risks.
Based on the risk assessment, the audit firm develops a detailed audit plan to test the internal control environment and investigate the accuracy of specific line items within the financial statements. The audit partner then assigns audit team members to work on each element of the plan.
4. Gathering evidence
During fieldwork, auditors test and analyze internal controls. For example, they may trace individual transactions to original source documents, such as sales contracts, bank statements or purchase orders. Or they may test a random sample of items reported on the financial statements, such as the prices or number of units listed for a randomly selected sample of inventory items. Auditors also may contact third parties — such as your company’s suppliers or customers — to confirm specific transactions or account balances.
5. Communicating the findings
At the end of the audit process, your auditor develops an “opinion” regarding the accuracy and integrity of your company’s financial statements. In order to do so, they rely on quantitative data such as the results of their testing, as well as qualitative data, including statements provided by the company’s employees and executives. The audit firm then issues a report on whether the financial statements 1) present a fair and accurate representation of the company’s financial performance, and 2) comply with applicable financial reporting standards.
Understanding the audit process can help you facilitate it more easily. If your company doesn’t issue audited financials, this understanding can be used to evaluate whether your current level of assurance is adequate — or whether it’s time to upgrade. If you have questions about preparing for a financial statement audit or if you are looking for an independent auditor, JLK Rosenberger can help. For more information, call us at 972-931-6803 or click here to contact us.