What is a financial statement audit? If you are a business owner who is feeling overwhelmed by the prospect of facing a financial audit, you’re not alone – many are intimidated by what it involves and what to expect from the process. The truth is, audits don’t have to be intimidating or confusing; understanding how financial auditing works can help set your mind at ease and ensure a successful outcome.
In this post, Raleigh CPA firm Steward Ingram & Cooper, CPA, PLLC, will explore all aspects of financial auditing so that you are better equipped when it comes time for your own audit. We’ll cover topics on what exactly an audit entails, potential types & stages of an audit process as well as key tips in preparing you for success with your own financial audit. Let this post serve as your guide to help you feel informed and confident about navigating through every step.
What is a Financial Statement Audit?: Definition and Overview
First, let’s answer the key question: What is a financial statement audit? A financial statement audit is a process where an internal or external auditor checks your business’s finances. This is done to make sure that the money and other things related to your business are accurate. They will look at records, such as receipts and bills, to make sure all your accounts payable and receivable match up.
As your business grows and evolves, the need for accurate financial reporting becomes increasingly important. At its very core, a financial statement audit plays a critical role in ensuring that businesses are presenting their financial information fairly and accurately to stakeholders. Whether you’re facing an intimidating IRS audit or an internal audit, it’s vital to have all information on hand so you’re confident in your business financials and processes. Now that we’ve answered the question of “what is a financial statement audit,” let’s explore the different types of audits.
Different Types of Financial Statement Audits
Auditors can conduct different types of financial statement audits, depending on the needs of the company and the level of assurance required. For example, a full-scope audit provides the highest level of assurance, while a review engagement is a more limited type of audit. There are also specialized audits for specific industries, such as healthcare or government. By understanding the different types of financial statement audits available, companies can work with their auditors to determine the most appropriate approach for their needs.
Stages of a Financial Statement Audit
To ensure the accuracy and reliability of financial statements, companies navigate through the following three key steps during a financial statement audit.
- Planning and Risk Assessment: This is the first step of a financial statement audit in which an auditor or auditors evaluate the company’s financials and identify any potential risks that could affect the reliability of the statements.
- Internal Controls Testing: In the second stage of a financial audit, the effectiveness of the company’s internal controls is assessed. Proper authorization, the acceptable segregation of job assignments, and the safeguarding of assets are largely assessed during this stage.
- Substantive Procedures: The final stage of a financial statement audit is the most involved. The substantive procedures stage involves testing the account balances and transactions to ensure that they are accurate. A few items that are audited in this step include accounts payable, accounts receivable, inventory, cash, production costs, overhead costs, debt, and fixed assets.
Each stage of the financial statement audit is critical to guaranteeing the reliability and accuracy of the company’s financial statements. If there is a high level of risk in any of the areas mentioned above, the auditors will use other procedures to examine financial statements. On the other hand, if there is a low level of risk and a high level of effectiveness is shown throughout the business, an auditor may scale back their procedure. Thus, it pays off to show an auditor that your procedures and financials are effective and compliant.
How to Prepare for a Financial Statement Audit
Preparing for a financial statement audit can be a daunting task, but following a few simple steps can make the process smoother. One key aspect of successfully navigating a financial audit includes having your financial information on hand and up to date. You may use a general ledger or a spreadsheet to keep track of your financials. If so, now is the perfect time to refer to those entries.
- First, gather all relevant documentation and ensure they are organized and accessible. This includes all financial statements, receipts, business documents, and other documentation of expenses and receivables.
- Next, get comfortable with the auditing process by familiarizing yourself with the steps above. You may want to practice an audit with your internal team in order to avoid any surprises when you encounter a formal financial statement audit. This will also ensure that your employees are confident when exhibiting and explaining their job duties to an auditor.
- Third, it is essential to communicate effectively with your auditors to make the most of their expertise and ensure a thorough review. Ultimately, the key to a successful audit is being proactive and transparent, which will ensure that the audit runs smoothly and you maintain a good relationship with your auditors.
Taking these steps will help you prepare for a financial statement audit so you and your team are comfortable and confident when a formal financial statement audit occurs. Perhaps one of the worst feelings is feeling unprepared, especially during an important audit.
The Benefits of a Financial Statement Audit for Small Businesses
Running a small business is no easy feat, and staying on top of finances can feel like a daunting task. That’s why a financial statement audit can provide invaluable benefits for small businesses. Not only does an audit provide a thorough examination of financial records and transactions, but it can also identify areas for improvement in bookkeeping and internal controls. This can help small businesses streamline operations and better manage cash flow. Additionally, having an audit conducted can improve credibility with investors, lenders, and other key stakeholders, ultimately fostering long-term success. Overall, a financial statement audit is an investment in the future of a small business, providing peace of mind and valuable insights for growth and success.
Red Flags to Look Out For During a Financial Statement Audit
As a business owner, you may not have the expertise to conduct a financial statement audit on your own. That is where an external auditor comes in to check the accuracy of your financial records. However, it is important to look out for warning signs or “red flags” during the audit process to ensure that your business’s finances are legitimate. Some common red flags to watch out for include inconsistencies or irregularities in financial reports, unexplained transactions or journal entries, failure to disclose important financial information, and inadequate record-keeping practices. As a business owner, it is essential to be aware of these red flags and to work closely with your auditor to address any concerns that arise during the financial statement audit. In addition, it’s vital to ensure your business financials are consistent across all accounts.
Request Financial Statements from Steward Ingram and Cooper, CPA, PLLC, a Raleigh CPA Firm
As previously mentioned, one of the most important parts of a financial audit is having your financial statements in order so you can present your expenses to an auditor. If your business does not have financial statements generated on a regular basis, working with a CPA such as Steward Ingram & Cooper, CPA, PLLC is a business investment that can help you tremendously. With easy access to accurate and updated financial statements, your business can successfully navigate a financial audit, whether it be by the IRS or internally. To request more information or schedule a consultation with one of our Raleigh CPAs, you may call us at (919) 872-0866 or fill out the form below.
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