Financial Reports (Audits, Reviews, and Compilations): What are They, and Which One Does Your Business Need? Pt. 1

Part One of Three: Audits, Assurance of the Highest Level

Many people hear the word audit and only think of the IRS. (Save that thinking for another time – link to IRS audit blog.)

Financial audits are one of three reports used to evaluate your company’s financial position: audits, reviews, and compilations. In this first of three blog entries, we will focus on the audit, which provides information about your finances for your stockholders, creditors, and private investors.

What is an Audit?

Stockholders, creditors, and private investors often need assurance that the financial statements accurately represent the true financial position of a company. An audit provides the highest level of assurance.

An audit is a methodical review and objective examination of the financial statements, including the verification of very specific, detailed information. The auditor’s assessment of a company’s risk, as well as, general accounting practices will determine what level of detail is required for a particular audit.

An auditor will first review the internal controls or processes that drive the business. Internal controls can include some of the following: the structure of the company, workflow, who has authority for financial decisions, financial reporting in relation to company goals, and compliance with applicable laws and regulations.

The auditor will next focus on reviewing selected transactions including bank statements, invoices, and receipts. We also perform physical inspections by observing your inventory counting methods and perform test counts. We document and test each operating cycle, including sales and cash receipts, expenses and cash disbursements, and payroll. Our audit papers include a detailed work program to document the examinations and testing performed, as well as the client’s supporting work papers. During this review, record-keeping policies will be reviewed for discrepancies and internal controls will be evaluated for the level of protection they provide against theft and fraud.

In the final stages, the auditor will communicate with outside parties such as vendors, banks, customers, and attorneys. This communication will verify such matters as confirming outstanding receivable balances, cash or debt balances and terms, payable balances, and any pending legal action.

Once all review is complete, the auditor will issue a report indicating whether the financial statements are fairly stated and free of material misstatements.
Some key ways an audit can benefit your company or organization:

• Satisfy stakeholders (employees, customers, suppliers and pressure groups, as well as the investing community) as to the credibility of published financial information.
• Facilitate the payment of corporate tax, goods and services tax, and other taxes on-time and accurately, thereby avoiding interest, penalties, and investigations.
• Comply with banking requirements.
• Help deter and detect material fraud and error.
• Facilitate the purchase and sale of businesses.

Which Businesses Need This Type of Audit?

All public companies are required to have an annual audit, but some nonpublic entities must undergo an annual audit as well. These include local governments, not-for-profit agencies and other organizations receiving government grants.

Moreover, some financial institutions require audits of nonpublic companies based on the financing amount and/or the bank’s assessment of the company’s risk. Also, companies with absentee ownership (such as those owned by investment firms, or individuals who no longer run the business) may choose to order audits as an additional check on their management teams.

What are Cook CPA Clients Saying About the Audit Process?

“Wish I would have had an audit sooner. It really helped improve our business.” Marilyn, small business owner

If you have further questions about whether an audit is right for your business, contact Cook CPA Group at evelyn@cookcpagroup.wpengine.com or 916-432-2218.