Your company has decided it’s time for its first financial statement audit. Congratulations! You are well on your way to better financing, renewing your line of credit, starting a new relationship with a vendor or supplier, and myriad other possibilities. So, what’s next? Well, for a first-time audit, it is important that you develop an understanding of what to expect in terms of what an audit is, what it does, and what you and your personnel will need to do in order to get the most out of your audit.
What to expect in an audit
In the simplest terms, a financial statement audit is an examination and evaluation of the financial statements of an organization for the purpose of determining whether the financial statements are fairly stated and materially correct. This is the highest level of assurance a firm can provide, which means auditors must perform substantial inquiry to obtain necessary support and corroboration. They must ask questions of a variety of employees within your company, as well as request support documentation and perform observation procedures to verify information.
Unlike a financial statement review, the audit team must see the supporting evidence. Regulatory requirements for audits will not permit them to simply take someone’s word, so your employees need to be prepared to provide all requested documentation.
First-year audits include all of the standard procedures required for all audits in order to gain an understanding of the company’s financial situation, but there are also additional procedures the auditors must perform. These additional procedures include things like testing the beginning balance sheet and income statement cut-off, and looking at financial information or significant transactions from up to a year prior to the start of the audited period. So, for example, if we are auditing your company’s 2021 financial statements, you will need to be prepared to answer questions and provide support documentation for 2020.
For the audit team to do their job, it is absolutely critical that key personnel within your organization be available to speak with them in a timely manner. The CFO or controller may be the main point of contact for the audit, but audit procedures require the team to gain an understanding of the company’s overall business, including operations, internal controls, and business structure. This may require a significant time commitment from employees across a variety of roles and departments, including the sales team, project managers, and inventory management personnel.
Phases of an audit
An audit typically starts with a planning phase during which the audit team begins developing their understanding of the company as a whole, its policies, procedures, and inner workings related to financial reporting, and specific details about what occurred in the business during the period under audit. This phase takes a considerable amount of time in a first-year audit, but diminishes significantly in future audits.
After the planning is complete, the audit moves into the pre-fieldwork phase. Active involvement from you and your personnel is crucial in this phase. The audit team needs to complete a considerable amount of data testing before going to your office for fieldwork in order for the fieldwork to be effective. They will request the information necessary for them to make sample selections for testing, such as revenue detail reports, accounts payable aging reports, and equity rollforward information, as well as supporting documentation like proof of cash receipts, copies of vendor invoices, and bank statements.
It is important to be aware that this phase may require your personnel to dedicate a significant amount of time to locating the necessary information. The overall efficiency of the audit depends on the audit team being able to complete this phase of the audit advance of fieldwork. Since the audit team cannot work without information, your employees must be ready and able to provide it in a timely manner.
Fieldwork is, of course, the next phase. This is when the audit team is on-site at your company’s offices performing the testwork phase of the audit, including clarifying any questions or issues found. This phase may last from one to three weeks, depending on the complexity of the business. As noted earlier, key members of your personnel will need to be on hand and available to answer questions the audit team will have.
Once the fieldwork is complete, the audit moves into the final, closing phase. During this time, the audit team reviews the work performed and then issues the final audit report and required communication letters.
Tips for a smooth audit
- Prepare documentation of policies, such as revenue recognition, asset capitalization policies, treasury management processes, and financial reporting controls ahead of time. If adequate documentation isn’t available, the audit team must document it themselves which requires that they interview your personnel and ask questions. Having the information ready in advance saves time for everyone.
- Similarly, have company organization documents, revenue contracts (if applicable), lease, debt, and equity agreements readily available and easily accessible to save time for the auditor and the company staff.
- Plan ahead to ensure adequate coverage of regular duties while the audit occurs. Consider hiring outside help if your accounting team is small since the audit will necessarily take time away from performing other tasks.
A first-year audit often sparks conversations and considerations maybe not been previously had. This portion of the audit provides value to the company in providing an outside viewpoint in the effort of strengthening processes and procedures and helping drive efficiency.
Calvetti Ferguson is committed to providing a collaborative audit process with added value and insights. Our team members will guide you through your first-year audit and seek to address all questions and uncertainties you may have with a constant flow of communication and availability. Unlike other firms, our leaders are deeply involved and invest significant time and attention into client relationships and understanding your business, so that we can partner with you to provide value and insights beyond the scope of the audit.