17 Nov Demystifying the Audit Process
Independent auditors provide many benefits to business owners and management: they can help uncover errors in your financials, identify material weaknesses in your internal controls, and increase the level of confidence lenders and other stakeholders have in your financial reporting.
Many companies are unclear about what to expect during a financial statement audit, so here is an overview of the five-step process.
- 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.’
- 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 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.
- 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.
- 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. 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. If your company does not issue audited financials, this understanding can be used to evaluate whether your current level of assurance is adequate or whether it is time to upgrade. Contact us for additional information.