Trust, but verify.
People ask why a financial statement audit is important.
It is important because banks, creditors, and outside investors are not going to completely trust the financial statements produced by the company’s employed accountants. There is a conflict of interest because the company will tend to show better results on their income statement and balance sheet compared to actual results.
This is why a 3rd party CPA firm is hired to perform the audit and provide reasonable assurance that the financial statements are materially free of misstatements due to error, fraud, etc. This doesn’t mean that the financial statements will be perfect but provides an opinion that the amounts are not so far off that they would affect a decision made by a stakeholder.
An audit is the most extensive look into a company’s financials as compared to a review or compilation. It requires in-depth testing and gathering evidence of many financial transactions. The financial transactions to be examined are selected by the CPA auditor using random sampling, dollar amount thresholds, or other sampling methods. Procedures performed during an audit include but are not limited to detailed testing of account balances, confirming account balances with 3rd parties/banks, evaluating the company’s internal control environment, management inquiry, physical observation of inventory/fixed assets, examination of documents, and analytic procedures.
Audits are necessary for:
- Large non-profit organizations
- Publicly traded companies – required by the SEC (Securities and Exchange Commission)
- Businesses wishing to acquire especially large loans
- Companies that receive funding from Federal or State governments
A company may not require the full gamut of an audit and may only need a high level look at the financial statements. A review provides limited assurance on the financial statements. A review is not as costly as an audit since it takes less time for the CPA firm to complete.
The procedures performed by the CPA firm during the review include but are not limited to inquiries of management, analytical procedures, and gaining an understanding of the client’s business, accounting procedures, and industry.
Reviews are necessary for:
- Companies wanting to obtain small business loans
- Loan Covenants – required by banks on a periodic basis to verify the borrower is still in a financial position to pay back the loan on time
Compilations provide no opinion on the financial statements and is the least work intensive financial statement service provided by a CPA.
Basically, the CPA uses the financial transactions provided by the company to help assist in preparing the financial statements. The CPA does not make an opinion on the account balances being materially accurate but can help to see if there are any obvious errors during the preparation.
Compilations are necessary for:
- Companies wanting to convert cash basis financials to accrual basis financial statements
- Small companies applying for loans
Internal Controls/Internal Audit Outsourcing
Internal controls are developed by the company itself or the CPA firm to prevent/detect errors or fraud within the business. They are essential in running a profitable business by protecting the company’s assets (Cash, Inventory, Fixed Assets etc.). Internal controls help verify the accuracy and completeness of accounting data and help in producing reliable financial statements and management information. Basic examples include reconciling cash receipts to deposits to the general ledger, segregation of duties, counting/inspecting inventory for missing/damaged goods, and signoffs by key personnel before making capital expenditures.
If your company has not developed internal controls, we can assist in designing controls and creating a plan to implement.
We can also assist by serving as your internal audit team. In this type of engagement, we would assess your company’s current design of internal controls, test all your internal controls, and report on deficiencies. Having these deficiencies pointed out and corrected will save your company significantly and set the tone for employees to work ethically and efficiently.