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Businesses produce financial statements (i.e., income statement, balance sheet, cash flow statement, etc.) to provide information about their financial performance to stakeholders, such as investors, employees, banks, regulatory bodies, and so on.
But how can you ensure the accuracy of these financial statements? Financial audits conducted by a qualified third-party (an auditor) can enhance confidence in your business’s financial statements and identify areas where your accounting processes could be improved.
Find out everything you need to know about financial statement audits with our definitive guide.
Financial audit definition
A financial audit, also referred to as a financial statement audit, is an objective evaluation of your company’s financial statements. They are usually conducted on an annual basis. While financial audits can be conducted internally (by an employee), most of the time, your stakeholders will want an audit from an independent body. As such, you’ll probably need to reach out to a Certified Public Accountant (CPA) firm to conduct your audit. Ultimately, the aim of a financial audit is to ensure that your financial records are an accurate representation of your organization’s financial performance.
Why is an audit of financial statements necessary?
Although an audit of your financial statements may make you feel like you’re under the spotlight, the process is intended to assure your stakeholders that management has provided a “true and fair” view of the business’s financial position. This confirms that your company’s financial processes are all above board – minimizing the risk of fraud – and that your accounting documents aren’t covering up for any financial mismanagement. However, it’s also important to note that financial statement audits can bring value to your business by identifying controls or processes that could be improved, thereby enhancing the quality of your business.
Financial audit vs. review
If you’ve decided to engage a third party to complete your financial statement audit, it’s important to understand exactly what level of service you need. CPA firms can perform three types of evaluations: compilations, reviews, and audits. A compilation is the least rigorous option, as it refers merely to the preparation of your business’s financial statements. So, when it comes to financial audits vs. reviews, what’s the best option for your business?
It’s relatively simple. Reviews provide “limited” assurance, whereas audits offer “reasonable” assurance (although it is important to note that a financial audit does not provide “absolute” assurance). In a nutshell, reviews are less detailed and provide a less comprehensive level of assurance, although they are usually cheaper than full financial audits. Ultimately, audits deliver much better value, while it’s also important to note that in some cases, audits are a legal requirement.
Financial audit checklist
Preparing for a financial audit? Don’t worry if you’re nervous – financial statement audits can be frightening, but as long as you prepare adequately, you should be able to get through it with a minimal amount of fuss. You can take three basic steps before the audit gets started to ensure that you’re ready. See our financial audit checklist for a little more information:
Implement robust accounting practices – Putting acceptable accounting practices in place year-round can ensure that your financial audit goes as smoothly as possible. Be sure to reconcile your accounts on a regular basis and document your expenses throughout the year.
Review your financial information – It will also help if you undertake a mini-audit of your financial statements. Ultimately, your accounts need to be as transparent as possible. If you have a strong understanding of your accounting records, you can help the auditor by clearing up any questions they have as quickly as possible.
Gather your documents – Finally, it’s a good idea to prepare a full list of the required accounting documents and provide it to the auditor before they begin work. This way, they won’t need to spend additional time and money tracking everything down.
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