What to Expect During a Financial Audit


June 3, 2024
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What to Expect During a Financial Audit

Let’s take a closer look at financial audits. In this article, learn about the three types of audits, what you can expect during the different stages of an audit, and what you can do ahead of time to prepare for your upcoming audit. Keep reading to find out more. 

Audit, Defined

An audit is a comprehensive examination of a company’s financial accounts by an independent body to ensure financial records are both accurate and fair. 

Three Types of Audits

External audits are performed by outside firms and serve to remove any bias in the review of a company’s financial reports. External auditors adhere to the generally accepted auditing standards (GAAS) set forth by the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA). External auditors can provide unqualified audits, or thorough audits of a company’s financial systems and statements that are candid and objective.

Did you know that Honest Buck Accounting provides Yellow Book audits for preschools? 

If you receive $750,000 or more in state or federal funding programs, then your Yellow Book audit is required. 

Get started with your Yellow Book audit today. 

Internal audits are conducted by auditors employed by a company who adhere to the company’s standards for the audit, as opposed to external standards. The internal audit report is given directly to company management and the board of directors and is used to make management decisions, including improvements to financial processes. Internal audits serve to ensure a company is in compliance with laws and regulations and help maintain accurate financial records and systems. 

The primary difference between external and internal audits is the independence of the third party auditor, which is why external audits are requirements for many companies, including those who receive government or public funding of any kind. 

Internal Revenue Service (IRS) audits are carried out by the government to ensure that a taxpayer’s return is both accurate and fair. The IRS audit selection is based on statistical formulas that compare a taxpayer’s return against similar returns. A taxpayer may also be selected for an IRS audit if they have had any financial dealings with an individual or company who was found to have errors from their own IRS audit.

Being selected for an IRS audit often carries a negative connation, but it doesn’t necessarily indicate wrongdoing on the taxpayer’s part. 

Next, let’s check out what to expect during each of the stages of an audit. 

What to Expect During the Stages of an Audit

An audit can be broken down into three stages: planning, fieldwork, and completion. 

Here’s what you can expect during each stage of the audit:

Planning

  • The firm conducting the audit will present an engagement letter (also known as a Request for Proposal), defining the scope of the audit and identifying who is responsible for what. Here’s what the engagement letter typically includes:
    • A description of services to be performed 
    • Responsibilities of the company’s staff
    • Fees for the audit and related work
    • Start date and completion date for the audit
  • The auditors and company management will meet to discuss any preliminary questions, address any major changes to financial processes and internal controls throughout the year, and define objectives.
  • The auditors will walk through and review company policies and procedures, as well as key transaction cycles to understand all internal controls. 
  • If needed, a test of internal controls will be performed. 
  • The auditors will review all documented governance meeting minutes, including those from the Board of Directors, Finance Committee, and so on. 

Fieldwork 

During the fieldwork stage, the audit team will work on the following: 

  • Transaction testing and working through the account balance 
  • Calculate materiality and determine which accounts need to be tested further
  • Compare account balances against the prior year and against the current year’s budget
  • Review reported year-end account balances and test to validate supporting documentation
  • Select specific transactions within certain accounts for in-depth testing, as needed
  • Make inquiries of company staff, as needed
  • Propose adjustments to accounts, as needed 

Completion 

  • The audit team will draft financial statements and final reports on the audit.
  • The auditors will render an opinion on the financial statements and meet with company leadership to review the draft financial statements, making adjustments as needed.
  • In addition, the auditors will issue a report of any material weaknesses and significant shortcomings observed during the audit. 
  • The auditors may offer a management letter with recommendations for improvements.
  • If needed, the auditors will present the reports to those in governance. 
  • If engaged, they will also prepare the required tax returns, Form 990.

While the components of each stage of a financial audit are basically the same, the specific services offered may vary by firm. 

How to Prepare for an Audit 

You can do several things to prepare for an audit and help ensure a smooth auditing process for all involved: 

  • First, be sure your accounting records are up-to-date, accurate, and well-organized. 
  • Second, prepare all required documentation for the auditors ahead of time. 
  • Last, be sure all pertinent staff are briefed in advance and are available to answer questions and provide additional information once the audit has begun. 

In the next installment of our audit series, we’ll provide a detailed checklist of documents you’ll want to have ready for your Yellow Book audit

When you’re ready to start your audit, reach out to the experts at Honest Buck.


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