Preparing Your Business for a Financial Audit or Review: Part 1

Borrowing, Business Loans & Lines of Credit

With the tightening of the economy and business credit in recent years, more companies are facing the requirement for an annual financial audit or review. Either must be performed by a Certified Public Accountant (CPA) who is independent of your organization. CPA billing rates can be astronomical, so the more prepared you are, the more money you can save in audit or review fees.

The CPA firm will send you an engagement letter outlining the terms of the engagement including responsibilities of both the CPA and the organization’s management, timing of the engagement, and fees. Their fee arrangement may be a fixed fee or hourly rate. Even if it is a fixed fee, there is usually a stipulation that any time the CPAs are required to spend making adjustments or doing bookkeeping work is billed on top of that fee.

Why doesn’t my CPA help me with my bookkeeping? One of the core premises of performing an audit or review is that the CPA must be independent of the organization. If the CPA assists in making journal entries, there must be someone in your organization who can assume responsibility for reviewing them and approving them. Otherwise, the CPA is auditing or reviewing his own work and would not be independent. An audit or review engagement assumes the organization has personnel with reasonable knowledge of accounting principles. Ideally, that organization can also draft financial statements, including the required financial statement footnotes. Realistically, most small companies rely on the CPA for drafting financial statements and footnotes. However, the more of these functions you can perform in house, the more money you can keep in your pocket at the end of the audit/review.

Make sure that you understand the terms of the engagement letter. Your CPAs will also send you a listing of schedules (and usually electronic templates) they require to be prepared in advance of their procedures. Complete these items in a timely manner. This will give you an opportunity to do your own analysis — and be well prepared — before the CPAs arrive to question you. Getting your books closed and analyzed prior to the agreed time schedule can also save you huge amounts in fees. CPAs set aside the time they have budgeted for your engagement and typically have other clients waiting, so if you are late getting them your information, you may lose your allotted time slot and make the firm less efficient in completing your job, costing you more.

Audits and reviews are very different. Audits are much more comprehensive in scope, and are therefore much more expensive than reviews. If you can negotiate with your lender to require a review rather than an audit, you can save a great deal of money.

An audit provides a greater level of assurance on your financial statements. An audit includes assessing your system of internal control, risk assessment, and a planning process, which establishes audit procedures based upon risks and controls unique to your organization. An audit may include independent confirmation of bank, investment and accounts receivable or even vendor account payable balances, a physical inventory observation, and other detailed procedures vouching transactions to source documents.

A review report provides a reduced level of assurance on your financial statements as compared to an audit, and it includes primarily inquiries of management and analytical procedures. The CPA will ask you questions to see if your financial statements were prepared in accordance with generally accepted accounting principles (GAAP). They may dig into the detail in areas they consider important, but much less so than in an audit.

The scopes are very different, but preparing for either an audit or review is similar. Check out our next article in this series: “Kicking the Tires on Your Balance Sheet.” It will assist you with procedures that make you look sharp to your CPAs.

Continue on to Part II – Kicking the Tires on your Balance Sheet and Part III – Kicking the Tires on your Income Statement.

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