Tag Archives | audit

Does Your Business Need A Financial Audit?

The question we’re answering is, does your business need a financial audit? Before we get to that, let’s define financial audit. The term audit can mean many different things. You can audit operations, taxes, health safety and environmental, manufacturing processes, and your accounting records. When we refer to an “audit”, we are referring to an audit of your accounting records. That is, a financial audit of the accounting transactions for your company for a specific period of time and based on U.S. Generally Accepted Accounting Principals (“GAAP”).

does your business need a financial auditFinancial Audit Background

In my career, I have dealt with audits and auditors for companies as large as multi billion in revenue with international operations and as small as $15 million in revenue and closely held. I have also dealt with auditors from each of the Big 4, as well as from small local CPA firms. In 28 years working experience, I have been exposed to a variety of situations with financial audits and auditors.

In those 28 years, the big change in audits and auditors came in the years following the Enron debacle. The public markets, SEC, IRS, and Congress had to shift dramatically because of what happened at Enron. The Enron experience brought a landslide of changes to accounting, audits, and auditors. Pre-Enron, the audit process was much easier and less regulated. However today, the audit process is fairly complex. Furthermore, auditors risk their careers every time they go through an audit. And it is truly a regulated process. Their heads are on the line. If they make mistakes in the audit or if they do not follow the audit guidance then they risk, being sued, losing their job, or even going to jail due to negligence or even large mistakes.

The consequences for a bad audit are heavy for a reason. It’s because their work is so vital to a company’s success. To find other areas of value to improve upon, click here to access our Top 10 Destroyers of Value to address those areas that are currently destroying your company’s value.

Types Of Assurance Services

Assurance services provided by CPAs are broken up into the following three types of services:

  • Audits
  • Reviews
  • Compilations

Audits are the highest form of assurance offered by accountants.

Does Your Business Need A Financial Audit?

I get this question often, and it is a very good question. Does your business need a financial audit? My response is always, it depends on the size of your company, type of company, and the ultimate goals and objectives. For example, a micro company of $2 million in revenue that has 5 employees and is closely held. It has no plans of selling, and it is not it is growing exponentially and has no debt. In this example, the company really has no need to get an audit completed. Instead, save the money, and move on.

But, if you are a growing $2 million company that is backed by investors and has (or plans on having) some debt, then it is worth getting a financial audit complete. Also, you will need to complete an audit if one day you want to go public.

The most common situation I deal with is a company with revenue between $15 million and $200 million. They are a closely held business that has some debt. And it may or may not sell at some point. They have 20-200 employees and want to continue growing. In this scenario, I always recommend and actually push to have this company get their financial records audited by competent CPAs.

does your business need a financial auditRecommendation To Complete An Audit

Why would I recommend for this type of business to complete an audit? The audit is NOT designed to eliminate all risk, catch all errors, or provide any guarantees. But the audit will provide peace of mind that your accounting records properly represent the financial condition of the company based on GAAP. Why is that important? Because your financials are now of such quality that you can truly use them as a tool to properly run your business. Not only that, but you are adding value to your company by having an audit complete. Users of your financial statements will also have a positive sense of quality as it relates to the numbers you are presenting.

Does your business need a financial audit? If you want to increase value, then yes! It will help you identify areas of value improvement. In the meantime, click here to access our Top 10 Destroyers of Value to discover other areas of improvement.

Benefits Of A Financial Audit

Some of the benefits of a financial audit include:

  • Enhanced quality of the financial statements
  • Third parties, such as banks, investors, private equity groups, insurance companies, valuation specialists, will look at your company as one that is enhanced and one that cares about quality and is a “better company” because you have audited financials
  • Third parties such as banks and investors may require you to have audited financial statements
  • If you ever plan on going through an IPO, then you will be required to audit your financial statements
  • From a valuation perspective, you have added value to your company because you have audited financial statements
  • If you ever plan to exit, then buyers of your company will look at you as a better company versus the other company they are looking at that does not have audited financial statements (value)
  • Peace of mind for you as the CEO or owner. Although the audit performed by CPAs does not guarantee there is no fraud in your company and that you do not have any “leaks” of cash, there is a good chance that if there is any wrong doing, fraud or “funny stuff” going on, then completing an audit might pick up on these things
  • The audit will look at your internal controls and the auditor should provide suggestions on how to improve them

Complete a Financial Audit on an Annual Basis

The numbers behind the accounting records are still management’s responsibility, but an audit will provide an additional layer of excellence. There are other benefits of going through an audit, but I wanted to name a few that come to mind. The audit is not a one time thing. Consider completing a financial audit on an annual basis. Furthermore, this should be part of your best business practices. This really does distinguish your company, adds value, and will make your company a better company in many ways.

Cost Of A Financial Audit

The cost of an audit will depend on many things. Things that will influence the cost of your audit include the following:

  • Size of your business
  • Complexity of your business
  • Number of transactions per year
  • Number of legal entities
  • International or U.S. based
  • Private or public company
  • A lot of inventory in multiple locations, or no inventory
  • Multiple locations or single site
  • Service or Manufacturing

Who You Should Use To Complete The Audit

The cost will depend on who you use to complete the audit. Most CPA firms that perform audit services bill hourly. Large Big 4 firm have higher hourly rates. Small firms may have lower billable hourly rates. I have many friends in Big 4 firms, and I think very highly of the Big 4 firms. But I would say that a $100 million revenue company with 200 employees located only in the U.S. should look at alternatives other than the Big 4. There are many great regional and local firms that can complete the audit for a much lower cost.

Be careful though! Not a knock on small firms, but a firm that provides audit services should have multiple resources and skill sets to complete an audit. Just because a sole proprietor CPA offers to complete an audit for $10,000, it does not necessarily qualify him to do it. Remember, you do get what you pay for. A small company with not too much complexity and a few employees, single location will probably spend at least $20,000 for an audit, and it goes up from there. This should be something you include as a line item in your annual budget.

Increase Value Through A Financial Audit

With proper guidance from your strategic advisor, you will get value for your audit no matter what the price you pay. You do have to manage your auditors just like you need to manage your attorneys. But a well-run audit by a good firm will pay for itself multiple times over in incremental value to your business and peace of mind. In addition, locate other areas that are destroying the value of your company with our free Top 10 Destroyers of Value whitepaper.

Does Your Business Need A Financial Audit

Strategic CFO Lab Member Extra

Access your Exit Strategy Checklist Execution Plan in SCFO Lab. The step-by-step plan to get the most value out of your company when you sell.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

does your business need a financial audit

Share this:
2

Audit Committee

An audit committee is a subcommittee of a public company’s Board of Directors. Furthermore, a Board of Directors can have several subcommittees. The committee focuses on corporate governance, specifically, the company’s internal controls and financial accounting systems.

Audit Committee Membership

A company’s committee typically includes a number of outside directors, or non-executive directors. In addition, a committee prefers individuals with financial accounting expertise.

Audit Committee Purpose

This committee has several responsibilities as well as purposes. For example, it is responsible for overseeing the company’s financial reporting. In addition, it is responsible for financial accounting policies and procedures. The duties also include the following:

If you want to start developing and enhancing your strengths as well as start reducing and resolving your weaknesses, then download your free Internal Analysis worksheet.

audit committee

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

audit committee

See Also:
How to Control Annual Audit Fees
Managed Sales and Use Tax Audit Programs
Double Entry Bookkeeping
Direct Method Allocation
Company Life Cycle

Share this:
0

Securities Act of 1933

See Also:
Primary Market
Securities Exchange Act of 1934
Investment Banks
Secondary Market
Initial Public Offering (IPO)

Securities Act of 1933

The Securities Act of 1933 was a landmark decision in the United States to regulate the issuance of newly issued shares into the market – an initial public offering. The act is also there for companies to register before the issuance as to ensure reliability.

Securities Act of 1933 Meaning

The Securities Act of 1933 followed the stock market crash in 1929. It was a movement to regulate the markets as to not mislead investors. Furthermore, the idea requires due diligence so that the best possible information would hit the market. The 1933 Securities Act was also meant to do away with insider information. By requiring this information to be provided pre-issuance investors presented with the opportunity to buy shares of the firm, during the investment banker’s road show, can make well informed decisions. The due diligence required by the 1933 Securities Act is to have a full audit and compliance with Generally Accepted Accounting Principles (GAAP). Without registration and a following of the 1933 Securities Act rules a firm cannot be listed on a U.S. stock exchange until the requirements are satisfied.

If you want to overcome obstacles and prepare how your company is going to react to external factors, then download your free External Analysis whitepaper.

securities act of 1933

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

securities act of 1933

Share this:
0

Sarbanes Oxley Act of 2002

See Also:
Securities Act of 1933
Securities Exchange Act of 1934
Audit Committee
Auditor
American Institute of Certified Public Accountants – AICPA

Sarbanes Oxley Act of 2002

The Sarbanes Oxley Act of 2002 or SOX for short is further regulation of the secondary market by requiring further internal controls within companies and extensive audit practices. The Sarbanes Oxley Act 2002 resulted from several accounting scandals that plagued the early 2000s such as Enron, Tyco, Worldcom, and several others.

Sarbanes Oxley Act of 2002 Explained

Bi-partisan legislation by Paul Sarbanes (D-MD) and Michael Oxley (R-OH) created the Sarbanes-Oxley Act. The creation of SOX regulation was a result of investors mistrust in the market place after several scandals were revealed in the market. Consider Sarbanes Oxley an extension of the Securities Exchange Act of 1934. Sarbanes-Oxley is most known for the creation of the PCAOB, an extension of the SEC, who regulate accounting firms who audit companies. They also emphasize internal controls within businesses. These internal controls and audits involved regulation over not just employees, but both board members and management who neglected their duties. Separation of duties became a big factor in the regulation and rotation of tasks. As a result, no one employee would be able to keep a scandal going for very long.

After, SOX was put into place there became a concern by some after several years that it was too regulatory. And the costs associated with the new regulations were too high to maintain. It has thus been argued that there needs to be a softened form of Sarbanes Oxley as to prevent movement away from U.S. markets as well as to reduce a barrier to entry formed from entering the market. However, the US recently revisited the law in June 2010, and it is still fully operative.

If you want to overcome obstacles and prepare how your company is going to react to external factors, then download your free External Analysis whitepaper.

sarbanes oxley act of 2002

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

sarbanes oxley act of 2002

Share this:
0

History of Accounting

See Also:
History of Factoring
Generally Accepted Accounting Principles (GAAP)
International Financial Reporting Standards (IFRS)
Financial Accounting Standards Board (FASB)
Certified Public Accountant (CPA)

History of Accounting

Below is the history of accounting timeline is a general overview of larger events which have all contributed to modern day accounting. It encompasses primitive accounting, with the use of an abacus, to the accounting software and regulation that we use today.

History of Accounting Timeline

The history of accounting timeline starts in 2500 B.C.

2500 B.C.

Historical accounting records have been found in ancient civilizations like the Egyptian, Roman, and Greek Empires as well as ancient Arabia. Back then, rulers kept accounting records for taxing and spending on public works.

1000 B.C.

The Phoenicians created an alphabet with accounting so that they were not cheated through trades with ancient Egyptians.

500 B.C.

Egyptians carried on with accounting records. They even invented the first bead and wire abacus.

423 B.C.

The auditing profession was born to double check storehouses as to what came in and out the door. The reports accountants took were given orally, hence the name “auditor.”

1200 – 1493

The first requirement for businesses to keep accounting records spread across many of the Italian Republics in the 13th century. They took these records mainly to keep track of the day to day transactions and credit accounts with other businesses.


Want to take your financial leadership to the next level? Download the 7 Habits of Highly Effective CFOs. It walks you through steps to accelerate your career in becoming a leader in your company.

Download The 7 Habits of Highly Effective CFO


1494

Luca Pacioli, the father of accounting, writes his famous paper “Everything about Arithmetic, Geometry, and Proportion.” The treatise that he writes is mainly a study that Pacioli performs on the common practices of merchants in Venice, Florence, and Milan. He revealed that several merchants kept books of debits which means “he owes” as well as credits which means “he trusts.” With this early double entry accounting system merchants were able to maintain records so that they could improve the efficiency of their businesses. With these records came the primitive income and balance sheet statements.

1500 – 1700

As the time progressed, double entry records had large and small innovations added. For example, the East India Company develops invested capital and dividend distribution during the 17th century. This also created the need for a change in financial accounting and managerial accounting. They used the first presentation to gain investors, while they used the next presentation for business efficiencies.

1700 – 1900

During the Industrial Revolution, accounting really took off as industrial companies sought out to gain financing and maintain efficiency through operations. Several of the double entry accounting methods was truly developed in this area as there was a focus on business as never before. Shortly after, the first accounting organization was developed in New York in the year 1887. The title and professional license of the Certified Public Accountant followed shortly in the year 1896.

1920 – 1940

The 20s accounting really became important to reduce the amount of fraud and scandals that were performed in businesses around the country. U.S. GAAP was developed shortly after by the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB) in the year 1939.

1940 – Present

Since this time the AICPA and FASB have been working together with the Securities Exchange Commission (SEC) to develop accounting standards for business. Through the help of technology and computer systems all standards created for U.S. GAAP have been centrally located into what is known as the “codification.” The codification reveals all of the current practices and standards, and even reveals developing areas of standards of accounting that are currently being debated upon.

Several accounting systems like Peachtree and Quickbooks have also made the accounting profession automated. These programs ease the reporting of transactions, but also comply with GAAP. Because of this there is a lesser need for accountants to post transactions, and more of a need for the review of these transactions. In some firms, they don’t realize the change as they still employ a full accounting staff. As time moves forward it is necessary for accountants to move into a role of reviewing transactions rather than posting them.

Download the 7 Habits of Highly Effective CFOs to find out how you can become a valuable financial leader.

history of accounting

Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to manage your company before you prepare your financial statements.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

history of accounting

Share this:
1

Materiality Definition

See Also:
Accounting Concepts
Accounting Principles
Audit Committee
Auditor
Compliance Audit
What Should Your Month End Reports Contain?

Materiality Definition

Materiality is the amount that an omission or misstatement within the financial statements will seriously mislead people who use the financial statements of that company.

Accounting Materiality

Accounting materiality is often judged by the relative amounts and the nature of each item or transaction. Auditors use this concept everyday during the audit process. During the audit process, gather evidence of material. Then try and assess whether you should do something about that particular. Often times, address these serious issues before they become a problem. If an item is considered to be material, then either look further to address a change or disclose it within the notes of the financial statements.


Is your closing process as efficient as it could be? Access our Complete Monthly Close Checklist to use when you close your company’s or your client’s monthly books.

Materiality

Materiality

 

Share this:
0

Management Audit

See Also:
Total Quality Management
Capital Structure Management
Activity Based Management (ABM)
Retainage Management and Collection
Management Definition

Management Audit Definition

A management audit can be defined as an audit which analyzes the effectiveness of the management team of a company. The purpose of this is seven-fold: understand current practices, relate these to company financials, suggest new procedures which will improve the efficiency of managers, present a financial gain related to these new procedures, and create benchmarks and projections for the future. Finally, a management audit letter is the last piece of material shared with the client; it is a report of the findings.

Management Audit Explanation

The management audit process can be explained by the auditing of both the management method as a whole as well as key management staff. This is important to establish the effectiveness of both the leaders of the department as well as how it performs as a team. In this way, it can fill the purpose of a staff audit or performance audit, depending on the scope of the company.

Management Audit Example

For example, Stan is an auditor for a major, Fortune 500 auditing firm. Rather than focusing on the accounting side of the process, Stan has another focus: management. His work, analytic in nature, involves paying attention to the qualitative as well as quantitative factors surrounding the process of managing client companies. Stan loves his work because he gets to attack a new problem constantly.

Recently, Stan has begun work with a new client. To serve this client, as well as all the others, will require application of fundamentals while still customizing the project to the specific needs of the customer. Management audits generally use certain processes as a control technique while applying industry specific analysis techniques.

Evaluation & Management

Stan begins by asking the initial evaluation and management audit with questionnaire forms. These questions lay the groundwork for him to begin the process. Next, he looks at company financials. This tells him how much all of the management operations are effecting company profits. He continues the process with a number of variables until he understands the company quite well.

Completion

Stan finally completes his management audit. From this he can present his audit to the client company board of directors. His assessment with leaders improve the processes which support company revenue creation. His assessment has several gems of information but one stands above the others: a key manager in the company is not as effective as expected. The company will deal with the problem in a way they see fit.

Stan loves his work. Though sometimes he has to provide negative feedback, he appreciates that he is the messenger which leads businesses to the path of success. With his skills in the process of performing a management audit, Stan will help clients, his employer, and himself. If you want to find out how you can become a valuable financial leader, download the 7 Habits of Highly Effective CFOs for free.

Management Audit

Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to manage your company before your financial statements are prepared.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Management Audit

Share this:
3

LEARN THE ART OF THE CFO