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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

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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:

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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

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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

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Management Audit

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Managed Sales And Use Tax Audit Programs

See Also:
Auditor
Audit Committee
Choose a CPA/Auditor
Allowance for Uncollectible Accounts
Are You Collecting Business Data?

Managed Sales And Use Tax Audit Programs

A managed audit is an agreement with a state’s taxing authority in which a company self-examines its own books and records. A managed audit agreement allows the company, or an outside audit firm, to conduct a self review with guidance from the taxing state. But this occurs on its own time table.

In states that allow a self-audit, the ability to participate is usually reserved for companies that have been previously audited and that meet certain other criteria. This criteria may include type or size of business, records kept, and transactions under review. While voluntary, managed audits generally provide a company more control over the process and tend to be shorter in duration.

As an incentive to undertake and manage a self-audit, the state may offer an incentive such as a reduction in interest and/or penalty abatement on any deficiency uncovered. Although not all states offer financial incentives in their managed audit programs, in those that do, the rewards can be well worth the costs associated with a self-administered review.

Benefits of  Managed Sales And Use Tax Audit Programs

In addition to reduced penalty and interest assessments, other benefits can include the following:

  • Closed audit periods at the end of the managed audit process
  • Resolution of questions about taxability at the field audit level, during the audit process, not afterwards in administrative appeals
  • Less on-site time for state auditors and less disruption of regular business
  • Reduction in protested audits
  • Increased understanding of the audit process and the application of sales and use tax to the business, resulting in lower audit assessments in the future

While it may sound advantageous to undertake such an effort, a company will want to have an understanding of the increased expectation as well. For example, under a general audit, the taxpayer is not obligated to point out a known liability the auditor fails to uncover. Under a self-audit, a similar failure to disclose information could lead to a presumption of fraud.

Other aspects to consider include the following:

  • a company’s ability to provide the manpower
  • knowledge required for the self-audit

This ensures that it will work both effectively and economically. Even a managed audit requires employees to divert time away from their regular activities and job duties. Conduct an economic analysis comparing the internal cost of the audit versus the potential savings from reduced penalty and interest on uncovered liabilities before you negotiate a managed audit agreement.

Managed Sales And Use Tax Audit Programs

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Control Annual Audit Fees

See Also:
How to Choose An Independent CPA or Auditor
How to Hire a CFO Controller
American Institute of Certified Public Accountants – AICPA
How to create dynamic cash flow projections

Control Annual Audit Fees

Annual audits of a company’s financial statements may be required by partnership, loan or other agreements. The cost of an annual audit can constitute a significant administrative expense, if not properly managed by the company’s financial staff. Although the independent accountant has the responsibility of establishing the scope of the audit required in order for him to issue an opinion on the financial statements, the company can limit the involvement of the independent accountant’s staff, in order to keep the audit fee at appropriate levels. Read below to learn how to control annual audit fees.


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Procedures to Control Annual Audit Fees

Adopt the following procedures to minimize annual fees and to assure appropriate cooperation between the company’s financial staff and the independent accountant:

1. Meet with the independent accountant at least 90 days prior to the commencement of the audit to discuss changes, if any, in the company’s business since the previous audit. Include in the meeting the audit coordinators (company representative and auditor’s representative), as well as other key participants in the audit.

2. Review problems encountered during the previous audit in order to outline procedures to facilitate a more efficient audit.

3. Review auditor’s audit plan, including a detailed time budget by audit category, in order to establish responsibilities of the auditor’s staff and the company’s staff.

4. Request auditor to provide a schedule of schedules to be prepared by company’s staff (PBCs), including schedule skeletons, which the company should use to provide the data requested by the auditor. If the company routinely prepares similar schedules during the year, or can be system generated, then the auditor should not demand that his format be used – nor should his staff redo the schedule into their format.

5. Agree upon tasks that the company’s staff will perform for the auditor, such as copying documents, typing confirmations, pulling invoices and other required documents, reconciling differences reported on confirmations, etc.

6. Provide copies of any new significant agreements (debt, organizational, etc.) to the auditor.

7. If your company requires physical inventory counts, then mutually develop the scope of the physical inventory. This includes what assistance financial staff provides. Document the process in clear and complete count instructions.

8. Reasonably challenge the auditor’s time budget to perform the required scope.

9. Agree upon the timing of the engagement, including completion dates of each specific schedule; then provide them to the auditor.

Recommendations

The company ought to consider the use of a contract employee to supplement company staff with daily routine, or to prepare the PBCs during the audit, if the company staff is not available. Generally, such fees will be considerably lower than the auditor’s hourly fees.

When the auditor’s staff arrives on site to commence the audit hold a meeting with the key participants in the audit to review the agreed upon procedures, discussed above, and to establish any ground rules, such as no additional audit schedules are to be prepared by the auditors unless the company staff has had an opportunity to provide such data.

Regular progress meetings, involving the audit coordinators, to determine that the audit is on schedule, PBCs are being provided on scheduled due dates, and to discuss any problems being encountered. The auditor should discuss any anticipated time overruns. This is critical before time overruns occur to allow for possible corrective action by the company’s staff.

The auditor should discuss each proposed audit adjustment with the company before they are recorded. Record all adjustments recorded by the auditor in the company’s financial records prior to the completion of the audit. The company records should agree to the financial statements to be reported upon by the auditor before their report is finalized.

The company should retain a copy of any schedule provided to the auditor to facilitate preparation of the following year’s audit as many of the schedules may be maintained on a running basis during the year, and may be an important source of data for management.

Determine the Nature of the Report

Determine the nature of the report issued. For example, financial statements prepared in accordance with GAAP include comparative (1) balance sheets, (2) statement of income, (3) statement of owners’ equity, (4) statement of cash flows, and (5) notes to audited financial statements.

Detailed schedules of operating expenses are not required. However, if the company requests it, then include them in the report. Although this report requires certain footnote disclosures, but limit them only to required disclosures.

The independent public accountant’s report upon a company’s financial statements includes the following statements:

“These financial statements are the responsibility of Company X’s management. Our responsibility is to express an opinion on these financial statements based on our audit.” And “ …….as well as evaluating the overall financial statement presentation.”

Accordingly, the company may dictate the language to be used in the footnotes, so long as the language complies with GAAP.

Hold an audit wrap up meeting to review the final report. Discuss the problems and success encountered during the audit. Also, use this opportunity to lay the basis for the following year’s audit.


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See related article: How to Choose an Independent CPA or Auditor

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Forensic Audit

See Also:
Auditor
Audit Committee
How to Choose An Independent CPA/Auditor
How to Control Annual Audit Fees
Managed Sales And Use Tax Audit Programs

Forensic Audit Definition

A forensic audit, defined also as forensic accounting, is the process of auditing a company’s records for the purpose of satisfying a legal investigation. Forensic accounting, though it does not always yield a crime, is generally for the purpose of bringing an embezzlement or fraud case to its end. Tools are often employed for this work, such as forensic audit mortgage software, checklists, and more.

Forensic Audit Explanation

Explained as the method to find fraud in a company, forensic audit has other purposes as well. Forensic accounting can be used to find information for any government investigation: fraud, embezzlement, subpoena, deposition, or other. Along these lines, forensic accounting can involve a company, company employees, or just be used to find relevant records for an outside investigation. Forensic audit cost varies depending on the size and scope of the project.

Often times a forensic audit report does not yield results which indicate an illegal action. In this case, the investigation will cease and the results of the audit will not be used. In this case, all involved parties will be left as if no audit occurred.

Forensic Audit Example

Lucas works forensic audit jobs with a private auditing company. His employer is hired when a company expects fraud may be occurring in their ranks. Lucas is a CPA and can find records which can be used to bring a criminal to justice.

Recently, Lucas is sent on a project for a distribution plant of a major public company. He is prepared to find foul-play as he begins his investigation. As Lucas proceeds, it appears that someone has stolen funds from the company. All signs point to Susan, an account manager with the company. Lucas is about to talk with the company when he finds a crucial record for the case. It seems Susan was instructed to transfer company funds to an outside bank account. Though this seems suspicious at first, Lucas is able to find documents which support this action. He later finds that the issue lies with Susan’s boss, he lost some of the paperwork for this transaction. It was completed; however, it remained unaccounted for. Lucas looks a little deeper and finds no mistake other than the loss of the paperwork.

He completes his project on a good note. He recovered the funds while preventing a criminal case against Susan. Lucas enjoys his work but prefers to find no party at fault. He appreciates this welcomed change of pace and leaves work on a happy note.

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Choose a CPA or Auditor

Choose a CPA or Auditor

Do you choose a CPA or auditor? Any company whose stock is sold to the public is subject to the reporting requirements of the Securities & Exchange Commission, which include having its financial statements audited by an independent certified public accountant. Whereas companies, whose stock is not sold to the public, are not subject to such reporting requirements. But many such companies have an annual audit of their financial statements performed because one of the following may require it:

Owners may require one to satisfy themselves that the data provided by the company’s financial staff is “materially correct.”

It should be understood that an audit does not guarantee that the financial statements are 100 percent “correct” but rather that they are “materially correct and not misleading.” Also, the audit is not intended to detect fraud.

Selecting an Auditor or CPA

Selecting an auditor (CPA) is an important task for a company, as the CPA can be a valuable resource for information, and such relationships generally last for years. But privately-owned companies rarely use the 4 largest international (Big 4) certified public accounting firms; particularly if the company revenues are under $100 million. This is because the fees commanded by these firms who perform most of the audits of the world’s publicly owned companies would be too expensive.

Factors to Consider When You Choose a CPA or Auditor

Consider the following factors when choosing from the remaining firms:

  • The nature of the company’s operations – multi-national, multi-state, or multi-location within a state
  • Company plans for expansion, potential future debt placements, and IPOs
  • Experience of the CPA in company’s industry, particularly that of the local office staff’s experience
  • Size of CPA and its impact on ability of CPA to meet company reporting requirements, such as timetables and contractual deadlines
  • Compatibility of CPA staff with company culture
  • CPA’s reputation within the local business community, particularly the company’s bankers, trade creditors, or other debt holders
  • References from existing and former clients
  • Potential for year-to-year stability of staff assigned to your account
  • Tax experience in company’s industry
  • Composition of CPA’s staff assigned to account
  • Distribution of CPA’s businessaudits, write-up, tax
  • Willingness of CPA to utilize company staff to minimize annual audit and tax return preparation fees
  • Audit fee charged

Keep in mind that Bigger does not necessarily mean BETTER SERVICE for your company.

Determine which CPA or auditor are the right fit for your company using our 5 Guiding Principles For Recruiting a Star-Quality Team.

choose a cpa or auditor

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choose a cpa or auditor

See Also:

How to Control Audit Fees
How to Hire a CFO Controller
American Institute of Certified Public Accountants – AICPA
How to Control Annual Audit Fees
Certified Public Accountant (CPA)

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LEARN THE ART OF THE CFO