Learn How To Ready Your Business For An Audit And What Other Financial Reports Tell You
This article is part of our Small Business Corner series, which is designed to address challenges and considerations regularly faced by owners of small- to mid-sized businesses. Check out past Small Business Corner articles at www.reacpa.com/small-business-corner.
Preparing for an audit can be overwhelming and time-consuming, and if you’re not ready, you may experience issues and significant delays (maybe even additional audits!). Don’t get caught off guard. If you adopt a “hope for the best but plan for the worst” mindset, you can be prepared for virtually anything at a moment’s notice, which is a particularly good way to come out on top if (and when) your business needs an audit.
As your business grows, you might find yourself in need of an audit. A little foresight will help ensure you have nothing to worry about.
- Request A Physical Inventory Observation: Conduct a physical inventory if you think you will soon reach the point of having an audit. Completing this inventory observation will make the auditor comfortable with your inventory quantities right off the bat, allowing them to provide a complete report on your balance sheet and income statement. Also, with a physical inventory observation done in advance, you could potentially avoid a scope limitation in the audit report for the current year’s income statement.
- Provide Reconciliations And Account Summaries: The reconciliations and account summaries of the opening balance sheet and the current year in which you need an audit should also be readily available. This helps the auditor review your balance sheets while avoiding the hassle of trying to reconcile information back to the trial balances.
- Prepare Control Narratives Of Significant Transactions Cycles: Documentation of your significant transaction cycles such as accounts receivable and accounts payable information should be readily available. An auditor needs to understand the significant transaction cycles and key controls that are in place, along with each employee’s role throughout your business. Furthermore, walk-throughs will be conducted, so it’s important to have your team available to assist the auditor.
- Team Availability: Having your team accessible during the audit process is vital. There will be plenty of questions and discussions that occur throughout the audit. With a significant collaborative effort, the time and cost of the audit can be greatly reduced.
Don’t Fear The Audit
Listen to episode 110: “How To Prepare For A Painless Audit,” featuring James Moore, on unsuitable on Rea Radio, our award-winning podcast.
What Is Your Financial Report Telling You?
Depending on your needs, you have a few different options available to address your business’s financial statements. For example, the following reporting options may be valuable to you if you just need a financial statement that is not audited:
- Financial Statement Preparation: Under AR-C Section 70, an accountant may prepare your business’s financial statements (which is a non-attest service) without issuing a formal report. With this work, your CPA takes your financial information and provides a clean financial statement in accordance with a specified financial reporting framework such as accounting principles generally accepted in the Unites States of America (U.S. GAAP) and indicates that no assurance is provided on the financial statements. It’s important to note that even though this is a cost-effective approach, your CPA isn’t required to make a determination regarding independence and doesn’t have to verify the accuracy and completeness of the information provided by management.
- Compilation Work: With a compilation, the financials will be accompanied by a written report. Similar to general financial statement preparation, your CPA doesn’t need to be independent. In cases where they are not independent, the report should be modified. Additionally, the report is required to indicate that the financials were not audited or reviewed, and that the accountant does not express an opinion on the financials. Compilation work requires an accountant to understand the client’s business and industry. This can be another cost-effective way for management to have a clean financial statement with a report from a CPA to utilize internally or for external purposes.
At the end of the day, your needs will be determined by what you need your financial reports to do. Oftentimes, management is just looking for a basic financial statement that ties into their tax return as part of their year-end reporting, or maybe you need a clean statement to provide to third parties such as a bank. Either a preparation or compilation engagement may be viable options. You’ll need to think about the extra cost associated with having a compilation report signed by your CPA. Understanding your options when it comes to your business’s financial reporting and preparing for an audit is important for long-term success. Taking action to prepare your business for financial reviews will help avoid any headaches down the road. Give me a call at 216.573.9051 or email me to learn more about your options and how you can start preparing for an audit.
By Don Grassler, CPA (Cleveland office)