What is an Audit and Why do I Need One?

Mindy Barker | Barker Associates

In all my years as a CPA and a CFO, I do not recall anyone (ever) who has gotten excited about a financial audit.  No one wants to pay for an audit (in money and time), prepare schedules for the auditors, or answer the millions of questions they ask. Who has time for all of that? I get it – they’re only thinking of the pain. In fact, most would likely prefer to have root canal without a pain killer rather than go through another audit. 

The sad truth though, is that most financial records are not maintained in a proper manner. And, as such, they are not ready to be audited, causing increasing frustration, and yes, increasing work. This can be the result of –  

1) Early-stage businesses trying to save money. These organizations look only at immediate cashflow and expenses, and not at the long-term needs of the organization. This limited view is very short-sided and often results in trouble down the road. Proper accounting records help you make the right decisions now. And the cost overages from a first-year audit due to the company not having the proper records can far exceed the savings incurred. 

2) Lack of acquisition integration. This requires the auditors to audit several systems, requiring extra work and time, and thereby increasing the fees. 

3) Changes in personnel. This often results in a disarray of the financial information, as there are generally issues with training new personnel and maintaining continuity in the financial process. Continuity is essential for consistency in accounting, as well as a strong foundation of GAAP (Generally Accepted Accounting Principles). 

4) A system conversion occurred in the current fiscal year and the historical information is not easily available to audit. 

Often, the reason any relationship does not go well is a lack of understanding and respect for the other party.  This is no different than with an audit. Once you understand the purpose of an audit and the rules and constraints under which an auditor must operate, you will be more apt to lean into the process, prepare your company more thoroughly, and have a far better experience with the audit and auditors. 

While there may be many reasons for a financial audit, they all have the same two main objectives – to answer the following questions:  

1) Are the financial statements for the period audited prepared in accordance with GAAP? 

2) Is the company a going concern and able to remain a viable business? 

Affirmative answers to these questions are keys to an organization’s financial success.  

It is important to note that the auditor cannot prepare the financials and audit them. Doing so would be a violation of the independence rules, and is unethical. Through an audit, you receive an independent fresh set of eyes looking at the financial books and process.  As a result, the auditors may:  

a. Recommend improvements in processes that save time or enhance controls, or 

b. Find potential fraud.   

After understanding the types of audits and the benefits, it is important to understand why an organization is required to have an annual financial audit. In most instances, the audit will fall under one of the following:  

1) Some lending institutions/banks require it. 

2) Some investors, private equity, or other types of investors may require it. 

3) The company is publicly traded. 

4) The company has undergone a public offering, which includes crowd-funding. 

Although financial audits are the most commonly referred to audits, you should be aware that there are other types. For example, a forensic audit is used to determine if fraud is present within an organization or under other sets of circumstances, such as a high-profile divorce. If you suspect fraud, you should request and pay for an audit of this nature, and NOT rely on a financial audit. As discussed above, detecting fraud is not one of the primary objectives of the financial audit. 

It’s a new year – time for reconciled accounts, fresh books and records, and even a fresh perspective. It’s time for the perception of audits to shift from only thinking of the work involved in preparing for them to the enormous benefits that can be uncovered from the audits themselves. In essence, it forces an organization (and its officers and directors) to stay organized and honest about its financial well-being. With this frame of mind, maybe more will choose an audit over a root canal after all. 

Do you need help preparing for an upcoming audit? If you are either preparing for a first-year audit and/or you have had some significant changes in the organization over the past year, let’s work together to set you up for success by ensuring you are prepared. Barker Associates has extensive experience working with organizations to prepare the many schedules and memos required for an audit, helping them keep the costs under control. Use this link to my calendar to choose the best time for your free 30-minute audit consultation.