What Does a Financial Statement Audit Actually Involve?

If your business has never been through a financial statement audit, the process can sound much more intimidating than it actually is.

For most small and mid-sized businesses, an audit is an independent examination of the company’s financial statements and the records supporting them.

The goal is for an independent auditor to determine whether the financial statements are fairly presented based on the applicable accounting standards.

Why Would a Business Need an Audit?

An audit may be required by:

• A government agency or regulatory program

• A lender or investor

• A grant or funding agreement

• A contract

• An ownership or governance requirement

• Publicly Traded

Some businesses also choose to obtain an audit voluntarily when they need a higher level of credibility around their financial statements.

What Does the Auditor Actually Review?

For an SMB, the auditor generally starts with the company’s financial statements and accounting records.

They may request:

• Bank statements and reconciliations

• Payroll records

• Revenue and expense documentation

• Contracts and agreements

• Loan documents

• Accounts receivable and payable records

• Fixed asset information

• Tax returns

• Supporting documentation for selected transactions

The auditor does not necessarily review every transaction. Instead, auditors typically perform testing and select samples to determine whether the financial statements are reasonably supported.

They may also confirm certain balances directly with banks, customers, lenders, or other third parties.

What Happens During the Audit?

A typical small-business audit generally includes four stages:

1. Planning The auditor learns about the business, its accounting system, operations, and areas that may present greater financial reporting risk.

2. Document Review and Testing The auditor reviews accounting records, reconciliations, supporting documentation, and selected transactions.

3. Questions and Adjustments The auditor may ask management for explanations or recommend adjustments when something in the financial statements is not recorded or presented correctly.

4. Final Financial Statements and Audit Report Once the work is complete, the auditor issues a formal report containing their opinion on the financial statements.

Why Can't My Regular Accountant Perform the Audit?

Your regular accountant may prepare your books, reconcile accounts, prepare financial statements, handle taxes, and help get your records ready for an audit.

However, the person or firm issuing the audit opinion must be independent.

The auditor is being asked to objectively evaluate the financial information, which means they generally cannot simply audit financial records they were responsible for creating or controlling.

Think of it this way:

Your accountant helps prepare the financial information.Your auditor independently examines it.

The two professionals can work closely together, but they serve different roles.

Why the Right Accountant Matters During an Audit

Having clean bookkeeping is important, but an audit requires more than knowing how to enter and categorize transactions.

The accountant supporting the business should understand financial reporting, accounting standards, reconciliations, and the types of documentation and explanations auditors expect.

An experienced accountant can help:

• Properly classify assets, liabilities, equity, revenue, and expenses

• Identify necessary accounting adjustments before the audit begins

• Prepare supporting schedules and reconciliations

• Address more complex accounting issues

• Explain unusual balances or transactions

• Respond efficiently to auditor requests

• Prepare financial information in accordance with applicable accounting standards

A business can have organized bookkeeping and still have accounting issues that become apparent during an audit.

How Should a Business Prepare?

Before an audit, businesses should make sure:

• Bank and credit card accounts are reconciled

• Revenue and expenses are properly recorded

• Payroll records agree with the accounting system

• Loans and owner transactions are properly classified

• Supporting documentation is organized

• Accounts receivable and payable balances are accurate

• Major balance-sheet accounts can be explained and supported

Resolving these issues before the audit can reduce repeated questions, audit adjustments, delays, and potentially additional audit costs.

Audit vs. Tax Preparation

An audit and a tax return are not the same thing.

A tax return determines the business's tax reporting and tax liability.

A financial statement audit evaluates whether the company's financial statements are fairly presented under the applicable financial reporting framework.

Depending on the business, both may be required.

How Balanced Accounting Services Can Help

Balanced Accounting Services does not perform independent financial statement audits. However, BAS can prepare and support your business throughout the audit process.

With more than 10 years of accounting and finance experience, including public accounting and audit, BAS brings an understanding of both financial reporting requirements and what auditors expect during the audit process.

BAS can assist with:

• Financial statement preparation and accounting cleanup

• Account reconciliations and balance-sheet review

• Identification and correction of accounting issues before the audit

• Preparation of audit schedules and supporting documentation

• Coordination with the independent audit firm

• Assistance responding to auditor requests

• Ongoing accounting support throughout the audit

The goal is not simply to hand an auditor a bookkeeping file. It is to provide financial records that are organized, supportable, and prepared in accordance with the applicable accounting framework.

Having the right accounting support can make the audit process more efficient and help reduce unnecessary delays and back-and-forth with the auditor.