Financial Audit

Service description

A financial audit is a systematic and independent examination of a company's financial statements and records to assess their accuracy and compliance with accounting standards and regulations. It's a process where an external or internal auditor verifies the financial information to ensure it fairly represents the company's financial position and performance. Businesses conduct financial audits for a number of reasons, to include: (i) Improving operations and internal controls. (ii) Improving reputation, credibility, and trust as well as assuring stakeholders. (iii) Detecting and resolving errors and fraudulent activity. (iv) Facilitating growth and expansion.

Common industries

Any company preparing for outside investment, a loan covenant, a sale, or public reporting requirements.

ROI

An audit opinion unlocks capital and satisfies covenant or regulatory requirements that a review or compilation cannot meet.

Benefit

An independent audit of your financial statements — the highest level of assurance — for investors, lenders, or regulatory requirements.

Why get it

A review or compilation costs less but gives less assurance; an audit is what a bank covenant, an investor, or a regulator specifically requires when nothing less will do.

When you benefit

Typically annual, timed to the fiscal year-end, since lenders, investors and regulators usually expect a current audited set of statements.

What it costs

Usually a fixed fee, scoped to the company's size and the complexity of its accounts.

When you pay

Commonly billed in stages tied to the audit's phases — planning, fieldwork and reporting — or as one fee due when the audit opinion is issued. A first-year audit often costs more than the repeat engagements that follow.

Other costs

Preparing records the auditor requests, such as legal confirmations or a physical inventory count, can add internal staff time or third-party fees beyond the audit fee itself.

Risks to know

An auditor can issue a qualified opinion, or decline to issue one, if records are incomplete or a material issue can't be resolved — either of which can unsettle a lender or investor. Waiting until close to a deadline to start narrows the time available to fix problems the audit turns up.

When risks arise

Most issues surface during fieldwork, after the auditor has tested a sample of transactions and controls; a problem found late in that process is the hardest to fix before the reporting deadline.

The process

The auditor plans the engagement and requests a list of documents and schedules, then performs fieldwork — testing transactions, confirming balances with third parties, and evaluating internal controls. It reviews the draft financial statements and disclosures with management, resolves any open items, and issues its opinion. The business distributes the audited statements to the lender, investor or regulator that required them.

Your commitment

The business gives the auditor full access to its accounting records, bank statements, contracts and supporting documentation, and makes staff available to answer questions and produce requested items (a PBC list) on a schedule. Management also confirms, in writing, that the statements and disclosures it provided are complete and accurate.

Documents to gather

• Trial balance and general ledger detail for the period
• Bank and loan statements, and reconciliations
• Prior-year audited or reviewed financial statements, if any
• Material contracts, leases, and board or shareholder minutes

Helpful reading

• All About Auditors: What Investors Need to Know — U.S. Securities and Exchange Commission
• How financial statement audits deliver key business insights — Journal of Accountancy

Further research

• 2 CFR § 200.501(a) — Audit requirements: a single or program-specific audit is required for non-Federal entities that expend $1,000,000 or more in federal awards in a fiscal year (raised from $750,000, effective for fiscal years beginning on or after October 1, 2024)