For many business owners, the idea of conducting an independent financial statement audit causes them to cringe. Although public and private company audits might be challenging, conducting one can be necessary to satisfy lenders, regulators, and investors. However, they can be less overwhelming once you understand each audit stage.
Let’s look at the five parts of a financial statement audit so you can be better prepared.
The Five Stages of an Independent Financial Statement Audit
There are five stages of an independent financial statement audit. Before beginning the audit process, it’s important to be familiar with each step to be as prepared as possible.
1. Audit Planning and Preparation
Depending on your organization and industry, an annual financial audit may be required. Waiting until the last minute to determine deadlines and due dates can add unnecessary stress to the engagement. Before the start of the engagement, collect the balance sheet, income statement, and cash flow statement for your audit. A company’s audit teams should prepare these documents ahead of time and gather any other necessary and required information. This will make it easier for the auditor and team when the audit date arrives.
2. Review Internal Controls
During a financial statement audit, the auditors will review a business’s internal controls to check that they are strong and safeguard assets.
These may include:
- Authorization Processes
- Segregation of Duties
- Access Controls
- Document and Record-Keeping
- Reconciliation Procedures
- Physical Asset Safeguards
- Performance Reviews and Monitoring
- Information and Communication Systems
- Risk Assessment Practices
It’s helpful that the company has a good understanding of its internal controls and processes and how to access any password-protected controls. Auditors may need access to those passwords during the engagement, so having them readily available is critical. can easily provide passwords to auditors during the engagement. The audit report will reveal any problems with internal controls and suggestions for correcting them.
3. Risk Assessment
Each financial statement audit accounts for a certain amount of risk, like misstating an earned income or expense. Because of this risk, the auditor should deeply understand the business’s procedures and internal controls before conducting a risk assessment. During a risk assessment, the auditor identifies any potential areas of risk misstatement and checks those areas against the reported financial statements.
4. Substantive Testing
Financial statements report more than a company’s assets. Inventory valuation, or the value of goods your business has not yet sold, is also reported on the financial statements. This is important because the audit team will need to know the entirety of a business’s worth to be able to test the internal controls to ensure their accuracy. Once the CPA auditor determines the accuracy of the internal controls, they will then test the internal controls against various variables that affect the business.
5. Financial Statement Reporting
Once the audit team completes the necessary steps of the independent financial statement audit, they will use their professional judgment, findings, and the accuracy of the company’s internal controls to develop a standard business report. The auditor will be able to answer any questions about the report.
Conducting An Independent Financial Statement Audit
Preparing for an audit can be labor-intensive and even nerve-racking if you’re unfamiliar with the audit process. At Assurance Dimensions, we have over 75 years of combined auditing experience, and our dedication to data security, plus our remote-friendly auditor services, sets us apart from other auditing firms.
Contact us today to learn more about how you can partner with us for your auditing needs.
