As a business owner, private company manager, or stakeholder, you’ve probably heard the term “GAAP audit” discussed. But what is it, exactly? Our article sheds light on what a GAAP audit is in relation to private company audits, who is involved in the process, and why it’s crucial for your company’s financial transparency and credibility.
What is a GAAP audit?
A GAAP audit is an independent examination of a company’s financial statements and accounting records to ensure compliance with GAAP. An independent auditor, auditing firm, or a Certified Public Accountant professional perform this type of audit. The yearly audit per GAAP assures investors, creditors, regulators, and the public that a company is in good financial standing.
What’s the process of a GAAP audit?
During a GAAP standards audit, an audit team will compare financial statements to proper documentation to show they represent an accurate record of the financial position, performance, and cash flows of a private company.
The Key Players
The key players during a GAAP standards audit include the audit committee, management, and the independent auditor. Let’s explore each set of responsibilities for the key players during the audit process.
- Audit Committee: Audit committee members are usually selected by the corporate governance of a private company, such as the board of directors. Audit committee members oversee the financial reporting process, provide financial records to auditors, and oversee the audit process, internal controls, and compliance with laws and regulations. This oversight ensures there is no financial fraud.
- Management: The management team, often led by the CEO and CFO, is responsible for the day-to-day operations of the company, including the preparation and presentation of financial statements. Management ensures that accurate financial records are maintained and provides those records to the audit committee and independent auditors for review. They are also responsible for implementing internal controls and for compliance with laws and regulations related to financial reporting. Their role is critical for providing the information that will be audited and ensuring that it is reliable and in accordance with GAAP.
- Independent Auditors: Auditors examine the financial statements, transactions, and internal controls to ensure they meet GAAP guidelines. Auditors also prepare the audit report with an opinion letter reporting the financial accuracy and compliance of the private company’s records.
The GAAP Audit Report
The audit report must be conducted by an independent auditor with no ties to the small business or private company. This independence is essential to provide an unbiased and objective audit opinion and report.
During the audit process, the external auditor examines the financial records to ensure GAAP, legal, and regulatory compliance. They’ll also evaluate internal controls, such as the policies and procedures that safeguard assets and prevent fraud and unethical practices. The process finalizes with the auditor preparing the GAAP audit report with an opinion letter. There are four opinion letters: unqualified opinion, qualified opinion, adverse opinion, or disclaimer opinion.
- Unqualified Opinion: This letter states that the private company’s records followed GAAP guidelines accurately.
- Qualified Opinion: This letter shows concern about the financial records, but no fraud was detected.
- Adverse Opinion: This letter states the financial records were either misleading or wrong.
- Disclaimer Opinion: This letter is prepared when the financial records provided by the audit committee to the auditor are not sufficient for the auditor to make a judgment of the accuracy of the financial records against GAAP guidelines.
Assurance Dimensions: Your Audit Firm
Our CPA firm has over 75 years of combined experience, and we understand the complexities of the GAAP framework and regulations. Contact us today to learn more about our audit and assurance services and our commitment to our US and global clients.
