How to Prepare for a Financial Statement Audit or Review

We come across clients that require a review or an audit either for their banking requirements, want to support additional funding for not-for-profit organizations, or the owner wants to ensure that management is maintaining accurate records.  An audit or a review provides some different levels of assurance over the financial statements since the work involved varies between an audit and a review.  When you engage an accounting firm to conduct an audit or a review, be aware of what the process entails.

Firstly, there is a common misconception that an audit will detect all errors or fraud.  Performing a 100% audit of the entire financials is not reasonable due to time and cost constraints.  Therefore, an audit is conducted under a risk-based approach and using sampling tools to obtain reasonable assurance rather than absolute assurance.  Also, due to the nature of fraud, the individual or individuals involved in fraud will purposely create ways to conceal the fraud and as such the nature of which will be difficult to find.  The auditor must assess the risk of fraud, but its not fair to expect to have the accounting firm to identify fraud at all times.

Now, moving on, what should you prepare for a financial statement audit?  The auditors will generally provide their client with an audit assistance package.  This will list all the items the auditor will need to begin with such as the trial balance, financial statements, bank statements, expense & revenue details, invoices, confirmations to send to 3rd parties, etc.  If your company has significant inventory, the auditor will be present to observe the inventory count and conduct their test counts on a sample basis.  Also, you should expect the auditor to be at your premises for a few days to a few weeks depending on the size of the company.  So make them feel welcome and right at home :)

The auditor will be requesting for a lot of information from the staff for their testing.  They will inspect third party source documents, and discuss with management and the individuals involved in impacting the financials.  Their presence will be felt!  However, an audit is a necessary evil for many of our clients, and it is important to know that both the auditors and the accounting staff at the client site both need to work together to complete the audit.

A review engagement does not involve extensive procedures as an audit as it involved analytical procedures, inquiry, and discussion with management.  Therefore, expect the accounting to ask questions on the financial data, and variations from prior year.

If you are considering whether you need an audit or a review, feel free to call an MP Group professional.  We can help your company find its way.

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