You’ve just been told you need a CPA audit by your banker to satisfy covenants, or your Board of Directors is requiring that an audit be performed.
Most CPA firms perform audits in accordance with Generally Accepted Accounting Principles (GAAP). During an audit, your CPA will perform a test of your financial data, analyze the information, and gather an understanding of your company’s internal control process and how it impacts your financial reporting. Professional standards also require that CPAs obtain sufficient knowledge of a company’s internal control to plan the audit.
The audit’s complexity depends on the type and size of the business and the accounting processes and controls you have in place.
- Small businesses tend to have limited processes and fewer controls: The CPA firm has to test many transactions to satisfy the bank or board of directors.
- Medium-sized businesses would usually have written processes that everyone follows: The CPA firm has to match up policies and procedures, but they don’t have to test as many transactions.
- Big organizations typically have an internal audit team that matches up the controls and makes sure that their processes are always working: The CPA firm does the final audits of a company’s internal auditors who have checked and double-checked financials and controls throughout the year.
What should you do to prepare?
If you’re a medium or large business:
Maintain a robust system for internal controls. Companies with enough resources to complete the necessary preparations will have used systems that support internal controls. With or without an audit looming, adhering to strong accounting principles will always be tremendously helpful in safeguarding a company’s assets and resources, detecting errors, protecting against theft and fraud, and ensuring accuracy and completeness of accounting data.
Choose a CPA firm (you might even interview a few different ones) with broad auditing experience in your industry or similar industries and companies. The firm you choose will look at your internal control documentation, which is usually written somewhere in your policies and procedures, and will guide you as to the most efficient and effective approach to your audit.
For smaller companies:
CPA firms will want your bank reconciliation, a list of your fixed assets, and matching liabilities. They will ask you to hand over budgets and analytics, cash control measures (if applicable), payroll records, and accounts receivable and payable documentation. They will need access to sales, purchases, inventories, owner draws, shoe size. Everything.
Audit changes under COVID-19
CPA firms are completing audits remotely these days. They won’t be driving out to you, so part of your search for a CPA auditing firm should include making sure they have secure systems for transferring your financial data digitally. Their system should be encrypted and secure.
How disruptive is the audit going to be?
One good thing about remote audits is that the audit team doesn’t take up your conference room as they pour over your books. (And, they won’t drink your coffee and leave the pot empty, which no reputable firm does anyway, of course.) Whether in-person or remote, the amount of disruption depends on how good your internal controls have performed. If the systems you have instigated are sound, and the CPA firm understands the controls, then there will be less disruption of your day and the workers that keep your business afloat. On the other hand, if auditors find cash is missing, inventories are not correctly identified, payroll numbers are askew, etc., then the audit team may need to ask your staff for clarification.
Whether you are a small, medium, or a large business, manufacturing company or car dealership, your best friends come audit time are your internal controls and your processes. The CPA firm you choose will see if they have been faithfully and consistently implemented first by looking at the documentation (paper or digital) and then seeking answers from people responsible for the company’s data. A squeaky-clean audit is a function of your internal controls and processes. The best way to prepare for an audit is to keep excellent records all year long.
Good internal controls facilitate good planning and decision-making based on rigorous, audited reporting. Everyone wins, including the bank, the company, its Board of Directors, its owners (shareholders), and employees. Consider that being told you need an audit could be an excellent way to sleep better at night, knowing your books are in order.