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Importance of Audits & How to Get Started

Many companies require outside debt or equity funding to support business growth and development. However, the excitement around finally receiving funding can be dampened by the capital provider’s requirement of an official financial statement audit. If a company has never experienced an audit, the initial reaction to this requirement might be fear or anxiety. You don’t know what to expect, or how to allocate the time, resources, and money to complete a successful audit. But instead of fearing a first-time audit, companies should embrace it as an opportunity to bring an independent advisor to the table— one that will help navigate through prevalent challenges and offer valuable guidance and advice.

In order to welcome this opportunity, companies want to know what’s coming. Here are the key aspects of an audit that companies can expect to encounter, and considerations to ensure a smooth audit process.

Why Do You Need an Audit?

If you’re in need of financing or obtaining a loan to support the growth of your business, most creditors and banks require audited financial statements. If you’re looking to be bought out or attract venture capital, they also like the comfort of audited financials. And, if you dream of going public in the future, the Securities and Exchange Commission (SEC) requires a company to have up to three years of audited financial statements before registering to go public. Companies should be prepared to be audited from the beginning to handle these events seamlessly.

How to Select an Audit Firm

When you’re selecting an audit firm, it’s important to ask questions that pertain to their experience in your industry, your current stage of development, and your potential exit strategies.

Also focus on the amount of interaction the principal or partner of the audit firm will have in the process with your company. Some only get involved in final sign-off, but it's in your best interest if they're more involved throughout the audit. After all, these are the people with the most experience and expertise.

Make sure to fully understand how the audit services are priced. Is it a fixed price or charged hourly? If charged at an hourly rate, when would those rates change and how will you be notified? How do they handle billing when you call on your audit firm outside of the audit timeframe?

Make sure you’re comfortable with the answers to all of these questions before you sign an engagement letter.

Three Steps to a More Successful Audit

Once you have decided on your audit firm, make sure you have a clear understanding of the audit process and keep an open line of communication with your audit firm. These three steps will help facilitate a smooth audit:

Step 1: Obtain the Request List from Your Audit Firm Early

The Request List outlines all the documents the auditors will need. Ensure to have these items available at the start of the audit. Make sure you have all important agreements (articles of incorporation, board minutes, policies and procedures manuals, lease agreements, equity agreements, etc.). The comprehensiveness of what’s listed in the request list and how well prepared you are is key to a successful audit. The better prepared you are, the faster the audit will be completed.

Step 2: Document Your Internal Controls

Auditors are going to want to understand the control processes in place. It’s beneficial to document your system of internal controls surrounding financial reporting and each significant area (revenue, cash, fixed assets, etc.). Not only does this save time during the audit, but it also provides you with an understanding of what internal controls may be missing.

The size of the company will dictate how in-depth the internal controls should be. Auditors will be looking to make sure there is a proper “segregation of duties” of employees’ responsibilities so there are no conflicts of interest or opportunities for fraud. Your auditors should be able to provide templates and checklists that are appropriate for a company of your size and complexity to assist with this documentation.

Step 3: Meet with Your Auditors Prior To the Planned Audit Field Work

It's important for you to discuss any one-off transactions, contemplated transactions, and complexities prior to the audit to resolve any accounting matters before they become issues. These matters may include mergers and acquisitions, equity instruments, new revenue streams, new accounting guidance, and more.

Conclusion

An audit is a great opportunity for better insight into your business. The process shouldn’t be something that a company fears, but rather a chance for the company to validate its financial results, and verify that it has proper accounting policies and procedures in place. With proper planning and diligent preparation, you can increase the likelihood of the audit process running smoothly, gain valuable insight on your company, and have confidence that your business is on the right financial path.