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In Need of an Audit? How to Get Started and Three Steps for Success

The good news is that you have either received financing or are about to. The other side is that those investors have an expectation that your financial statements will be audited. The common initial reaction to the news that you now need to have an audit may be a sense of fear or annoyance.  You don’t know what to expect, or how to allocate the time, resources, and most importantly, the money. The reality is that you must have your financial statements audited. So, rather than fearing your first-ever audit, embrace it as an opportunity.

Why Do I Need an Audit?

In addition to your investors requiring it, there are other reasons why getting audited financial statements are best practice.  If your business is ever acquired or bought out, a future buyer will require audited financials.  And, if you dream of going public in the future, the SEC requires a company to have up to three years of audited financial statements before it can register to go public. A good practice is to be prepared to be audited from the beginning.

How to Select an Audit Firm

When you are in your audit firm selection process, it’s important to ask questions that pertain to their experience in your industry, your current stage of development, and exit scenario. These all get to the amount of experience they have in guiding companies like yours.

Focus as well on the amount of interaction the owner, or partner, of the audit firm will have in the work with your company. Some firm partners only get involved in final sign-off but it’s in your best interest if that accounting firm owner is more involved rather than less.  After all, these are the people with the most experience and expertise.

Make sure to ask question on how the audit is priced. Is it a fixed price or charged hourly? If charged hourly rates, when would those rates change and how will you be notified? How do they handle billing for contact you make outside of the audit timeframe?

Make sure you are comfortable with the answers to all of these questions before you sign that 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 you get there:

Step 1 – Obtain the request list from your audit firm early

The Request List outlines all the documents the auditors will need. Make sure to have these items available at the start of the audit. The comprehensiveness of what is listed in the request and how well you do preparing it is key to a successful audit.  The better prepared you are, the faster the audit will get done and that is to everyone’s benefit.

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.). 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 to go unnoticed. Your auditors should be able to provide you with 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 fieldwork

It is important for you to discuss complex audit areas and get ahead of any potential accounting issues.   For early stage tech companies, two especially complex areas are equity and revenue recognition:

Equity – If your company issues equity compensation awards (i.e. restricted stock, stock options, etc.), be prepared for an audit of those awards.  Each award must have a corresponding authorization most frequently from the board of directors plus evidence of a signed award document. There will also be the requirement that these awards be based on an acceptable valuation methodology, so make sure you have yours clearly documented.

Revenue Recognition – Document your understanding of the process for recognizing revenues and discuss the appropriateness of the recognition with your audit firm.  Most companies have more than one revenue source that goes into their overall revenue number. You need to document this for every major revenue source.

An audit is a great opportunity for better insight into your business. It is your opportunity to prove the company is financially sound, with proper accounting policies and procedures in place. As it is your first audit, you should expect to run into some issues along the way.  By following the advice here, you can increase the likelihood of a smooth audit process and receive good insight throughout.