What Is a Financial Statement Audit?
A financial statement audit is an independent examination of the fairness and accuracy of your financial statements, performed by a certified public accountant (CPA). Although not required by law, financial statement audits are ideal for private companies that want to provide a high level of assurance to shareholders, lenders, creditors, suppliers, potential buyers and other financial statement users. The audit can help you meet regulatory or contractual requirements, improve internal controls and risk management and enhance your ability to secure financing or attract investors.
If you’re a chief financial officer or controller, a financial statement audit can be a formidable proposition — especially for a startup or smaller organization. To make the process less overwhelming, this guide provides a high-level overview of:
How Financial Statement Audits Provide Objective Assessments
What value does a financial audit bring to your company? An independent, external auditor objectively assesses the accuracy and fair presentation of your financial statements by addressing the following questions:
- Do your financial statements comply with generally accepted accounting principles (GAAP) or other applicable accounting principles?
- Are your internal controls over financial reporting designed properly and functioning effectively — specifically the processes and procedures that ensure accurate, reliable and compliant financial statements?
After your auditor completes a thorough audit of your documents and internal controls and processes, you’ll receive an audit report showing their opinion on the above.
Alternatives to Financial Statement Audits
Private companies are not always required to have a financial statement audit. Many opt for alternative financial statement reviews due to factors like:
- Cost considerations. Audits can be expensive, especially for small businesses or startups with limited budgets.
- Time and resource constraints. Audits require significant management time and effort to prepare documents and respond to auditor requests. Your employees may need to divert their focus from daily operations to support the audit process.
- Strong internal controls: Companies with well-established internal controls may rely on periodic internal audits or reviews instead of a financial statement audit.
It’s important to note that a financial statement audit isn’t the only way to ensure your financial statements are accurate and fair. Depending on your needs, there are several alternatives that provide varying levels of scope and assurance. These include:
Financial Statement Audit Alternatives
Type of Financial Review
Focus Areas
Typical Users
Financial statement review
A CPA provides limited assurance about the reliability of your financial statements through analytical procedures and inquiries to identify any misstatements.
Smaller businesses that don’t require a full audit but still want some level of external validation for their financial reporting.
Compilation
The CPA prepares your financial statements without verifying data accuracy or providing any assurance about financial statement reliability.
Smaller businesses that need financial statements for internal use or to meet basic reporting requirements without the need for assurance.
Examination
A CPA evaluates specific financial information against established criteria and conducts thorough testing, analysis and data validation.
A company may use an examination to review areas like internal controls, regulatory compliance or forecasts. It provides more assurance than a review or compilation.
Agreed-upon procedures (AUP)
The CPA performs specific tasks that you define to address particular financial or operational concerns. This review doesn’t provide assurance.
A company may use AUP for tasks like verifying inventory, testing a contract for compliance or reviewing specific transactions.
For more clarity on alternatives to financial statements audits, review our quick guide on audit vs. review vs. compilation.
Financial Statement Audit Requirements
Your auditor will request many types of documentation and records. These are some of the typical documents you’ll be asked to compile and submit:
- Bank statements
- Executed agreements such as lease agreements, revenue contracts, equity preferred stock agreements, organizational documents and any litigation
- Supporting schedules that tie into the trial balance (financial report showing the closing balances of all accounts in the general ledger at a point in time), bank reconciliations, accounts receivable aging, fixed asset roll-forwards and deferred revenue schedules
- Process and control documents
If you’re at all unsure about any document request, reach out to your audit team for clarification. Get our audit prep work checklist for more information on documentation requirements.
Quick Rundown of the Financial Statement Audit Process
After you hire an external auditor, these are the general next steps:
- Pre-planning. Assign your internal audit team. Meet with your auditor to set expectations and the timeline to discuss significant accounting questions or complex accounting areas. Receive your document request list.
- Planning. Gather documentation and walk through all of your processes and controls with your auditor. Your auditor will determine the audit area(s) after reviewing your risks related to financial statements.
- Fieldwork. Auditors will visit your location to gather evidence, review documents and perform tests to verify the accuracy and reliability of your financial statements.
- Wrap-up. This is the final phase of the audit process where auditors complete their reviews and finalize their findings. Key activities include reviewing workpapers, addressing open items, finalizing the audit report and communicating with management on findings or recommendations.
For more in-depth information on the audit process see our first-time audit guide to financial statement audits and single audits.
Financial Statement Audit Deliverables
At the conclusion of the audit, these are the deliverables:
Audit report
Your auditor will release the audit report expressing their opinion on the fairness and reliability of your company's financial statements.
Financial statement
You will generate the financial statement. It’s your own report summarizing the company’s financial performance and position. Or, you can ask your auditor to prepare the financial statement.
Post audit letter
The post audit letter is issued by the auditor to those charged with governance (i.e., the board of directors) and summarizes key findings, observations and recommendations related to the financial statement audit.
Internal control letter
If the auditor identifies weaknesses or control deficiencies in internal controls over financial reporting, they will present an internal control letter to your management and board/audit committee. This letter outlines the weaknesses/deficiencies and will also include recommendations for correction.
Best Practices for Financial Statement Audits
It’s no secret that an audit can be daunting. However, you can take steps to make the process smoother:
- Give yourself enough time for fieldwork. Ideally, you want to have six months to prepare for the audit. If the audit is being requested by a bank or other party, you may need to ask them to push fieldwork back to give you enough time to provide all the documentation.
- Be prepared. Be sure that the auditor is aware of any potential issues, has a complete understanding of your company’s process and controls and you’ve sent documents with enough time for the auditor to prepare for fieldwork.
- Make sure the books are closed properly before fieldwork begins. An audit can get messy when supporting schedules for closing don’t tie to the trial balance. Tip: When preparing for the audit, work down a checklist and capture all the items your auditor will be looking for.
- Manage the open items list. During fieldwork, your audit team will send over updated open items lists every day or every few days to let you know what’s still needed. It’s important that you begin fieldwork with clear expectations on how and how often you want to receive requests from the audit team. Be prepared to reset expectations throughout the process.
Turn Your Financial Statement Audit Into an Opportunity
Is a financial statement audit on your horizon? Minimize the stress with our first-time audit guide and learn how our financial statement audit experts can help you turn this sometimes formidable process into an opportunity to strengthen internal controls and risk management and build stakeholder trust.
