How to Get a Company Audited: The Process Explained

An audit is an independent examination of a company’s records, primarily its financial statements. The purpose is to lend credibility to this information, providing assurance to stakeholders like investors, lenders, and regulatory bodies. An independent auditor conducts this process to form an opinion on whether the information fairly reflects the company’s performance and financial position. This examination uses selective testing to gain reasonable assurance, rather than checking every single transaction.

Determining the Need and Scope of the Audit

The decision to conduct an audit is driven by either mandatory requirements or voluntary choices. Public companies listed on stock exchanges are required by the Securities and Exchange Commission (SEC) to have their financial statements audited annually. Lenders may also require audited financials as a condition of a loan, and entities receiving certain government funding can face a mandatory audit.

A company may also choose a voluntary audit. An audit can enhance credibility when seeking investors, as it provides independent verification of financial health. It can also be a proactive step when preparing to sell the business or merge, ensuring financial information can withstand scrutiny. Internally, a voluntary audit can improve financial discipline and internal controls.

Once the need is established, the next step is to define the audit’s scope by determining its type. A financial statement audit is the most common, focusing on whether a company’s financial statements are presented accurately and in accordance with Generally Accepted Accounting Principles (GAAP). A compliance audit evaluates if a company is adhering to specific laws, regulations, or internal policies, such as workplace safety rules or data privacy standards. An operational audit examines the efficiency and effectiveness of a company’s procedures to identify areas for improvement.

Preparing for the Audit

Financial Records

The auditor will require a complete general ledger, which is a full record of all financial transactions for the audited period. A trial balance, listing all account balances before adjustments, is also needed. The company must provide its primary financial statements: the balance sheet, income statement, and statement of cash flow.

Supporting Documents

Auditors verify financial statements by examining underlying evidence. The company must provide all bank statements and corresponding bank reconciliations for the period. Significant contracts and agreements, such as leases, customer contracts, and vendor agreements, must also be available for review. A complete file of accounts payable invoices and accounts receivable aging reports will be needed to test expenses and revenues.

Corporate and Legal Documents

Auditors need access to organizational documents to understand the company’s governance and legal structure. This includes the articles of incorporation, corporate bylaws, and minutes from board of directors meetings. These documents provide context for financial transactions by documenting major decisions and approvals.

Internal Control Documentation

An auditor evaluates the strength of a company’s internal controls to determine the risk of misstatement. The company should prepare documentation describing its financial processes and policies. This can include written procedure manuals, flowcharts of transaction cycles, and a clear description of the segregation of duties, detailing who is responsible for authorizing, recording, and handling assets.

Selecting an Independent Auditor

Identify qualified Certified Public Accountant (CPA) firms through referrals from bankers, attorneys, or other business owners. State CPA societies and industry associations also maintain directories. It is beneficial to find firms with experience auditing companies of a similar size and in the same industry, as they will be familiar with relevant accounting issues.

Evaluate the credentials of potential firms. The firm must be properly licensed, and its auditors should hold CPA designations. Companies should ask for a copy of the firm’s most recent peer review report, which is an external review of a firm’s accounting and auditing practices by another CPA firm. This report provides insight into the firm’s adherence to professional standards and the quality of its work.

A company should issue a Request for Proposal (RFP) to solicit formal proposals. The RFP provides potential auditors with the information needed to submit a bid. It should include a company background, the type of audit required, the desired timeline, and specific expectations for the engagement.

When reviewing proposals, consider factors beyond the fee, such as the firm’s proposed methodology and the experience of the assigned engagement team. It is common to interview the top candidate firms to meet the team and ask clarifying questions before making a final selection.

The Audit Engagement and Process

Once an auditor is selected, the relationship begins with an engagement letter, which serves as the contract between the company and the audit firm. It outlines the audit’s objective and scope, the responsibilities of both management and the auditor, the expected timing, and the fee structure. The engagement letter is a foundational document that prevents misunderstandings about the services to be performed.

The audit process begins with a planning stage, involving meetings between management and the audit team. Auditors use this time to understand the business operations, internal controls, and industry environment. They also discuss risk areas, establish a timeline for fieldwork, and coordinate logistics for accessing records and personnel.

Following planning, auditors begin fieldwork, which can be done on-site or remotely. They perform substantive testing by examining transactions and account balances, and also test the effectiveness of internal control systems. This phase includes making inquiries of company staff to corroborate information.

The audit team and company management maintain communication throughout the process, with auditors providing progress updates and discussing issues as they arise. The process ends with a closing meeting where auditors present preliminary findings and proposed adjustments. This meeting allows management to respond before the final report is issued. In addition to the formal report, the auditor may issue a management letter to highlight observations and recommendations for improving internal controls.

Understanding the Audit Report

The independent auditor’s report presents the auditor’s formal opinion on the company’s financial statements. The most common outcome is an unqualified opinion, or a “clean” opinion. This signifies the auditor has concluded the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

A qualified opinion is issued when the financial statements are fairly presented but with a specific exception. This may occur due to a limited scope issue that prevented the auditor from examining a particular area or a material departure from accounting principles. The report specifies the nature of the qualification.

An adverse opinion indicates that the financial statements as a whole are materially misstated and do not conform to accounting standards. This opinion is a serious red flag for investors and creditors, suggesting the financial records are unreliable. It is rare because companies will make the necessary corrections to avoid it.

A disclaimer of opinion is issued when the auditor cannot obtain sufficient evidence to form an opinion. This is not an opinion on the financial statements, but a statement that one cannot be expressed. This might happen due to significant limitations on the audit’s scope imposed by the company or other circumstances.