1st-time audit

Why an audit?

An external financial statement audit is useful in some situations. Some examples are:  

1. Expansion has increase cash needs and bankers or investors want the assurance of an audit as a condition of a cash infusion. 
2. In preparation for eventual sale the current owners believe an audit will get them a higher selling price. 
3. One potential way for an owner to get the cash out of their business is to sell to the employees through an ESOP (Employee Stop Ownership Plan), which requires an audit for groups over 100 employees. 
4. An owner that has been very hands on is stepping back, perhaps as part of generational transition. 

Remember, it will usually be two years from the first audited balance sheet until you have a full set of financial statements with two income statements. 

What is a Financial Statement audit?

The audit opinion states that “financial statements present fairly an entity’s financial position, results of operations, and cash flows in conformity with generally accepted accounting principles”. 

Auditors sample transactions, rely or reasonable estimates and form an opinion based on the evidence they find. 

What an audit is not

“Fairly” is not an absolute statement. Will you collect every penny of your accounts receivable? Will fixed assets last for exactly as long as the estimated period? Likely no. However, these things can be materially accurate. The small differences (often offsetting) will not make a difference to large decisions. 

Audit standards know that if two or more people are colluding to get around otherwise functioning internal controls, the auditors may not find it unless the effects are very large . 

What affects the cost of an audit?

The auditors will want to look at your internal financial statements and understand where the risks are, the volume of transactions, internal controls in place and sources of external evidence to support your financial statements in order to give you an estimate of cost. 

The more prepared you are, the less time auditors need to spend on your audit and keep the bill under control. Steps to control costs are – 

1. Create a project plan and execute the plan 
   1. Asses where your company’s financial statements are prepared in accordance with US GAAP (Generally Accepted Accounting Priciples). Up front discussion with an outside professional can usually uncover most areas of difference. To quote Donald Rumsfeld, don’t be surprised if there are “unknown, unknowns” that come up during the audit

2. Gather information to back up the –
   1. Balance Sheet – usually reconciliations of what is in the balance sheet accounts and that these amounts make sense. For example, the detail of Accounts Receivable agrees to the General Ledger, and that there is a reasonable chance these amounts will be paid. 
   2. Income Statement – usually variance analysis compared to the prior year and budget. Have explanations for changes in sales, margins and expenses.
   3. Cash Flow Statement – most will come from the other two statements but detailed work is needed on sales of fixed assets and other depreciating or amortizing assets. 
   4. Notes to the financial statements – examples include future lease costs, debt repayments and top Customers and Suppliers. 

3. Gather evidence to support amounts – examples include
   1. Bank statements for cash and loan balances, 
   2. Inventory counts (auditors will likely want to attend both at the beginning and end of the year to be audited 
   3. Invoices for inventory and fixed assets 

2. Monitor against the plan with your auditors. Just because you send information to the auditors does not mean they accept it as complete backup for a financial statement amount. 

3. Communicate. A first-year audit can be very challenging for both sides. Being open and communicating helps. Remember, the auditors do not have prior year examples to work from either.

If you are considering getting a first-time audit and the task seems beyond your staff’s ability, call Mark Twain CFO Consultants. Our principal, John Salmon, has completed over 80 year ends and audits in all sizes of companies, on both sides of the desk. John is available to meet and discuss your needs and help as much or as little as fits. 

We will listen to your needs, assess the challenges, and communicate them to you clearly. We can make a plan together. 

Contact John at 312-479-0963
Or you can email at jsalmon@marktwaincfo.com