Preparing for an Audit? Here’s What You Need to Know
Auditing is common and necessary for businesses. Understanding the process and the options available to you can make audits simple. Calculated, accurate auditing can improve your business so you can operate more efficiently in the future.
Importance of Audit Preparation
Preparation is key, especially when meeting financial reporting obligations during an audit.
Auditing serves as proof that your business meets legal requirements. Doing the work in advance shows that your business prioritizes accounting and follows relevant guidelines.
Audit preparation also has many secondary benefits. For instance, auditing unveils fraud quickly, mitigating harm. Auditing also encourages diligent recordkeeping so that your business is more aware and in better control of its financial situation.
Ultimately, auditing is an important process, and an audit prep checklist ensures it runs smoothly.
The Different Types of Government Audits
The first step when preparing for a company audit is to identify and understand which type of audit you are dealing with. There are 14 main types of audits, each one serving a unique purpose. Once you do this, you can then take the necessary steps to prepare for the audit and incorporate the results into your daily operations.
1. External Audit
External audits are performed by external auditors who have no stake in your company. They are ideal for businesses of any size that want to get a clear look at their company and its processes without bias. An external, expert opinion is often one of the best resources for difficult issues your company may struggle with, like finance or tax compliance. Additionally, external audits lend your business more credibility with financial stakeholders.
As you prepare for an external audit, take the time to designate someone to be the liaison between your company and the external auditor. A single point of contact will help both you and the auditor stay organized. This person will be responsible for compiling reports and communicating with the auditor about questions, findings and more.
2. Internal Audit
An internal audit is an audit your company handles itself, checking that each branch of the company is following the proper procedures and internal policies. The goal of an internal audit is to strengthen the organization and identify areas for improvement. To prepare for an internal audit, sit down with all areas of management and compile a thorough list of focal points. Your internal audit may prioritize elements such as risk management, compliance, accounting processes, financial reporting and operational processes.
3. Forensic Audit
A forensic audit is usually required at the request of the court, and its findings are used during legal proceedings to investigate fraud or misappropriation. To stay on top of a forensic audit, make sure your company keeps detailed records of all financial transactions, including dated receipts. Detailing a clear picture of your financial transactions before a forensic audit will help you prove your compliance and prepare your defense from all angles.
4. Statutory Audit
Statutory audits are a legally required review of a company’s finances and financial procedures. A statutory audit can occur on a federal, state or local level. Because there are differences between local standards and national standards, do not use the results of a statutory audit as your primary source of information about your company’s standings. As you prepare for a statutory audit, make sure you submit all required documentation requested by the initiator on time to avoid delay.
5. Financial Audit
A financial audit is conducted by external auditors and carefully analyzes your company’s financial statements, processes and position. Because financial audits are typically an annual audit, make sure you close out your company’s fiscal year before proceeding. This way, you get an accurate report of your company’s data.
6. Tax Audit
Tax audits are conducted by the IRS and are one of the most recognized types of government audits. Your company could experience a tax audit for several reasons, including non-compliance, or it could just be a scheduled event by the IRS. To adequately prepare for a tax audit, make sure you know the scope and purpose of the audit. If you know why your company is being audited, you can prepare your answers and have the appropriate financial information ready before the proceedings begin.
7. Information System Audit
An Information System audit is also known as an IT audit. This type of audit is an investigation into your company’s IT infrastructure, operations and related policies.
For a productive audit experience, create a list of all relevant systems and the controls currently in place.
The checklist of systems should include the applications, services, software and programs your company uses to collect, store and analyze financial information, as well as the information needed to access them.
The controls are the processes your organization uses to verify and protect the information within those systems. You should also compile a list of all known IT gaps, so your IT auditor has a place to start and focus their efforts.
8. Compliance Audit
A compliance audit ensures your business is compliant with a given set of standards or regulations. Compliance audits are essential, as they keep your company running smoothly and according to all laws. To avoid surprises, conduct your own internal compliance audit before the real thing so you can identify and address weak spots ahead of time. At the very least, you can learn something new to help your business run better.
9. Value for Money Audit
A Value for Money audit is typically used by non-profit organizations when a traditional for-profit analysis of an organization’s finances cannot be made. The purpose of this classification of audit is to analyze your organization’s financial effectiveness and determine whether your designated funds are correctly utilized.
Before a Value for Money audit, make sure you have a clear understanding of your organization’s money in and money out, as well as the value of all goods and services purchased. Creating a cumulative cash flow statement over time will help you gauge your standing as you start the audit.
10. Review Financial Statements
A review of financial statements is less expensive than a full audit and smaller in scope. A review of financial statements is useful for analyzing financial information and checking for accountability, accuracy and legality. Many organizations and businesses use a review of financial statements when they do not have financial experts on staff as a way to stay on top of their financial proceedings.
Because a financial review is smaller in scope than a full audit, it does offer less assurance. For this reason, make sure you check with all lenders or financial investors with a stake in your organization before electing to have a review of financial statements, as some may require full audits instead.
11. Agreed Upon Procedures (AUP)
An Agreed Upon Procedure (AUP) is when a company hires an external auditor to audit a specific part of their business. Companies may initiate AUPs if a part of their organizational structure is not performing up to standards or as a way to identify where they should allocate time or funds. Once you receive the results of an AUP, it is up to you to make sense of the findings and apply them to your practice. To do so, you may need to consult an outside expert. Keep this potential cost in mind as you plan and budget your AUP.
12. Integrated Audit
An integrated audit combines an external financial audit with an internal audit of your company’s operations. It is a way to identify discrepancies before between financial reporting and financial statements. Integrated audits take a closer look at how each branch of your company interplays with one another. To prepare for an integrated audit, make sure each department of your company’s management is aware of the audit so they can help implement internal changes, and provide the external auditor with all necessary information.
13. Special Audit
A special audit looks at one specific area of a company’s operation. It may be initiated by an outside agency, like the government, or from inside the company. To get the most out of a special audit, make sure all management has a clear understanding of the purpose and goal of a special audit. This will help your staff feel at ease and will give everyone a clear direction once the results of the special audit are returned to you.
14. Operational Audit
Companies initiate operational audits to get a fresh perspective on their company’s processes and structure. Operational audits are excellent for identifying weaknesses and strengths, as well as introducing new ideas to help your company thrive. Before conducting an operational audit, determine the scope of the review and create a list of goals. For the most productive audit experience, work with your auditor to identify the areas of concern you want the audit to focus on.
Simplifying Audit Preparation for Your Business Through Documentation
Preparing for any type of audit is easiest through an active process. You can take steps throughout the fiscal year to prepare for an audit, whether it’s sudden or planned. One effective way to practice perpetual preparation is through documentation.
Financial documentation is the act of keeping and organizing records about your business’s transactions. The types of documents to compile include financial statements, expense reports, revenue reports and payment schedules detailing outstanding balances. By documenting this information as an ongoing process, your business will be ready to navigate an audit at any time and protect against fraud.
Establishing documentation policies makes ongoing documentation manageable. Your business can stay ahead by closing all records monthly according to specific instructions. It also helps to notify an auditor of any significant transactions or changes. Timely communication helps the auditors prepare while showing your business does its best to keep accurate books.
Let Marshall Jones Help Your Company Prepare for an Audit
At Marshall Jones, our certified public accountants and advisors perform audits according to auditing standards generally accepted in the United States and standards that apply to financial audits in government auditing standards. We use a risk-based audit approach to comply with all standards and objectives. Contact us today for your audit needs.
