Who Actually Requests an Audit?

First of a two-part series

Believe or not, there are lots requests for financial audits. Not the type of audit IRS agents conduct to ensure you’re paying your taxes, but an audit of a company’s financial well-being.

Specifically in the business environment, stockholders, creditors, private investors, bonding companies, and government agencies often need assurance that a company’s financial statements accurately represent the firm’s true financial position.

Stockholders, creditors, private investors, bonding companies and government entities maintain different levels of risk tolerance, so three levels of assurance—known as attest services—are available.

Audit - Highest Level of Assurance

Audits provide the highest level of assurance. An audit is a methodical review and objective examination of the financial statements, including the verification of specific information as determined by the auditor or as established by general practice.

Included in an audit is a review of internal controls, testing of selected transactions, and communication with third parties. Based on the findings, a report is issued on whether or not the financial statements are fairly stated and free of material misstatements.

An Audit enables owners to...

• Satisfy stakeholders such as other owners, creditors, and bonding companies, as to the credibility of published information.
• Comply with banking covenants. 
• Help deter and detect material fraud and error. 
• Facilitate the purchase and sale of businesses.

Owners get the highest level of assurance because the CPA goes outside the company to obtain more information. Typically, the CPA will have written communication with:

• Customers: to check outstanding receivable balances;
• Banks: to confirm cash or debt balances and terms;
• Vendors: to verify outstanding payable balances; and
• Attorneys: to gather information on pending or threatened legal action.

The CPA will also perform physical inspections by conducting job site visits and counting inventory. Records such as contracts, cash receipts, expenses and cash disbursements, and payroll will be verified and tested on a sample basis.

Audits Are Not Just for Public Entities

All public companies are required to conduct an annual audit, but some nonpublic entities must undergo annual audits as well. Bonding companies may require audited financial statements as the size of the jobs increases. Some financial institutions require audits of nonpublic companies based on the financing amount and/or the bank's assessment of the company's risk.

Also, companies with absentee ownership (such as those owned by investment firms, or individuals who no longer run the business) may order audits as checks of their management teams.

Next week we’ll look at the other types of attest services: reviews and compilations. Of course, if you need financial information verified—or need to get ready for an upcoming attest service—contact the professionals at Patrick & Robinson CPAs: 904-396-9400 or Office@CPAsite.com.