Financial statement audits are basically used to dig deep into the company’s financial condition. The auditors check the company’s accounting records, internal control policies, cash holdings and the other sensitive financial areas. Even the small businesses can be subjected to an external financial audit by any governmental authority or the IRS. Other than that, it keeps you updated about the financial health of your organization.
It keeps you aware of your accounting system and discourages the facts for internal fraud or theft. The auditors have the authority to check with your company’s internal control policies, accounting duties, pending bank deposits, comparison of internal records of cash holdings, income and expenses against the external records, etc. The financial audit provides reasonable assurance to the investors, regulators, directors and managers; therefore, it is important to prepare yourself for a financial statement audit.
Information Required for an External Financial Audit:
You need to access the financial information of your organization and prepare a few things prior to the external financial audit. It does not matter if it is written on paper or saved in an electronic device, all of your financial records should be filed logically. However, if the files are saved in an electronic format, then it would enhance the repute of your organization. The things you need are:
- Contracts and payroll records of your employees.
- Bank statements, invoices and deposit books.
- Capital assets sub-ledger. (optional)
- Updated inventory list. (optional)
- Lease, third party agreements, contracts for rental equipment, which should include the contractors and consultants)
- Documentation of internal control. (for internal control testing)
- Access to board minutes, letters patent, supplementary letters patent, contracts, by-laws, legal invoices and legal correspondence.
- On-site access to the bookkeeper or some other person who knows how to access computers and filing the systems.
This information should be provided to the external audit and should be prepared at all times before a financial audit is conducted. It should be available in a chronological order or alphabetical order. The original receipts and invoices should be accessible at all times. You should also keep an on-site record, just to be on the safe side. Plus, the law requires these records. The original invoices also include the airline or train tickets, to determine the company’s travel expenses. During the external audit conduct, try to ask for some suggestions from the auditor to improve the internal control of your organization. The staff of your company should be aware of the rules governing the spending of your company’s funds.
The auditors might express an opinion on the broad financial statement; therefore, he would systematically evaluate the financial statements assertions. He would also expect you to explain the significant variances and you have to be prepared to discuss the results of the current year, based on your expectations. You can be asked about any changes in the governance, management, ownership, technology, etc. Therefore, you have to be open with your auditor about all the difficult areas that you have encountered.