Each year, many companies face the prospect of an audit. Understandably, many executives are nervous about being audited. Audits can discover problems with a company’s finances, operations, and tax situation. This means that some companies may receive negative consequences after an audit has been completed.
Jawdat Abulhaj, a student, community volunteer, and finance intern from North Carolina, explains why companies are audited and what purpose the process holds. He also explains some of the consequences that companies may face as a result of being audited.
The Definition of an Audit
Neutral third parties examine a company’s or organization’s financial statements to discover whether they are accurate and above-board. Audits are objective reviews of a company’s financial statements, and when an audit has been completed with regards to financial standards, the credibility of the company or organization will increase.
The auditing firm presents its opinion on whether the company has accumulated proper books of their accounts. The auditing firm’s results are not an absolute assurance that the company is in excellent financial shape, but they are generally enough to determine that the company is being run without any grift or embezzlement.
When companies are properly audited and are found to be financially sound, they will be more likely to get credit and funding on the open market. This could result in a lower capital cost that makes it less expensive to do business. Stakeholders will be more likely to invest in the company in the future. Finally, audits are a good defense against financial fraud.
Who Performs an Audit?
Financial audits are performed by practicing accountants who are experts in this type of reporting. Financial audits are just one of the many functions of an accounting firm.
Auditing is a good way to promote accuracy and transparency in an organization’s financial statements. This means that an organization that has been audited is more trustworthy since it is far less likely that the company is hiding financial secrets that could interfere with its operations.
An auditor should not have any type of financial stake in the companies they are examining. Financial audits can only be completed by independent firms and not the company’s management.
Financial audits are conducted in accord with international accounting standards. This means that companies around the world can be fairly compared in terms of their financial stability and transparency. The two major boards that certify accounting standards are the International Federation of Accountants and the International Accounting Standards Board.
How to Prepare for a Financial Audit
Nearly every company has had to deal with the strain of being audited. Publicly listed companies are required by law to have all of their financial accounts audited. Many small and privately-owned businesses must also undergo rigorous financial audits. Taking certain steps to prepare for an audit means that the chances of a positive outcome are higher and that reputational damage to the company can be avoided.
The first step that companies should perform in order to comply with an audit is to plan well in advance. Records should be kept carefully and should be easily accessible when the audit begins. Expert audit preparation firms are available to help finance department employees get all of their documents in order. Keeping your schedules and reconciliations current throughout the year will make a big difference when it comes to surviving an audit.
The next step is to learn from audits that have happened in the past. Executives should think about all of the difficulties that have occurred in past audits and decide how best to combat them. Looking into the past issues allows a company to make a plan for how to address them.
Staying up-to-date with changes to accounting standards is another important step. New accounting standards and tax laws can impact the kinds of information that a company will need to make available during an audit.
Performing a pre-audit of tax activities is a must. Keeping tax records for at least seven years is a must according to IRS law. Checking over the taxes paid along with credits and deductions can be a big help when it comes to a smooth audit.
Companies should always review the information they are planning to give to the auditors. This step can prevent minor mistakes from causing major problems. Company executives also need to be ready to explain any changes in their financial situation from one year to the next.
The Difference Between a Financial Audit and an Internal Audit
Some organizations employ internal auditors who are concerned with operations that go far beyond simple financial statements. Internal audits often cover such topics as effective management, employee culture, and sustainability practices. An internal audit suggests ways in which a company’s operations can be improved.
Understanding Why Audits Occur
Jawdat Abulhaj, a community volunteer and student, understands why audits are so important to every company’s financial future. When companies fully comply with audit regulations, they are more likely to build a positive reputation and avoid serious problems with accounting and tax liabilities.
Interesting related article: “What is an Accountant?“