By, Leading Edge Alliance
Just mentioning the word audit to some business owners is enough to cause them to groan. The good news about audits is that at their core, they are designed to help your business run more efficiently.
Although publicly held companies are required to have annual audits, many closely held companies also need to have them when seeking outside financing to provide independent assurance that financial statements are correct.
An audit is the independent verification of client-presented numbers, says Tom Sulewski, shareholder in the accounting firm of Clark Nuber PC in Seattle, Wash.
Although the accounting industry, specifically auditing, is under scrutiny as a result of the Enron/Andersen debacle, the crisis is focused on publicly traded companies.
The majority of Leading Edge firms don't perform audits for many publicly traded clients. They have more closely held clients operating businesses of various sizes in a wide range of industries.
Although many think audits primarily pertain to public companies, it's not uncommon for privately held businesses to need them as well. "Often audits are used to satisfy some outside agency, such as a bank or financing arrangement," says Sulewski. The annual financial certification from a CPA is a critical element to the life of a business because if the business loses its line of credit with the bank, it's in trouble.
"We evaluate internal controls or cycles of transactions, such as revenues, payroll and disbursements. We query internal people on those transactions and will select a sample of them to trace through the system to see if the controls work," he says.
Even if the auditor finds that the controls are adequate, he or she may suggest a more efficient system.
"Our trend is to be more involved with clients on a year-round basis, providing assistance with setting up systems and procedures along the way," he says. "We're better auditors when we're involved throughout the year and understand the transactions that take place in their business."
For example, if you're setting up a new commission structure for your sales staff, discussing it with your CPA in June, will ensure he has a better idea about how the system works or should work. "Consulting engagements make us more effective auditors," he says.
Auditors often look for and communicate other means of enhancing management knowledge and its ability to safeguard assets. Auditors may assess certain insurance coverage and computer back-up systems. The process should identify where there is a lack of segregation of duties and offer suggestions on how to overcome such situations.
The perceived pain of an audit can be lessened if a business owner and/or the controller is in regular communication with the CPA, according to Tom Sulewski, shareholder in the accounting firm of Clark Nuber PC in Seattle, Wash. Understanding the following common steps involved in an audit can make the process more effective.
- Preplanning audit and management teams should meet to get a feel for the kind of year the company is having. Did you launch new product lines or establish a new division in another state? What are anticipated inventory levels? Are you in compliance with your bank?
- Read interim financial statements and inquire as to unusual or unexpected amounts and relationships.
- By fourth quarter, interim testing is done on internal controls—revenue, disbursement and payroll cycles—on a random basis. "If you can build a relationship with a client based on open communication, you can come up with a system to review postings of unusual transactions as they occur rather than at the end of the year," says Sulewski.
- Letters of verification are prepared by management for the CPA to send to external sources in the fourth quarter, including attorneys, customers, banks and insurance companies, to verify amounts and related information.
- Auditors observe your staff taking the physical inventory, recording test counts.
- Responses from external sources are reviewed and the testing of year-end balances begins in January and February.
Various data extraction software is now available allowing audit work to be done on computer files the company provides the auditors. Auditors may evaluate this computerized information in many different ways. In addition, other information may become available to management with this software. For example, while auditing sales and accounts receivable, the auditors may be able to provide average dollars by transaction by customers using the data extraction software.
The key to successful use of this tool is planning. Meetings should occur in the summer to identify the possible uses and test whether the company computer files and the data extraction software would serve the intended purpose.
Leading Edge Alliance - http://www.leadingedgealliance.com