415 Group typically performs an audit for a client for two main reasons: compliance and strategic reasons. Compliance audits are usually required by a lender or grantor as part of an agreement. Strategic reasons range from providing valuable insights for business owners planning a potential sale, to providing assurance of financials for outside investors. A clean audit adds credibility and value to a company, providing valuable information to outside users.
During the planning stages, it is essential to set the foundation for a successful audit. At the start of planning, 415 Group will gather information about the period under audit, along with reasons for the audit, from the client by setting up a meeting between members of our engagement team and members of management involved with financial reporting for the client. We meet with our clients to review the past year’s financial performance and discuss projections for the next year. We also discuss any major changes to the business or new initiatives that occurred during the year. This will provide a clear roadmap for conducting the audit. The meeting allows us to identify significant changes or events that may impact the audit’s risk assessment.
Following this, an internal meeting is conducted with all members of the engagement team to discuss and evaluate the inherent audit risks. We use the information obtained in the client meeting along with previous knowledge of the client to help determine what areas are significant to the audit and where we should concentrate our focus. This process helps us tailor our audit procedures accordingly.
415 Group is ready to help businesses navigate the complexities of an audit. Contact us today to help ensure your business is on the right track.
As calendar-year entities wrap up financial reporting for the year, their external auditors work behind the scenes to prepare for audit season. Here’s what you can do to help facilitate the audit planning process.
The audit risk assessment
During fieldwork, auditors can’t test every transaction, recalculate every estimate or examine every external document. Instead, they tailor their procedures and assign audit personnel to keep audit risks as low as possible.
So the process starts with evaluating “audit risks.” This refers to the likelihood that the auditor will issue an adverse opinion when the financial statements are in accordance with U.S. Generally Accepted Accounting Principles or (more likely) an unqualified opinion when the opinion should be either modified or adverse.
2 types of audit risks
First, auditors assess the inherent risk of material departures in the financial statements. Examples of inherent risk factors include complexity, volume of transactions, competence of the accounting personnel, company size and use of estimates.
Second, they assess control risk. This is the risk that the entity’s internal controls won’t prevent or correct material misstatements in the financial statements.
Separate risk assessments are done at the financial statement level and for each major account — such as cash, receivables, inventory, fixed assets, other assets, payables, accrued expenses, long-term debt, equity, and revenue and expenses. A high-risk account (say, inventory) might warrant more extensive audit procedures and be assigned to more experienced audit team members than one with lower risk (say, equity).
Risk assessment process
External auditors use auditing checklists and, for existing clients, last year’s workpapers to evaluate audit risks. However, new risk assessments must be done each year, even if the company has had the same auditor for many years. That’s because internal and external factors may change over time. For example, new government or accounting regulations may be implemented, and company personnel or accounting software may change, causing the company’s risk profile to vary. As a result, audit procedures may differ from year to year or from one audit firm to the next.
Auditors can’t assume the status quo; they must conduct in-depth procedures to determine current risk levels. In addition to researching public sources of information, including your company’s website, your auditor may call you with a list of open-ended questions (inquiries) and request to visit your facilities to evaluate whether your internal controls are operating as designed. Timely responses can help auditors plan their procedures to minimize audit risks.
Help us get it right
Audit fieldwork is only as effective as the risk assessment. Evidence obtained from further audit procedures may be ineffective if it’s not properly linked to the identified risks. You play a critical role in helping your audit team understand the risks your business faces and the challenges you’ve experienced reporting financial performance. Let’s work together during the planning stages to help ensure your audit runs smoothly and your company’s financial statements accurately reflect its results for 2024.
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