Management, tax authorities, lenders, and investors rely on accurate, detailed financial statements to make decisions about a company. Audits are crucial in helping to ensure such accuracy.
Many companies conduct regular internal audits, but they may also benefit from external audits done by independent consultancies. An independent review of an organization’s finances and record keeping can uncover weaknesses, allow clients to tighten their security, increase data accuracy, and improve the reliability of financial statements. They can also underscore what organizations are doing well in their accounting and record keeping.
To be sure, audits can be stressful. That’s because they place a company’s processes under a bright light. However, such scrutiny can lead to long-lasting improvement in their operations, and ultimately in their ability to serve clients.
Creating a Plan
Time and cost constraints make it impossible for auditors to examine every transaction. That’s why before an engagement, auditors assess the risk of a company’s processes and develop a plan that targets areas of greatest concern.
The scope of an audit depends on a number of factors, including the business’s volume of transactions. The audit plan determines how many transactions make up a representative sample of the total and then may randomly selects those to examine.
Other parts of the audit may focus on industry- and client-specific risks. An all-cash business — Laundromats for example — requires different financial analytics to verify the reasonability of reported revenue relative to key expenses, such as water use.
Additional risk may also exist for companies where many employees have access to business assets. In that situation, auditors may focus on the company’s internal controls related to assets. For example, they may ask to see that appropriate background checks were conducted on employees who handle cash.
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How it Works
Auditors generally spend many hours at the brick-and-mortar location for at least part of the audit. They bring laptops, scanners with optical character recognition software to capture documents, and other equipment. They may also request remote access to a client’s database, using the auditor’s secure client portal, or cloud storage if the client uses it. That gives the auditor a greater opportunity to run reasonability tests, check for coding accuracy, or search the details of a particular account.
Transaction-heavy components, such as accounts payable, are generally tested by a computer-generated random list of invoices, complete with documentation and authorizations. Other audit processes may be more predictable. For instance, the auditor might ask to see a spreadsheet that proves a line item on the balance sheet, such as “equipment.” That spreadsheet, with relevant documentation attached, allows the auditor to quickly verify that procedures were followed, including proper authorizations. This documentation also establishes the accuracy of the numbers on the balance sheet.
What if Something is Missed?
Auditors can help companies avoid complacency that may crop up over the years and leads to errors. Instead of performing the same tests that in-house accountants and other financial professionals rely on, auditors can conduct their own probes, reassessing fraud risks and uncovering potential problems that might have been overlooked. They may also make recommendations that can improve an organization’s financial management. In an increasingly complex, fast-moving economy, outside review by an objective outsider can have great benefit.
A Master of Accountancy degree from The University of Scranton will provide the expertise to help ensure that data is accurate and withstands the scrutiny of an audit. Learn more about this program – and what it can do for your career – by visiting us here.