What to Expect During an Annual Financial Audit

Donny | Graphite - Startup Accounting Services

Donny Tyra, Director of Technical Accounting at Graphite

When you think of an annual financial audit, images of an intimidating team of suits going through boxes and boxes of your organization’s records, looking for inconsistencies and mistakes, may fill your mind. 

Even though this annual audit process is now fully digital, it might still feel nerve-wracking. Especially if it’s your first audit. 

It’s important to remember that auditors aren’t supposed to be scary—they’re actually on your side! It’s in everyone’s best interest to help the process run as smoothly and professionally as possible. 

Many organizations actually find that audits help them improve internal accounting processes and operate more efficiently moving forward. 

Knowing what to expect and proactively preparing your documentation makes the entire process easier and will empower you to check the boxes you need or extract the insight you’re looking for.

What is an Annual Financial Audit?

Put simply, a financial audit is meant to verify your organization’s financial statements. 

During this time, organizations engage a third-party licensed public accounting firm. This firm then reviews a sufficient amount of documentation to give an opinion on how solid your financial statements are. 

Auditors will not look at every transaction. They will select a sample of each type of transaction and review the documentation for it. Because you won’t know which transactions they are going to select, you need to be prepared to produce the documentation for every transaction the company has made.

Who Needs an Annual Financial Audit? 

If you’re a small startup, it’s unlikely that you’ll need to complete a financial audit until your company grows. Annual financial audits are much more common for medium to large organizations with more financial responsibilities. 

Here are three reasons why your organization might need an annual financial audit:

  • You’re public or planning to go public. Public companies are required by the SEC to complete financial audits each year to ensure that public reports are accurate. Some organizations also opt to conduct audits when planning to go public in the near future to get ahead of the process. 
  • You have significant credit agreements. If your organization has taken on a significant amount of debt, banks or lenders might require an audit of your records. 
  • You need an audit to meet industry compliance standards. Some industries have specific regulations that result in yearly audits. For example, organizations that provide insurance services typically have this requirement.  

 

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What are the Different Phases of an Annual Financial Audit?

Annual financial audits happen in several phases, so let’s walk through each of them. 

1. Background Information

Before the process starts, auditors gather as much information as possible about your organization. This initial discovery phase helps them plan the audit and understand which relative jurisdictions are applicable. 

Auditors need to understand exactly what your company does and who your team is. This means digging into the types of transactions you have, your main assets, and the industries you’re engaged in to better understand what exactly they will be auditing. 

They need to see lists of your officers and staff to understand the people who make up your company. 

In particular, they need to determine your primary sources of financial governance. In other words, who would they talk to if they noticed financial inconsistencies or improprieties in your work? Keep in mind that this might not necessarily be management.

2. Planning

Once your auditors have gathered this important information, the next step is to plan the audit.

This is when auditors perform risk assessments and materiality thresholds, where they determine exactly what needs to happen during the audit. Auditors complete most of this process behind the scenes based on their own assessments, so if you’re the organization being audited, you won’t have much involvement in this step.

3. Gathering Documentation

Now that the audit has been planned, it’s time to dig in and gather documentation so that the auditors can begin their process. You’ll receive a PBC (Prepared by Client) list with all of the items that you need to provide, which generally covers all relevant financial information for your organization.

In the past, you would need to make physical copies of each document, so auditors would limit their PBC lists to the items that were most necessary. In today’s fully-digital context, auditors are more likely to ask for all of the documentation you have available. 

4. Results

Once you’ve provided this documentation, it’s time to step back and let the auditors do their jobs. While this might feel stressful, it’s important to go back to the idea that the auditors are on your side. 

The auditors will analyze the results, which could go many different ways based on the specific situation. They will identify any unusual transactions or errors during this time. 

Finally, the auditors will draft and review the financial statements, disclosures, and notes. Once that is complete, the auditors will sign off on their opinion.

 

How Do You Best Prepare for an Annual Financial Audit?

Preparing documents in advance helps the audit run smoothly for everyone involved. Most mid-sized organizations start preparing at least 90 days ahead of the audit, but large enterprises might need a whole year. Ultimately, your preparation process will depend on the complexity and size of the company. 

When preparing, think about every single transaction your organization processes. How would you document and support these transactions? 

One of the best ways to be prepared for any kind of financial deep dive is to create a reliable system for recording and sorting your transactions. 

We often recommend starting with a financial review rather than a full audit when possible. The review process isn’t as comprehensive or intense as an audit, and the third-party firm you work with will guide you through the process. This will set you up for an official audit the following year.

 

Nail Your Next Audit With Graphite

Working with Graphite ensures that there won’t be any surprises on your next financial audit. Our highly experienced team will make sure your financials are accurate and help you compile all of the documentation you need. 

Once you begin the audit process, your organization will also need a financially competent professional to take responsibility for your statements. We’ll serve as your representatives to help the process run smoothly. 

Interested in working with us? Get in touch to learn more about our services, and check out our free month-end close checklist to get your books organized. 

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