Financial Audit Answers: When Should I Have My Financials Audited?

In a financial audit, the CPA partner must gain a full understanding of the company’s processes and the CPA corroborates the company’s financial records and disclosures, by obtaining evidence through inquiry, physical inspection and observation (to name a few).

After the audit is complete, the CPA partner will issue a formal report which expresses an opinion on whether the financial records are presented fairly, in all material respects. Audited financial statements are the highest level of assurance a CPA can perform.

In both the finance and accounting industries, audited financial statements (and even reviewed financial statements) lend credibility to company.  In some circumstances, a business is legally compelled to deliver an audited financial statements. And, businesses, as a form of best practices, may choose to engage a CPA to perform a financial audit, even without legal obligation.

In most cases, a financial review is more time and costs effective than a financial audit.

You may weigh the benefits of a financial review vs audit for your business. To make the wisest choice, learn the distinctions between the two procedures. Then, consider the relative costs and benefits.

A financial audit is a more in-depth process than a financial review. During a financial audit, the auditor examines and tests a business’ financial records and gains an understanding of the business’ processes. This can include:

• Systemically investigating accounting records
• Examining financial statements
• Confirming third-party agreements
• Surveying internal controls and security measures
• Interviewing employees

Ultimately, a financial audit is a process of gathering evidence. With evidence, the auditor corroborates the company’s financial statement.

An audited financial statement presents an organization’s financial position. Specifically, it presents this position as a result of the company’s operations.

Financiers value this unique presentation and assessment for its thoroughness and expertise. These statements give the highest degree of assurance that a CPA performs.

This contrasts with a financial review.

A financial review is more limited in scope than a financial audit. Like an audit, a financial review culminates in a report. The report concludes on whether, the CPA is aware of any material modification that should be made to the organization’s finances.

During a financial review, the auditing accountant tests the company’s books but not contemplate gaining an understanding of the business processes. Yet, unlike an audit, a review limits the investigation to:

• Evaluating financial statements
• Gathering evidence of information completeness
• Checking for material misstatements
• Analyzing core financial procedures
• Assessing the company’s financial management

A financial review uncovers whether or not a business’s financial  records require material modification in order to be in accordance with the applicable financial reporting framework.

Financiers value reviewed financial statements. But, not as much as audited financial statements. Reviewed financial statements give the second-highest degree of degree of assurance that a CPA performs.

Here are five key times when a small business might need its financials audited or reviewed.

According to the Federal Reserve, most lenders offer small businesses loans within a wide range of interest rates. A normal spread runs from 2.54% to 7.0% interest.

To secure a loan at a good interest rate, it’s wise to conduct a financial audit beforehand. This is true whether you aim to get a loan from a bank or the Small Business Administration.

Strict lenders require businesses to provide audited financial statements before approving any loan. In the same vein, audited financial statements can help small businesses leap some common hurdles to loan securement.

Sometimes, investors reject loan applications. They often cite limited cash flow and disorganization as reasons for rejection.

Audited financial statements can provide credibility to the business’s profitability shown in the financial records. This holds even if, at the moment, its cash flow is low or negative.

Typically, banks and lenders only require audited financial statements if a business applies for a “large” loan. What counts as large depends on the bank.

For some, any loan over $2 million qualifies as large. For other lenders, the cutoff is closer to $25 million. Some lenders factor in an applicant’s collateral or how the loan is backed when they require audited financial statements.

In most “small loan” circumstances, banks do not require audited financial statements. Instead, a financial review will suffice.

The Small Business Administration supports small businesses with development and funds. Small businesses can apply for SBA loans through different funding programs.

All SBA programs require applicants to provide financial statements to qualify or stay qualified. The requirements vary. In most cases, the SBA accepts reviewed financial statements from applicants.

There is only one circumstance where the SBA mandates audited financial statements. A small business must submit annual audited financial statements when its gross revenue exceeds $10 million.

At that stage, a business should build financial audits into its periodic reporting process.

Another opportune time to audit your financials is before you apply for a business line of credit.

A business line of credit is a flexible business loan. It’s similar to a credit card. Companies use business lines of credit to borrow money up to a limit.

But, the company only has to pay interest on the money it actually borrows—not the full, maximum loan amount. As long as the company stays within the credit limit, it can repay lent funds as it moves forward.

For a small business, a bank may loan up to $100,000 on credit.

To apply for a line of credit, a business must demonstrate it’s in good financial standing.

Lenders typically accept audited or reviewed financial statements and put equal wright on financial statements regardless of the type of loan.  However, when offering lines of credit lenders perfrom additional inquiries on subsidiary ledgers as additional diligence.

Borrowers aren’t always required put up collateral when they apply for business lines of credit. Instead, credit is granted or denied based on the applicant’s:

• Financial statements
• Credit rating
• Business outlook

Audited financial statements can provide credibility to all three factors.

It’s wise for a business owner to periodically negotiate lower interest rates on business loans. It’s possible throughout the life of the loan.

You may decrease your rate by offering new repayment terms, based on new assets or positive cash flow.

Or, you might negotiate a better interest rate if you plan to consolidate and pay off multiple loans.

Audited financial statements can provide credibility to these tactics. With a financial audit, you can demonstrate how your business’s finances have improved since you initially took out the loan.

In business, an operating agreement is a legal document. It outlines the rules, regulations, and provisions a company must abide by when it makes financial and functional decisions.

The operating agreement is a contract signed by business owners and shareholders. It typically notes:

• Voting rights
• Member responsibilities
• Procedures for buy-outs
• Profit and loss distribution
• All powers and obligations of managers

It is not unusual for signers to require periodic financial audits in the operations agreement. Periods are typically quarterly, annual, or every 120 days.

Financial audits are critical if you aim to sell your business. Buyers typically seek three or more years’ worth of financial statements when valuing a business.

Audited financial statements elevate the credibility of the reports. This increases the confidence buyers have in the valuation.

Financial audits are frequently beneficial. As a private business owner, you may want to integrate financial audits into your regular reporting process.

What’s the best way to establish financial audits as part of a financial management strategy?

No two businesses are identical. The best way to conduct financial audits will be tailored to your business. Accounting professionals are the best guides to walk you through that strategic development.

Your accounting professional will help you build an audit plan. This ensures your audit strategy has maximum impact. Analysis should be relevant to the market and operating environment of the business.

It should also emphasize processes that require special audit consideration. Trend analysis and ratio analysis can be put to good use.

A manager may transform documented processes into procedural manuals to implement training.

An audit committee is responsible for financial reporting and disclosure. The audit committee initiates and oversees financial assessment and reporting processes.

Typically, the audit committee is an advisory committee on the Board of Directors.

Audit committee members must be independent. They must be outside directors.

The audit committee sets financial expectations by maintaining internal controls. They also periodically evaluate those internal controls.

Reputable organizations have proposed frameworks to fulfill financial investigation, reporting, and disclosure obligations effectively.