Breaking Down the Importance of an Audit and Assurance

Breaking Down the Importance of an Audit and Assurance

If you own a business, you likely want to know that your financial records are accurate. Otherwise, you could run into trouble with the IRS or suffer a financial setback because your figures are off. With an audit, a financial professional double-checks that your books are correct, giving you peace of mind and confidence to make well-informed financial decisions. Understand more about what audits are and why they are essential, even if the law does not require you to have one. 

Must You Undergo an Audit?

Public companies that trade debt securities and ownership in U.S. markets must complete yearly audits. Private businesses do not have to complete audits, but private business owners may find them helpful for their company’s financial health. Sometimes, banks and other lenders who work with private businesses require owners to submit audited financial documents. 

Are There Different Audit Types?

There are three types of audits: operational, financial and compliance. With an operational audit, the auditor studies planning, procedure, objectives, processes and operation results, offering suggestions for improvement. Financial audits, the most common, focus on a business’s financial history. The goal is to determine whether the company accurately and properly prepared its accounts and whether financial documents provide a factual perspective of the company’s financial health. Companies that operate in regulated industries undergo compliance audits that determine whether the business adheres to the latest internal and regulatory standards.  

Further, audits are either external or internal. During an external audit, a financial professional unaffiliated with the company performs an assessment either for shareholders or the company itself. An organization may perform an internal audit to prepare for an external audit. Internal audits may help reduce the amount of work that an external auditor must do, which can save organization money. Further, internal audits are often operational. 

What Happens During an Audit?

Before an audit, companies must create a report according to the latest financial and legal requirements, ensuring that they approve the report internally before the auditor looks it over. Auditors must research companies before auditing them to determine if external factors affected the company during the reporting window. Auditors also assess and identify financial risks. If the company has internal controls to help reduce risk, the auditor examines those, as well. Auditors look into steps that businesses take to ensure the accuracy of financial reports, assessing supporting information related to controls and risks. 

Creditors and investors rely on audits and auditors to give them the peace of mind that a company handles money legally and properly. One of the auditor’s most essential objectives is safeguarding the public from financially allying themselves with businesses that engage in fraudulent practices or attempt to deceive investors through bogus financial statements.  

What Do Audits Include?

Auditors list evidence supporting a company’s financial records, study overall financial record presentation and evaluate accounting principles. They also determine whether a company’s internal controls align with its financial statements, which is the most essential aspect of the evaluation. Another vital audit aspect that company leaders should focus on is whether they leave themselves vulnerable to malfeasance or fraud.  

What Are Common Misconceptions Regarding Auditors?

Oftentimes, business owners and private citizens alike view auditors with a measure of annoyance and suspicion. Misconceptions regarding auditors often fuel this distaste. Much like doctors do not make it a priority to judge their patients, auditors do not go out of their way to search for fraud. That said, they do remain alert to potential indications of fraud. The financial professionals do not scrutinize every company transaction, only those deemed “material.” 

While auditors offer assurance services, they cannot assure business owners or shareholders of continued success. Auditors only examine a specific snapshot of the organization’s financial history.  

How Do Accounting Principles Figure Into Audits?

Other than determining the overall accuracy of financial records, auditors also examine a company’s accounting standards. This ensures that a company takes steps to prevent fraud. Specifically, auditors focus on how organizations pay vendors, sign checks and handle deposits. Businesses must also follow specific requirements regarding personnel who handle money.  

How Does an IRS Audit Differ From a Standard Audit?

Business owners who make errors on their taxes may have to undergo an audit from the IRS. For instance, business owners may estimate figures, fail to report corporate employee salaries or include several home office deductions that they do not qualify for. IRS audits, often done by mail or in-person, involve the auditor looking over financial records to double-check that the company accurately reported losses, income, deductions and expenses according to the most recent federal tax laws. Should the auditor find an oversight, the business owner may face a tax penalty with interest. 

No matter the reason for an audit, organizations must take them seriously. Ultimately, the intention is to help rather than harm.