My department is being audited, my taxes are being audited, my expense reports are being audited, my company is being audited…
Necessity:
Any of these comments or thoughts can cause even the most loyal, most organized, most honest, and most driven employee, manager, executive, officer, or owner to cringe.
Although typically an accounting function, audits are designed to add security, accuracy, and consistency to any company’s processes, departments, or financial statements. An audit of any kind is designed to gauge strengths and weaknesses in a reporting process. Any owner, board member, or manager concerned about improving performance and company success MUST embrace and conduct audits regularly in order to ensure highly accurate information is available to gauge a multitude of future business decisions.
Accounting audits primarily focus on Income Statements, Balance Sheets, and Cash Flow Statements; however, expect deep dives and laser focus on critical components that are specific to the type of business being engaged in. Examples can include, overhead and inventories for manufacturing and retail businesses, receivables and payables for service and hospitality, and deprecation, debt, and financing for large asset holdings, equities, and investment firms , etc.
Stakeholders:
The type of audit required or desired depends on the target audience. Virtually any stakeholder can glean critical and highly accurate information resulting from an audit or review. Knowledge that is crucial to making valuable and beneficial decisions related to a company’s success, longevity, and growth to stakeholders, such as:
- Customers
- Shareholders
- Creditors, Banks, and Investors
- Governmental Entities
- Venders and Suppliers
- Owners, Board Members, and Partners
Since all financial statements originate and develop internally, there is an increased risk of fraudulent behavior and inaccurate data by the preparers and managers of the internal information to appear more profitable or successful than actuality. Stakeholders often desire assurances that standard regulations and reporting are being met in order to help alleviate bias and risk. International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) are the two most commonly accepted and/or required regulatory guidance related to a company’s financial statements and picture.
Types:
All audits can be grouped into three main types:
- Internal Audits
- External Audits
- Governmental Audits
Internal audits are conducted by company personnel and are not shared to outside stakeholders. They are specifically prepared for management and internal stakeholders in order to facilitate effective decisions and actionable information to address and improve areas of weakness or strength. Additionally, internal audits should ensure compliance with laws and regulations and substantiate timely, fair, and accurate reporting to management.
External audits are performed by independent parties. Third parties and external organizations provide unbiased opinions in order to provide confidence that financial statements and published results are represented with high accuracy and comprehensive integrity to outside stakeholders. External audits will often be required by external stakeholders in order to assess a company’s financial picture, and simultaneously, address the risks associated with inherent internal bias and employee-employer relationships.
Finally, governmental audits are utilized to ensure accuracy related to taxable income of businesses and personnel. Specifically, amounts and transactions related to tax returns, sales taxes, payroll taxes, and other required tax regulations for local, state, and federal entities can be subject to audits by the governing entity. Although intent can be a factor of consideration in resolution, inaccurate taxable income, even if unintentional, is considered tax fraud. Typically, a governmental audit will involve three general phases of discovery, contestation, and resolution. However, having stringent and regular internal and external auditing beforehand can greatly reduce the chances of a governmental audit. Additionally, certified public accountants and legal expertise can help ensure the line between tax avoidance strategies and tax evasion is not crossed.
Samuel A. Lincoln IV 