Audited financial statements are used to provide financial credibility, accountability and accuracy for a business. Only a Certified Public Accountant (CPA) can perform the audit, but there are steps that the client can perform to reduce the cost of and time necessary for the audit to be completed.
The accountant performing the audit will requests financial reports from the company to review. These reports include the income statement, balance sheet, and statement of cash flow along with financial documentation to support these reports. If the client has the required financial documents and reports prepared and available for the accountant to review, this will save time and money, preventing the CPA from needing together this information themselves.
The accounts receivable will need to be confirmed. Having a prepared accounts receivable detail schedule which ties into the general ledger balance will make it easier for the accountant to confirm the accounts receivable. In addition the client should prepare a list of names and addresses of all customers and outside entities to give to the accountant for confirming receivables, business activities, and account balances.
The accountant will need to observe the inventory count. The client should have the names and addresses of public warehouses where their inventory is stored readily available. If the inventory is on site, they should have the personnel who performed the original inventory count accompany the accountant on their test counts since they are most familiar with the layout and locations of inventory.
The accountant needs to inquire with the client’s lawyers and document any active or pending litigation, claims, or assessments. The client should collect all documentation related to any litigation, claims, and assessments and provide their lawyers contact information.
The accounting estimates made by management will need to be evaluated by the CPA. The client should provide documentation for the estimates, factors and assumptions which affect the estimates, procedures used to prepare estimates in the financial statement presentation, and comparisons of past estimates and actual results to support the reasonableness of their current estimates.
Lastly the accountant needs to assess the degree of risk that fraud will cause a misstatement in the financial statements, document any fraud risk factors, and detail the client’s response to these risk factors. The client should provide documentation of any fraud that has occurred, how they have identified any fraud risk factors, and any anti-fraud programs that have been put into place.
A Client Representation letter is provided to the company to sign at the conclusion of the audit. They client should have documentation and information readily available to answer inquiries that are be found in the Client Representation letter. This letter usually includes written statements explicitly or implicitly given to the auditor by management; such as management’s acknowledgment of its responsibility for the fair presentation of the financial statements, compliance with laws and regulations, assertion that they are unaware of any fraudulent activity and have implemented procedures to detect and prevent fraud.
From this information the CPA creates an audited financial statement which will include an opinion, either qualified or unqualified, about the nature of the financial documents. The intention of the audited financial statement is to gather evidence that will ultimately provide the auditor with a reasonable basis for an unqualified opinion that the financial statements are free of material misstatements or false/missing information. With an unqualified opinion, the audit is found to be accurate, complete and fairly presented to meet the requirements of the US GAAP (Generally Accepted Accounting Principles). A qualified opinion indicates that the auditor is not in agreement with aspects of the company’s financial statements or accounting procedures and is not confident in the accuracy of the financial statements.