Audit Readiness

Free Financial Audit Checklist

Dec 29, 2020 | By Michael Whitmire

Preparing for the audit is always a burdensome task with plenty of room for error and a ton of stress involved. So, naturally, the goal should be to create an easily-repeatable process that removes the uncertainty involved and — at the very least — mitigates unnecessary stress.

A financial audit checklist acts as a guide to aid you through the year end financial activities. Let’s take a look at what the right financial audit checklist looks like.

What is a financial audit? 

Most folks outside of the accounting profession believe an audit is only something the IRS does and usually has a very negative outcome. An audit should be avoided at ALL COSTS. 

In reality, there are many different types of audits with a financial audit being the most common type of auditing. 

For many companies, an audit is a regular occurrence and a task the accounting department prepares throughout the year as a routine output of the department. 

The definition of a financial audit is an official inspection of the records of an organization which is usually performed by someone who is independent of the organization. 

It is important to distinguish an internal audit from a financial audit as the two can be easily confused. An internal audit is performed by staff working for the company and focuses on examination of the business practices and risks of a company. In comparison, a financial audit is performed by someone external to the company with a focus on the accuracy of the information contained in the financial statements. 

Why is an audit necessary?

A financial audit is performed by a CPA with the intention of providing the users of the financial statements a high level of comfort in the accuracy of the statements. The accuracy of a company’s financial reporting is critical to public trust and an annual financial audit is key to maintaining public trust.  

The procedures the CPA performs are intended to obtain “reasonable assurance” about whether the financial statements are free from material misstatement. Getting a guarantee that the financial statements are free of material misstatements is not possible. Reasonable assurance means there is a small risk that the financial statements will include a material misstatement. The definition of a material misstatement is the information in the financial reports is sufficiently incorrect that it may impact the decisions of someone relying on the statements. 

All publicly traded companies are required to have an annual financial audit performed by an independent (external) auditor who most often is a CPA. For non-publicly traded companies, a financial audit is often required for a company seeking high levels of credit, those bringing in additional investors or some insurance companies may require it. A financial audit may also be included as a requirement in the company bylaws. Most private companies do not issue audited financial statements. 

Some nonprofit organizations may also be required to have an annual independent financial audit. This requirement is determined by the organizations’ size and may be required by federal and state government agencies. 

External auditors must follow Generally Accepted Auditing Standards (GAAS) which ensures the accuracy, consistency and verifiability of auditors’ actions and reports. 

What does financial audit include?

During a financial audit, an auditor has three main objectives:

  1. Obtain an understanding of the business’s internal controls,
  2. Access fraud risk,
  3. Corroborate the dollar amounts in the financial statements and disclosures to the financial statements. 

During completion of the audit objectives, the auditor also conducts an assessment of the accounting principles used, significant estimates made by management and an evaluation of the overall financial statement presentation.

These objectives are designed to assist the auditor in developing their opinion on the accuracy of the financial statements. 

A financial audit includes four phases

Planning

This is the first phase in the audit. During this stage, the auditor determines the logistics of the engagement including audit procedures, objectives and the materiality threshold. They also determine the foundational information about the company including items such as entity type and fiscal year in this stage. This stage is performed mainly by the audit team and does not require much company staff time. 

Internal controls

This is the stage where the auditors gather information that they will need to conduct the testing and form the basis for the opinion. This stage requires significant company finance staff resources for providing the information. Items auditors will request in this stage include the trial balance, general ledger, bank statements and fixed assets listing, to name a few. They will also request documentation surrounding internal control procedures. 

Testing 

In this stage, the auditor examines the accuracy of the financial statements using standard testing procedures. They will verify transactions included in various year-end account balances. Some common accounts they will focus on include: bank accounts, accounts receivable, fixed assets, accounts payable, long term liabilities and changes in equity. Not only do they review the account disbursements, but they also test for accuracy of the accruals. Verification of the bank account balances, involved review of the bank reconciliation reports as well as sending letters directly to the bank asking for ending balance verification. The income statement will include testing related to revenue recognition, validation of expenses and tying the depreciation expense to the accumulation depreciation on the balance sheet. The auditors will also test the internal control processes of the company in this stage to verify they are being performed as documented in the company’s internal control procedures. 

Reporting

The findings of the financial audit are presented in the form of an audit report presented to the Board of Directors (in most cases). According to GAAS, “The auditor's report must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed. When the auditor cannot express an overall opinion, the auditor should state the reasons in the auditor's report. In all cases where an auditor's name is associated with financial statements, the auditor should clearly indicate the character of the auditor's work, if any, and the degree of responsibility the auditor is taking, in the auditor's report.”

The financial audit opinion will take one of four types of possible forms:

Unqualified Opinion – This is considered a “clean” opinion and includes the determination that the financial statements are free of any material misrepresentations. 

Qualified Opinion – This type of audit opinion is issued when the auditor finds that the financial records have not been maintained in accordance with GAAP (Generally Accepted Accounting Principles) but no specific material misrepresentations have been found.

Adverse Opinion – Totally not the type of opinion you want to get. This type of opinion indicates that not only do the financial statements not conform with GAAP, but also that the financial records have been grossly misrepresented. 

Disclaimer of Opinion – An audit opinion of this nature happens when the auditor is unable to complete the audit. This is usually due to the absence of the necessary financial records. The disclaimer of opinion indicates that the auditor cannot determine the financial status of the company. 

How do you prepare for an audit of financial statements?

Preparing for the annual financial audit can be quite an undertaking. We have put together a library of templates, tips and tricks to help you prepare here

The foundation of a smooth and successful financial audit consists of two key pieces:

Adequate Preparation – As the old saying goes, “The proof is in the pudding”, your financial records need to be in pristine order. This should not start in December before you leave for Christmas vacation. Working throughout the year to ensure your financial documentation is in order with an eye out for what you will need to provide the auditors at year end will pay dividends in January. 

In order to ensure you are prepared for the auditors to get started, it is helpful to have the guidance of a financial audit checklist. Best practice is to review a checklist such as this at the beginning of the year. This will allow you to design your monthly processes around the requirements for the year-end financial audit. Internal staff review of internal control processes will also set you up for a smoother audit. 

Strong relationship with your auditors – Solid communication with your audit team and complete workpapers are the cornerstones of a successful audit. For tips on improving your audit readiness and lower your audit costs, check out this article.  

With well-defined processes throughout the year and the use of templates and audit preparation checklists, your annual financial audit does not have to be the dreaded annual visit to the accounting dungeon. 

Learn what industry experts from Ventana Research have to say about the month-end close moving forward

Michael Whitmire
As CEO and Co-Founder, Mike leads FloQast’s corporate vision, strategy and execution. Prior to founding FloQast, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. He began his career at Ernst & Young in Los Angeles where he performed public company audits, opening balance sheet audits, cash to GAAP restatements, compilation reviews, international reporting, merger and acquisition audits and SOX compliance testing. He holds a Bachelor’s degree in Accounting from Syracuse University.

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