Ready, Set, Audit: Inside the 5-step Audit Process

For calendar-year organizations, now is a good time to get a jump-start on next year’s financial statement audit. Starting early gives your finance and accounting team time to address reporting issues, organize supporting records and clarify responsibilities before year-end demands intensify.

Many organizations — particularly those going through their first audit or working with a new audit firm — aren’t sure what happens behind the scenes. Although every engagement is tailored to the size, complexity and risk profile, most audits follow a five-step process.

1. Accepting the Engagement

The audit process begins well before auditors arrive at your offices to begin fieldwork. Before accepting an engagement, the audit firm evaluates whether it can perform the audit in accordance with professional standards. This includes confirming its independence, considering management’s integrity, assessing whether it has the necessary industry expertise and determining whether the engagement presents any unusual risks.

You also must recognize your responsibilities before signing the engagement letter. Management’s responsibilities generally include:

• Preparing and fairly presenting the financial statements under the applicable reporting framework
• Maintaining relevant internal controls
• Providing auditors with access to complete records, documentation and personnel.

Once both parties agree to move forward, management signs an engagement letter outlining the scope of the audit, each party’s responsibilities, the expected timeline and other key terms. Then the audit firm assembles its team, sends its preliminary information requests and schedules planning meetings so everyone understands expectations before fieldwork begins.

2. Assessing Risk

Audited financial statements are designed to provide reasonable assurance that the statements are free from material misstatement and conform to U.S. Generally Accepted Accounting Principles or another applicable reporting framework. Reasonable assurance is a high level of assurance, but it doesn’t guarantee that auditors will detect every error or instance of fraud. Management, lenders, investors, and other stakeholders rely on audited financial statements to make informed business decisions, so auditors focus their work on the areas that present the greatest risk.

Auditors develop an understanding of your business’s operations, industry, regulatory environment, accounting systems, and internal control environment. They also consider changes in your business, such as acquisitions, new accounting software, expanded operations, cybersecurity incidents or significant economic conditions that could affect financial reporting.

3. Planning

Based on the risk assessment, the audit firm develops a detailed engagement plan that outlines the nature, timing and extent of audit procedures. The plan identifies which financial statement areas require additional attention, whether certain internal controls can be relied upon in designing audit procedures and what types of substantive testing will be performed.

Modern audit planning also considers the client’s technology environment. Many businesses now use cloud-based accounting platforms, digital document management systems and other automation tools that may affect how financial information is processed and controlled.

Depending on the engagement, auditors may use secure client portals, data analytics and AI to streamline information requests and analyze larger volumes of financial data than was practical in the past. While technology has improved efficiency, professional judgment remains central to every audit engagement.

4. Gathering Evidence

During fieldwork, auditors gather sufficient appropriate evidence to support their opinion. This typically includes:

• Testing internal controls
• Performing analytical procedures
• Examining supporting documentation for selected transactions and account balances
• Observing physical inventory counts or inspecting assets, when applicable
• Confirming certain account balances or transactions
• Making inquiries of key personnel about accounting policies, significant estimates, unusual transactions and potential fraud risks

For example, auditors may trace individual transactions to original source documents, such as sales contracts, bank statements or purchase orders. They may inspect fixed assets, review journal entries and evaluate the assumptions underlying management’s estimates. Auditors also frequently obtain independent evidence by confirming selected account balances or transactions directly with banks, customers, vendors, legal counsel and other third parties.

5. Communicating the Findings

At the conclusion of the audit, the engagement team evaluates all evidence obtained to determine whether the financial statements present fairly, in all material respects, the business’s financial position and results of operations in accordance with the applicable financial reporting framework.

Before issuing the final report, auditors typically meet with your management team to discuss significant audit findings, accounting estimates, internal control observations and any required adjustments.

If deficiencies in internal controls are identified, your auditors may also provide recommendations to strengthen financial reporting processes and reduce future risk. You’ll typically be asked to provide written representations confirming certain information supplied and statements made during the audit.

The audit culminates in the issuance of the independent auditor’s report, which communicates the auditor’s opinion on the financial statements. An unmodified opinion indicates that the auditor concluded the financial statements are fairly presented under the applicable reporting framework.

Smooth Audits Begin with Preparation

Understanding what to expect during an audit can help your team prepare for each stage of the engagement and keep the process on schedule. Beginning the process before year-end gives you time to organize financial records, complete account reconciliations, address unresolved accounting issues and respond to preliminary information requests.

If you are required to have an audit, contact Kirsch CPA Group to discuss your upcoming audit needs.  We will work to develop a timeline that works for your business.

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