Everything you never knew you always needed to know about Audits
Audits are often portrayed as a consequence for doing something wrong. Although we do assist clients in responding to CRA audits and other tax audits, most audits we do are requested by our clients. Let’s explore some of the basics around audits.
What types of audits are there?
In most cases audits can be put into two categories: tax audits and financial statement audits
- Tax audits are performed by the Canada Revenue Agency (CRA) – the ones everyone dreads
- Read more about this and how we can help in our blog post here: https://www.kbh.ca/cra-audit-professional-services/
- Financial statements audits – one of three core engagements external accounting firms perform for their clients. This is what will be discussed in this blog.
What is a financial statement audit?
A financial statement audit is a service completed by an accounting firm where the financial records and statements are reviewed in detail to ensure that what is shown is an accurate representation of the company.
- The purpose is to ensure that users of that information can rely on it for making decisions.
Who gets an audit?
Various small businesses across various industries often get an audit.
- Companies may choose to get an audit for several reasons including:
- Their bank requires them to ensure the company can repay their financing
- The company plans to sell, and the buyer would like to know exactly what they are buying
- Other investors or stakeholders request an audit as external parties may want to monitor or have some certainty to the financial information when they are not included in day-to-day operations.
- Certain industries commonly have audits due to large contracts (think construction)
- The company is publicly traded – public companies (think listed on the Stock Exchange) must be audited each year. These audits follow a different accounting framework compared to small businesses and require significant resources. As such, these are not discussed in this blog.
How often does an audit occur?
Typically, audits occur on an annual basis.
- Although most audits are done on an annual basis to align with the fiscal yearend, depending on the reason for the audit, audits can be done more often, such as quarterly, or can sometimes be only a one-time occurrence.
What does the company have to do?
Most of the company’s role is to provide information
- Maintain good records that support each transaction for the year
- Prepare the bookkeeping and other financial information as needed
- Provide answers and documentation as auditor questions arise
- Meet with audit team to go over final documents and findings
What does the auditor do?
The auditors must determine whether the financial information provided by the company is an accurate representation of the company. There are a series of steps required:
- Create a plan to identify and address risks
- Perform that plan using various auditing tools such as examining documents, management interviews, preparing calculations, physical observations of assets, comparisons to company and industry trends, and much more.
- Express an opinion on the accuracy of the company’s presentation of their financial information
What is the timeline for an audit?
The timeline for an audit is typically 3-4 months.
- Depending on the industry and size of the company, the scope of the audit will differ. It could take as little as a couple of weeks to as long as a few months.
- Larger, non-public companies are looking at more of a 3-4 month timeline from start to finish. There are several steps that need to be done
- The audit work is planned in advance
- 1-2 weeks of work is done on location before yearend
- Another 3- 4 weeks of work is done on location after yearend
- All of the audit work is reviewed by a senior auditor
- There is typically a meeting with management to discuss any issues, review and approve the financial statements
- The final copy of the audited financial statements is then issued.
What are the final takeaways?
The final audit takeaways are the audit report, a management letter, and a trusted advisor.
- The audit report is a letter that is attached to the beginning of the company’s financial statements. This is where the auditor’s opinion of the information is provided.
- This is important as it tells the reader if the information is accurate and can be trusted or notifies the reader of an issue
- A management letter identifies risks the company is open to and how these can be addressed.
- For example, the company does not keep a backup of its financial information! We can all imagine how big of a problem this could create.
- Use of a trusted advisor who has knowledge of the industry and common tools used within it.
How does this fit in with my other KBH services?
An audit is one of three main year-end services for small businesses that we do at KBH: audits, reviews, and compilations. A company would have one of these performed along with the annual corporate tax return.
- Auditors as required to be independent from the company that we audit and therefore, some other services, such as bookkeeping, are required to be done by another party – we cannot audit our own work. However, we can act as an advisor, help with tax and wealth planning, and file all necessary returns.