How To Prepare For A First Year Financial Audit
FAS CPA & Consultants
For new companies, the first-year audit can be a daunting task. It is important for the company to understand what the audit process entails and what they can expect during the audit. In this article, we will provide an overview of the first-year audit process and what companies should prepare for.
Benefits Of Financial Audit
An efficient audit frees management to focus on critical operational goals (100-day integration plan and EBITDA. If a readiness audit team can handle the issues that might arise during the year of acquisition, audit efficiency is all but guaranteed.
For example
Purchase price accounting requires accounting for the flow of funds and the involvement with a valuation team.
If a readiness team possesses the required expertise in valuation and business, critical deadlines with the banks and internal deadlines (such as group consolidation) can most likely be met.
Preparing for Financial Audit
To prepare for the audit, the company should gather all relevant financial documents and records. This includes bank statements, invoices, receipts, and other supporting documentation for transactions recorded in the company’s financial statements.
The company should also review its internal controls and ensure they are functioning properly. This includes reviewing policies and procedures for financial reporting, cash handling, and inventory management. The company should also ensure that its accounting software is up-to-date and that all transactions are properly recorded.
Steps Towards Audit Preparedness
⇒ Allocate internal responsibilities for the handling of the audit.
⇒Include scoping the level of resources.
⇒Include the level of expertise required for the audit.
⇒Set a timeline for project management.
During an acquisition, most of the responsibilities fall on the portfolio company, but the purchase group will probably use a go-to firm to communicate with the portfolio company management.
⇒ Get the valuation done before the audit starts.
⇒ Delayed purchase accounting or valuation can lead to immense pressure during the audit. If this causes a delay in finalizing the audit for the banks, it can restrict the availability of refinancing.
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During the Financial Audit
During the audit, the CPA will request access to the company’s financial records and documentation. The CPA may also request interviews with key personnel, including the CEO, CFO, and other senior management.
The CPA will review the company’s financial statements and supporting documentation. They may also perform testing of transactions to ensure they are properly recorded and that account balances are accurate.
The CPA will also review the company’s internal controls to ensure they are operating effectively. This includes reviewing policies and procedures for financial reporting, cash handling, and inventory management.
After the Financial Audit
After the audit is complete, the CPA will issue an opinion on the company’s financial statements. This opinion will state whether the financial statements are presented fairly and in accordance with GAAP.
If the CPA identifies any issues during the audit, they may issue a management letter outlining areas for improvement. The company should take these recommendations seriously and take steps to address any issues identified.
Building A Winning Financial Audit Readiness Team
A winning readiness team should combine experience in the industry with experience in purchase accounting.
⇒ The risk of an audit adjustment that impacts EBITDA can appear in the opening balance sheet or during purchase accounting exercises.
⇒One of the main goals is to avoid surprises.
⇒If the enterprise does not have the required expertise or resources, it is wise to bring in external accounting consultants who do.
⇒ It is helpful if the team (or consultants) can point out.
⇒ Standards and regulations that apply.
⇒ Which accounting framework will work best.
⇒ Help to connect the accounting standards for different countries (GAAP & ASPE).
⇒ Study the statement of earnings or quality of earnings to identify areas of potential concern.
⇒ Under the American Institute of Certified Public Accountants and Canadian nonreporting issuer independence levels, TAC can provide significant assistance.
⇒ It might be prudent to determine if the firm should adopt Private Company Council Standards. Certain companies can significantly benefit from adopting these standards.
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Key Points to Remember
⇒ It is an audit, not an afterthought. Preparation reduces the risk of missed reporting deadlines, which will increase costs and put a strain on the firm’s time.
⇒ Conduct the required valuations.
⇒ Scope the audit.
⇒ The readiness team should have experience in the industry.
⇒ Accounting and independence standards are complex and vary from one country to another.
⇒ Some requirements are legally required.
⇒ Home in on complexities especially when facing deadlines.
⇒ Communication is key.
Conclusion
The first-year audit can be a challenging process for new companies. However, with proper preparation and understanding of the audit process, companies can successfully navigate the audit and ensure that their financial statements are presented fairly and in accordance with GAAP.
It is important for companies to work closely with their CPA throughout the audit process and to take any recommendations for improvement seriously. By doing so, companies can establish strong internal controls and financial reporting practices that will serve them well in the years to come.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
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