What Is a Financial Audit & How to Prepare for One (+Checklist)

The financial health of your company depends on the accuracy of your financial reporting. Everyone tries their best to be careful, follow procedures, and call out discrepancies, but getting fresh eyes on the data is valuable to ensure the best outcomes.

This type of independent review is known as a financial statement audit. While the concept of an audit usually brings up visions of issues and consequences—in reality, a financial audit is like a health routine for financial data. Conducting regular audits ensures all your numbers and processes check out.

Download the free tool: Financial Audit Preparation Checklist

This article covers the basics of a financial audit

• What a financial audit is
• How audits, reviews, and compilations differ
• The benefits of financial audits
• How software speeds and bolsters the audit process

What is a financial audit?

A financial audit is a thorough, detailed examination of a company’s financial statements and accounts. A dispassionate third-party auditor conducts the audit and develops an audit opinion based on the most recent financial statements. This information helps guide decision-making and controls.  

There are many reasons a company conducts financial audits 

• To ensure the accuracy of the books and financial statements
• For regulatory compliance with state or federal financial laws
• To demonstrate accurate financial statements for lenders or investors
• To improve the company’s internal controls and accounting processes

A financial audit looks at all historical data regarding operations: financial statements, books of accounts, invoice processing, and more. A skilled auditor or certified public accountant (CPA) uses these sources to ensure a company’s statements about its financial position are reliable.

Tool

Download the free tool: Financial Audit Preparation Checklist

Financial audits gives companies an objective read of their financial statements. Use this checklist to get started.

Download the free tool

What’s the difference between accounting and auditing?

Accounting is the regular financial reporting and activity that helps record and maintain a company’s financial life. Accounting follows a strict set of standards (called the Generally Accepted Accounting Principles, or GAAP) to maintain confidence in the financial statements a company compiles.

Auditing is another less frequent activity to ensure that your accounting policies are sufficient and error-free. Its purpose is to obtain an independent opinion on the company’s financial statements. Many internal and external stakeholders require occasional audits to verify financial data. Plus, the company benefits from this regular maintenance of its processes and records.

What is reviewed during a financial audit?

A financial audit considers every aspect of your financial process and documentation. During a typical audit, expect your auditor to review several pieces of financial information to render an independent opinion.

Account balances and transactions: Documentation of the account balances and transaction history for each account covering the duration of the review period

Historical documents: Documents about the company's founding, such as articles of incorporation and bylaws

IRS documentation: IRS communications and documents, such as exemption letters and returns

Internal documents: Policies and procedures documentation, such as financial reporting processes, personnel handbooks, accounting procedures, and security documents

Commitments: Financial commitments, such as loans, lease agreements, employee benefits, and other liabilities the company must pay

Financial Statements: Previous cash flow statements, balance sheets, and income statements that provide context for the other financial reporting activities within the organization

Why is a financial audit performed?

Organizations conduct an internal audit to ensure accurate financials and proper expenditures. During the audit, the organization looks at its records to ensure everything adds up (literally).

Benefits of a financial audit

A financial audit provides various internal and external benefits to companies, financial planning professionals, investors, and lenders. 

Error detection: An audit identifies the financial accuracy of the books by comparing known financial data (like previous year totals, trial balance, and other sources of verified data) to identify discrepancies and issues. The error detection process may surface unusual data or trends.

Fraud deterrent: During the audit, your auditor may review internal controls, such as the segregation of duties and dual control. They may look for changes in accounting estimates or incorrect requests for payment. A forensic audit addresses the possibility of fraud and analyzes data and trends to uncover potential malfeasance.  

Cost reduction: Audits take an in-depth look at the organization's financial performance. They help identify areas for improvement, streamlining, and cost-cutting.

Resource allocation: A financial audit helps leaders decide how to spend available capital. It may reveal areas of over- or under-spending that help align allocation with organizational goals. 

External reporting: Investors and lending institutions need assurances that the company has good financial management practices. The reporting from a financial audit helps companies demonstrate their financial process and ability to repay.

Tool

Download the free tool: Financial Audit Preparation Checklist

Financial audits gives companies an objective read of their financial statements. Use this checklist to get started.

Download

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What’s the difference between an audit, a review, and a compilation?

All reviews are not created equal. When conducting an audit report and analysis of financials, you may desire a certain level of detail in your financial reporting. To choose which activity best suits your needs, it helps to understand the three types of financial reporting.

Audit: An audit is a formal, independent evaluation of an organization's financial statements and records. Conducting it ensures that reported information is accurate, reliable, and follows established standards (like GAAP or IFRS). The purpose of an audit is to provide an objective view of the accuracy and completeness of financial statements as well as identify areas for improvement.

Review: A review is an analysis of financial statements and other records conducted by an accountant or another qualified professional. Reviews aim to ensure that reported information is accurate, consistent with established standards, and does not contain material misstatements. It does not provide the same level of reasonable assurance as an audit and may not include tests of accounting records. However, it still creates confidence in the completeness and accuracy of your finances.

Compilation: Sometimes, you need a CPA or accounting professional to gather necessary information without performing an analysis or audit. In this activity, the CPA highlights the accuracy and confidence of your financial records. They perform no analytical procedures beyond gathering financial information — they simply collect and present verified data in the form of financial statements.

Preparing for a financial audit 

Preparing for an audit takes time and attention, but with advanced preparation, it can be a smooth and informative process. Begin your audit planning with these three basic steps to reduce friction during the research and reporting process.

Locate pertinent financial information: Collect all documents for the review period of the audit. Include trial balance info, the general ledger, the book of accounts, financial statements, IRS documents, and supporting documents for your accounting.

Collect internal documentation: Pull together internal documents or process guidelines such as handbooks, accounting standards of practice (SOPs), department manuals, and bylaws.

Communicate to internal and external stakeholders: Discuss relevant information and dates with external auditors, the finance team, accounting team members, and others to create transparency and cooperation in the audit process. Communicate issues or discrepancies in advance so they can be addressed and resolved early.

Use software to improve the financial audit process

Financial audits go smoother and faster when you can access centralized information on demand. With a procurement management solution like Order.co, finance professionals create a thorough and centralized audit trail for every transaction. It gives auditors access to the full complement of financial information, transaction data, support documentation, and journal entries. 

Order.co provides quick access to information from every orin a secure, centralized, and filterable location so that teams can review the purchase approval history any time.

• Seamless resource invoicing makes tracking historical expenses (and their impact on profitability) incredibly easy. 
• Integration with various accounting systems is highly valuable when auditing finances or preparing tax returns.
• Integrated delivery options allow your team to quickly email financial reports to relevant stakeholders in an easy-to-read format.

See how these features streamline your audit process with a demo of Order.co.