Audit Preparation Means Picking the Right Auditor (and Audit)

As soon as you realize that you and your company need to have a financial statement audit, it can be difficult to know what to start. What is a financial statement audit? What exactly do I need? Who is the right provider to get this done?

This article on audit preparation walks through the first steps you should take on your path to a successful financial statement audit.

Your Audit Requirements and Scope

As a first step before anything else, you should know exactly what type of audit you need to meet your requirements. These are generally based on the agreements executed by your investors for your latest equity raise, or in the loan agreement from your lender. The larger the amount of funding you require, the more likely that an investor/lender will require audited financial statements to ensure accurate financial reporting for their investment. If you are planning to become a publicly traded company, through an IPO or otherwise, audited financial statements are required regardless.

Consider the following:

• Audit Period. Do you require audited financials for just the current year, or for prior years as well? If related to an acquisition, do you only need to report the post-transaction period, or the full year? More/longer audit periods lead to more testing and audit costs.

• Audit Standards. Are you a public company, or planning to IPO, where you require an audit under PCAOB (Public Company Accounting Oversight Board) standards? Or are you a nonpublic company where AICPA (American Institute of Certified Public Accountants) standards will suffice? The more stringent PCAOB standards come with a significant increase in audit procedures and levels of testing, and the resulting fees are significantly higher.

• Legal Entity. Make sure you identify which legal entity is required to have audited financial statements. Is it at the parent/consolidated level for all operations. Or does it relate to a specific entity/subsidiary where the loan/investment is held? The larger the scope, the higher the audit costs.

• Audit Deadlines. Know the deadline for when audited financial statements are required. Are you required to issue within 3 months of year-end, within 4-5 months of year-end, or with more flexible requirements of up to 9 months from year-end? Audit firms are most busy in the first 5 months of the year (January through May); earlier deadlines may lead to higher audit costs, or the ability to push audit work to later in the year can help you save on fees.

Finding the Right Auditor

Once you have a general understanding of your audit requirements, you then need to find an accounting firm with the right capabilities to perform an audit, and make sure you pick the right firm based on your needs.

Key Factors to Consider:

• Audit Firm Size/Cost. You want to find an audit firm that fits your company’s current financial reporting goals and budget. The general rule of thumb is that the larger the accounting firm, the higher reputation they bring, but also a larger price tag.

  • For companies that are publicly traded or planning to IPO, regulators and investors likely want a highly reputable audit firm. This is most seen as the Big 4 firms (e.g., Deloitte, KPMG, PwC, EY), or a Top 20 accounting firm (e.g. Grant Thornton, BDO, RSM).

  • For large and high-growth nonpublic companies, investors/lenders may want a balance of reputation and cost. National and regional audit firms (e.g., Eide Bailly, Moss Adams) may still provide high credibility but be more cost-effective.

  • For smaller businesses with a relatively lower investment/loan balance, a local firm may be sufficient.

• Audit Partner/Team. While most audit firms have consistent audit guidelines, the audit is most heavily affected by the audit partner and managers who will be involved on the project and have the final say on most areas of the audit.

  • Some partners have a rigid, “my-way-or-the-highway” audit approach; others are more flexible and collaborative in resolving audit matters.

  • Aim to find a partner/manager team that takes a collaborative approach to resolving audit issues, while still displaying a high level of competence in their discussions of accounting and audit guidance.

  • When searching for an auditor, make sure to have calls/meetings to get to know the partner/manager that will be involved. While it is difficult to know how they will ultimately operate, initial conversations may indicate their level of collaboration and competence.

  • Timing/Availability. Audit firms handle many clients, and so it is important to find a firm with the right resources and capacity to meet your audit deadlines.

Conclusion

By knowing your specific audit requirements, and finding the right auditor to meet you needs, you are well on your way to successful audit preparation. And if your auditor is a good match, they will likely help advise on important information going forward. However, regardless of the team, audits can still bring a great deal of effort and headache for both sides.

If you have any questions, reach out to our team, have the help you need to successfully navigate your financial statement audit.