Financial statement audits

There are a number of benefits that
can be gained from obtaining an
audit of financial statements — even if there is no third-party requirement.
Good auditors will familiarize themselves with the business and operations
of a company and share valuable advice
that may lead to more cost-effective
ways to operate.

By leveraging the knowledge gained
through the auditing process, an auditor
may also make suggestions to management on ways to improve internal controls to ensure accurate reporting and
guard against fraudulent activities.

“If an auditor discovers fraudulent activities with respect to financial reporting,
these would be reported to management,”
points out Rachel Simon, executive vice
president of Gumbiner Savett Inc.

Smart Business spoke with Simon
about audited financial statements, how
to go about finding an auditor that recognizes your needs and the importance of
starting the process early in the year.

Why is it so important for businesses to
have audited financial statements?

Audited financial statements are needed by businesses for a number of reasons. They are required by various federal and state regulators, such as the
Securities and Exchange Commission
(SEC) for companies whose stock is publicly traded, the Department of Housing
and Urban Development (HUD) for certain real estate developers and the
National Association of Securities
Dealers (NASD) for futures brokers.

Audited financial statements may also
be required by lending sources, such as
banks, current investors or potential
investors. Sometimes, a company’s owner may request a financial statement
audit so that he/she may obtain comfort
about the financial reporting or to put
employees on guard.

How should a company go about finding an
auditor that recognizes its needs?

Various factors should be considered
when a company’s management or audit
committee (for publicly traded entities)
decides to find a new auditor. Management should begin by trying to get references from its bankers, lawyers or
management of other companies. Having
an accountant that specializes in the
company’s industry or type of regulatory
reporting is an important factor. Some
examples of industries that require
specialized accounting knowledge are
not-for-profit, real estate, banks, investment companies, broker-dealers and

The ‘right fit’ as to the size of the
accounting firm should also be considered. A company that is working with an
accounting firm that is too big may not
get the attention it deserves. On the other
hand, a company that is working with an
accounting firm that is too small may not
get the appropriate level of expertise that
is required.

Lastly, management should make sure
that the accountant that has been selected to do the audit is in good standing
with its state board of accountancy and
the American Institute of Certified Public

How should a business prepare for an audit
of its financial statements?

The person(s) who will be responsible
for providing the auditors with financial
information should meet during the year
with the auditors who will be in charge of
the audit so that they can learn about the
business that is about to be audited and
to discuss what will be needed to perform the audit. The auditors will usually
provide a list of the items needed. This
first meeting should happen as early in
the year as possible, since the auditors
may perform some interim test work
prior to the entity’s year-end.

Many times, auditors obtain and document an understanding of the company’s
business and internal controls prior to
their year-end fieldwork. In order to have
as effective and efficient of an audit as
possible, information to be provided for
the audit should be completed accurately and completely prior to the start of

How can business owners benefit from a
financial statement audit?

In addition to providing the auditor’s
report, there are many other benefits that
can be derived from a financial statement audit. Because an auditor is
required to obtain an understanding of
the company’s business and internal controls, an auditor may become aware of
and recommend ways that the entity can
improve its internal controls over financial reporting or profitability. The auditor
is also required to perform certain procedures regarding a company’s policies and
procedures to detect and prevent fraud.
Any suggestions of ways to improve the
detection and prevention of fraud would
be recommended. Finally, an auditor
may discover tax savings measures while
performing the audit.

RACHEL SIMON is executive vice president of Gumbiner Savett Inc. Reach her at [email protected] or (310) 828-9798.