Understanding your first financial statement audit

While early stage businesses are frequently financed by a close group of owners, success often creates opportunities that necessitate outside funding.

Whether your business is experiencing rapid growth that is putting pressure on cash flow, or you are taking new technology to market and need an influx of outside equity, attracting outside funding will require establishing credibility in your financial statements.

So what can a business do to provide the necessary assurance to potential investors? The answer is an independent financial statement audit.

Smart Business spoke with Ernie Rossi III, Audit Partner-in-Charge at Sensiba San Filippo LLP, who helps growing Bay Area businesses navigate many different challenges including preparing for audits, and learning more about financial statement audits, how they work and what they can provide to businesses and investors.

What is an audit and why is it beneficial?

First and foremost, an independent audit provides assurance to third parties about the financial statements prepared by management. For management, playing the role of advocate creates an inherent conflict when it comes to sharing information with third parties — management has a vested interest in the result.

This is where a financial audit can provide tremendous value. A financial audit provides an objective, independent, third-party opinion on management’s financial statements. While an audit might seem like an onerous requirement, in reality, it can be the key that unlocks the door to outside funding and new opportunity.

How does the audit process work?

The audit process is designed to efficiently analyze the financial statements so that an auditor can issue an opinion.

From the standpoint of management, the desired result is an ‘unqualified opinion,’ meaning the auditor concludes that the financial statements provide a true and fair representation in accordance with the appropriate financial reporting framework.

If the audit process cannot resolve significant questions regarding representations of management, an auditor may issue a ‘qualified opinion’ or even an ‘adverse opinion.’

While an audit requires independence and objectivity, it also requires coordination and cooperation between management and the outside auditor. Financial audits generally have five phases including planning, risk assessment, audit strategy, evidence gathering and finalization.

What are the roles of the auditor and management?

In the strictest sense, the role of the auditor is to take financial statements and perform procedures so that he or she can determine whether the statements are fairly represented.

Auditors cannot be involved in the actual preparation of audit schedules supporting the financial statements, but they can provide templates, feedback and advice for management to help them prepare for a successful audit.

Management’s role in an audit is to provide the auditor with a complete, closed set of books for the audit period. While an auditor can provide guidelines for what he or she will need in order to complete the audit, management is ultimately responsible for preparing the required information.

Some companies have the knowledge and resources to prepare for an audit internally, but many organizations utilize outsourced controllers, CFOs or other accounting firms to help them prepare for an audit.

What should be considered when selecting an auditor?

It is generally a good idea to work with an auditor who understands your company and your industry. Industry knowledge helps auditors best assess areas of risk so they can focus the audit in the right areas to effectively minimize the risk of material misstatements.

Finally, and most importantly, find an auditor who is willing to make the audit a joint effort, not an adversarial relationship. Auditors must remain independent; they can’t be advocates for management, but they also don’t have to make the process combative. These engagements can be mutually beneficial.