Introduction

A financial statement audit is a crucial step that every small business should take to understand its current financial condition.

Furthermore, a financial statement audit is a useful tool for small business owners in identifying areas for potential improvement, increases in profitability, and loss prevention efforts. The several advantages of having an annual financial report audit will be highlighted throughout this handbook. It is recommended that you hire a professionally certified accountant to perform an annual financial statement audit to further your company’s ongoing success and growth while also providing you with acceptable documentation.

This walkthrough will guide you through the process of conducting a financial statement audit, explaining the key areas that need to be assessed and the various methods that can be used to get the most accurate results.

At the end of this blog post, you should be able to answer the following questions:

• What is the typical procedure for auditing the financial statements of your small business?

• What are the common mistakes that people make when they audit their business financial statements?

• Why should I use a certified public accountant when doing my own small business financial statement audit?

• What are the three most important financial statements for small businesses?

• Do financial statements need to be audited?

• How do small businesses prepare financial statements?

Background

If you have a registered business, you will likely need a financial audit, but what exactly is a financial audit? The objective examination and evaluation of a process to ensure that it fairly and accurately represents what it claims to represent is referred to as an audit. It could also include operations, taxes, health, safety, the environment, manufacturing processes, accounting records, and so on.

Financial statement audits, A financial statement audit is an objective inspection and appraisal of a company’s financial statements to ensure that they give a fair and accurate representation of the transactions they claim to represent for a specific period and are based on the Generally Accepted Accounting Principles (GAAP) in your jurisdiction.

The importance of auditing cannot be overstated. An effective audit not only detects problems quickly but also helps to improve business. Depending on your industry, there may be regulatory reasons for a financial statement audit but having audits as best practice will increase confidence among stakeholders such as banks, clients, and current and future investors. Whenever these stakeholders need to evaluate a business, they prefer to have statements that have passed a thorough examination by auditors.

An elevated level of accuracy is vital in financial reporting. Incorrect or improperly reported numbers can cause all kinds of issues, from unwise strategic planning decisions to cash flow difficulties. However, an audit performed by a certified chartered accountant that includes a thorough examination of everything from specific transaction testing to financial statement report presentation should assure that the information provided in a financial report is materially correct.

Small Business Financial Statements

It is critical to understand what financial statements are before we get into audits. That would provide some additional information on how they should be audited.

What are financial statements?

Financial statements are a set of documents that show a company’s financial position, performance, and cash flow. They include the balance sheet, income statement, and cash flow statement. These documents provide insight into the health of a company and its performance over time. They are important for investors to analyze because they support management’s plans (such as making key decisions about capital allocation), enable comparisons with other companies in similar industries, and serve as an invaluable diagnostic tool for every business owner or manager. Financial statements must demonstrate profitability from both internal and external operations, as well as a current financial condition that is competitive but comprehensive enough to explain meaningful trends in the company’s performance and pricing approaches; and cash flows, including expected future availability of funds to pay current expenses due within one year.

A collection of reports that contain the information presented in financial statements (and on which you can build). Each report includes a statement as well as notes, or additional explanations/details about a specific line item (for example, why there is no unearned revenue for short-term accounts receivable), as well as explanatory footnotes that provide context behind the numbers and explore historical performance. The reports are typically presented as part of a company’s quarterly, annual, or semi-annual financial reporting cycle.

How are financial statements prepared?

In general, financial statements are prepared in the same way as any other type of statement, by recording transactions and verifying the information presented with credible sources. However, certain items may require more scrutiny because their financial effects could have important implications for the company’s overall health and prospects. For example, a company’s income statement may be scrutinized closely to assess its ability to generate healthy profits and cover its costs; likewise, a company’s balance sheet will be given a thorough examination to assess the cash levels and liquidity needed.

One of the most important aspects of financial statement preparation is pricing assets in such a way that they can support future commitments and cushion against potential loss while also providing adequate flexibility when determining objectives during periods of financing or large-scale expansion.

The importance of financial statements

Financial statements are important tools for tracking company performance and assessing financial risks. Financial statements provide a detailed picture of the financial condition, results of operations, and cash flows of a company over a certain period. They can also be used to identify potential problems and make decisions about where to focus future efforts.

Balance Sheet

A balance sheet is a document that shows a company’s assets, liabilities, and net worth. It can be used to show how well the company is doing financially. A balance sheet lists all the assets and liabilities of a company, including any debts, grants, or bonds. A balance sheet is a snapshot in time that shows a company’s net worth now. The balance sheet is also known as the Statement of Financial Position.

The balance sheet is organized into three sections: assets, liabilities, and net worth. An asset is anything of value owned by the organization. A liability is something that must be paid, such as a debt obligation. Net worth is the difference between assets and liabilities.

Income statement

An income statement presents a company’s revenue and expenses over a particular period. It can be used to help determine a company’s financial health. An income statement compares a company’s revenue to its expenses and displays its profit, if any. The income statement is also known as the profit or loss statement or the Statement of Comprehensive Income.

An income statement looks at cash flows by looking at sales over time. Profit is found on an Income Statement when all costs, including cost overruns, interest expense, and depreciation, are deducted from revenues: gains and losses reduce net profit.

Statement of Cash Flow

A statement of cash flow is a document that summarizes a company’s cash inflows and outflows for a specific period. This document can help investors understand how much money the company has available to pay its bills and invest in new projects. Many businesses use both an income statement and a cash flow statement to forecast their future financial performance.

In a cash flow statement, there are three main sections: operating activities, investing activities, and financing activities.

The free cash flow (FCF) of a company is calculated by subtracting all sources of income from net profits. In other words, “the amount of actual operating profit or loss earned in a particular period less any additions to assets or claims against shareholders.” FCF can be calculated using the most basic formula: [(net income – depreciation)/asset balance] + capital expenditure.

Statement of changes in equity

A statement of changes in equity is a report that summarizes the total changes in the shareholders’ equity of a company over a specified period. Typically, the report shows how much money was added or lost during the period, as well as the percentage of total shareholder’s equity held by each class of shareholders. This is not commonly found in small business reports, but it is quite useful in analyzing the changes in the value that the owners have in the business.

Users of an Audit Report

1. Management

Current financials, budgets, and forecasts are key tools for managers and executives to make crucial business choices. At this point, management must use the most trustworthy data available since mistakes may be costly to the company.

Audited financial statements can provide extra confidence, allowing management to make targeted improvements to boost growth and development with the knowledge that the underlying figures are accurate.

2. Investors

Investors, from conventional stockholders to angel investors, are essential for many small businesses, particularly startups.

To avoid losing money, most investors will be hesitant to make investments unless they have carefully reviewed audited financial statements. Audited results to investors might help your firm avoid cash flow concerns and prepare better, as they may boost your chances of getting vital funding. Negotiating better investment terms is another potential outcome of audited financials. Because you have audited financial reports, a corporation is more valuable than comparable firms.

3. Banks and Lenders

Most small businesses need to borrow money from somewhere to stay in business or expand. The audited financial report is one of the first documents sought by banks and other lenders, and it is a basic requirement. By providing verifiable documents to banks and other creditors, an audit increases your chance of getting a loan, getting better terms, and obtaining lower interest rates.

4. Employees

Demonstrating confidence in an employer’s legitimacy can be accomplished by providing access to audited financial statements. This proves your dedication to your colleagues and, potentially, may result in tangible advantages for your company by improving job satisfaction and performance.

5. Customers and Vendors

Some of a company’s clients and suppliers spend time researching online, reading testimonials, and reviewing background information about the corporation when making purchasing or selling decisions. Only after they have examined the audited financial statements do some companies build relationships.

6. Tax Authorities

The tax authorities trust audited financial statements and records over non-audited ones. The likelihood of having additional tax liabilities because of audited financial statements is lower than for businesses with non-audited financial statements.

7. Regulators

Non-financial information is sometimes included in financial statements that are relevant to regulators. Audits of compliance are used by the regulators. An audit must both confirm the accuracy and ensure compliance.

Auditors’ Responsibilities

The underlying theme here is that the Auditor’s legal goals are to obtain reasonable assurance that the financial statements are free of material misstatement, whether due to fraud or error. The keyword here is “material,” which means that while the audit may not detect all errors, it does provide an elevated level of accuracy.

Even if the financial statements are found to be error-free in an audit, they are more likely to be accurate when reviewed by an independent accountant. The Auditors’ job isn’t just to ensure that the data in financial reports is correct. They also make sure that national and international accounting standards are followed in the financial statements. To guarantee that the accounting approaches and figures employed inside a firm are not only correct but also consistent and uniform, audited financial statements are reviewed for consistency.

Audits are NOT intended to eliminate all risk, detect all errors, or provide any assurances. Nonetheless, the review will provide assurance that your accounting data corresponds to your company’s financial state as defined by GAAP.

While management is still in charge of the numbers behind the accounting numbers, an audit adds a layer of quality to their efforts.

Who should conduct your audits?

Only Chartered Accountants with practice licenses are permitted by law to sign off on audit reports. Accounting firms can be sole proprietorships, partnerships, or corporations. Many great small firms can complete an audit for affordable fees.

Beyond costs, the audit firm should have good credentials and be knowledgeable about the company’s industry. Look out for firms with great referrals or research the principal person signing the audit report.

Factors Influencing Audit Costs

The following will influence the cost of your audit:

• The company’s size

• The business’s complexity

• Number of transactions per year

• Number of locations

• Having inventory or not having inventory

• Service or Manufacturing

• Availability of records

With proper guidance from your strategic advisor, you will get value for your audit no matter what the price you pay. But a well-run audit by a good firm will pay for itself multiple times over in incremental value to your business.

Does Your Small Business Need a Financial Audit?

Short answer, yes!

If your company is registered as a company under the Companies and Allied Matters Act, you may not have a choice.

Otherwise, for the stakeholders stated above, there is a lot to be gained from performing an external audit of your financial statements.

Your company’s financial statements will be of higher quality, and you will be able to use them as a tool to properly run your business. Users of your financial statements will also have a positive sense of quality as it relates to the numbers you are presenting.

Conclusion

There are many reasons why small businesses need to perform financial statement audits. This is because audits can help identify any potential problems with the company’s finances, identify areas where the company needs to improve, and reassure creditors that the company is solvent. By contacting a reputable financial statement audit firm, you can be sure that your business will be well-protected and able to weather any financial storms that may come its way.

Consider completing a financial audit on an annual basis. Furthermore, this should be part of your best business practices. This does distinguish your business, adds value, and will make your business better in many ways.

If you want to be sure there are no issues with your books, myCFOng is happy to help. As your top financial advisory firm, we can offer everything you need to keep your business moving forward. Get in touch today!