By Joseph P. Leverich, CPA

When a banker tells a business owner his company needs an AUDIT, most owners groan. They have two choices: find a CPA who is going to deliver the cheapest “base” service possible, or find a CPA who will deliver the financial statement audit AND consult on operating improvements.

For many years, the extenders of business credit offered large amounts of credit on the simplest of statements – internally prepared, compiled or reviewed by a CPA, or based on a review of tax returns. This has all changed.

Banks and finance companies that serve your business also serve larger entities – the likes of Enron, K-Mart, Global Crossing, and the stock market debacle. Banks and finance companies have had to pay billions in losses! Consequently, extenders of credit are being much more careful.

An audit is an independent verification of a company’s financial results presented in the form of financial statements. Creditors use audits to provide a certain level of assurance regarding the financial results of a business. The audit is an important tool that can help provide necessary operating elements such as proper financing, lines of credit, and other limits with extenders of credit.

Auditors evaluate the internal controls of business cycles and transactions, such as revenues, payroll, disbursements, investments in your company and payment of debt. Internal personnel and management are queried on these transactions, safeguards and the established internal controls. A sample of transactions are selected and traced through the system to test the way the transactions actually take place.

Often a good auditor finds areas where the company can enhance business operations and establish better controls. Other areas that can benefit from an audit include computer back-up and security, insurance coverage, workers compensation costs, employee costs compared to industry norms, comparative financial information, and owner and management issues affecting future company success.

A company will find it beneficial to have an open business relationship with an independent CPA auditor. With the right experience, the auditor should have specific recommendations to reduce labor costs, enhance profit, or improve cash flow. These added benefits don’t come with the lowest price audit because this auditor has only one goal – get it done on budget – don’t think or waste your time inquiring. Unfortunately, this is all done in accordance with current standards.

Auditing Tips

Here are some tips to help make your audit go smoothly and give you more for your investment:

1. The owner and controller should take an active roll with the CPA firm. This will enhance the audit and produce something greater than an expensive 15 page bound report.
   
   
2. Establish a timeline for the accounting department, management and your CPA to start the audit. A well-executed audit is just like a well-executed business project. There are varied tasks, involving key people within your company and all of this has to fit into a timeline. The finish date is typically based on tax filing deadlines and creditor needs, and should be managed to your current workload and management’s commitment to prepare internal schedules. If the complexity of your company is such that you won’t meet the tax-filing deadline for issuance of your financial statement, deal with this in advance. Your bank will probably not have a problem if this is discussed beforehand. However, banks do not want to have this discussion on the day they are expecting the results.
   
   
3. Work with your team to get all necessary documents and schedules to your auditor on a timely basis. If you are not sure what is needed, ask your auditor to give you a written list.
   
   
4. Be forthright with your auditor during the planning process regarding fines, penalties, regulatory agency concerns, and business issues. Other important issues include company compliance with lending agreements, filed certificates of compliance with your bank and other issues that are more readily reviewed by your bank today than they were just a year ago. Good auditors will find most of these, but they waste valuable resources discovering problems instead of working on the “best” choices and alternatives. It is to your benefit to be upfront.
   
   
5. Have your auditor do a pre-inspection of your books. Usually for an investment of a day or two, your CPA can identify items your internal people need to resolve before the audit is started. These include things like new equipment and debt, disposals of equipment and debt booked, all new financing disclosed and available, legal issues, claims copied for review and discussion with management, and changes of agreements or management. Being open and forthright in the pre-inspection will
   result in a more effective audit for your company because it gives management time before year-end to make critical choices.
   
   
6. Have your auditor prepare audit confirmations in advance, and have them ready to be mailed close to the company’s year-end. These are a necessary evil of a good audit. This will assure that the third parties have them timely and can reply timely. Typical confirmations that fall into this area include bank, legal, and accounts payable and receivable. The goal is to achieve approximately 80% of all confirmations within five days of year-end. This is a time sensitive area that can help both parties do a better job.

A business owner can have a positive influence on the outcome of an independent audit. You can plan for a better cost effective audit and achieve strategic tax planning by obtaining insight from a professional familiar with your industry to assure your company enhances its position in the market. If you are not sure where to begin, email or call me and I will send you a checklist that will get you started.