Preparing for an audit is a critical step for businesses navigating regulatory compliance, pursuing mergers and acquisitions or completing significant business transactions. Understanding the financial statement audit process and planning ahead can save time, reduce stress and ensure accurate results.
In this guide, we’ll walk through the key financial audit preparation steps, explain key differences between AICPA and PCAOB audits and provide actionable tips to streamline the external audit process. Watch the video below for an in-depth overview and read on for additional guidance.
Why Audit Preparation is Essential
Financial audits provide a clear, independent review of your company’s financial health and compliance. Whether you are preparing for audited financial statements for regulatory requirements or internal use to refine your operations, preparation is key to achieving accurate results and building confidence with stakeholders.
To set the stage, it is important to understand the types of financial statement audits and how they apply to your business.
Types of Financial Statement Audits
Businesses may encounter several types of audits depending on their needs, including:
- External Audit (focus of this guide)
- Internal Audit
- Tax Audit
- Statutory Audit
- Forensic Audit
- Compliance Audit
- Agreed-Upon Procedures Audits
Each type serves a unique purpose, but external audits, such as AICPA and PCAOB audits, are often required to meet regulatory, financial or contractual obligations.
AICPA vs. PCAOB Audit
External audits primarily fall into two categories: AICPA audits and PCAOB audits. Understanding the distinction helps you align your financial audit preparation steps with the right standards and requirements for auditing financial statements effectively.
- AICPA Audits are for the audit of private companies, not-for-profit organizations, and smaller government entities. These audits are governed by Generally Accepted Auditing Standards (GAAS) and focus on the accuracy of financial statements.
An organization may need an AICPA audit to adhere to regulatory requirements, loan covenants, investor agreements or other contractual agreements. It could also be required to prepare for a significant business transaction such as mergers and acquisitions, or to prepare for a PCAOB audit in the long term which is generally more rigorous.
- PCAOB Audits are required for publicly traded companies and entities registered with the SEC. These audits are governed by PCAOB auditing standards with focus on both financial statements as well as internal controls framework, requiring adherence to the Sarbanes-Oxley Act (SOX).
PCAOB audits are mandatory for publicly traded companies to ensure transparency and reliability of financial reporting.
The scope of PCAOB audit depends on the classification and size of the company. All publicly traded companies in the U.S. must comply with SOX 404(a) requirement, which requires management to assess and report on effectiveness of internal controls over financial reporting (ICFR). The accelerated and large accelerated filers are required to comply with SOX 404(b) requirement, which mandates external auditor’s opinion on ICFR.
Deciding which audit applies to your organization depends on your current needs and long-term goals, such as preparing for a public offering or aligning with investor requirements.
Key Financial Audit Preparation Steps
1. Identify Your Audit Needs
Determine the type of external audit required—AICPA or PCAOB—and outline your objectives. Understanding your audit’s scope ensures you prepare the necessary documentation and meet compliance standards.
2. Work with Qualified Professionals
Collaborate with experienced professionals to create a detailed plan that includes assigned ownership and a timeline.
- Identify critical investments needed for execution, such as implementing systems or automating workflows.
- Engage a qualified CPA firm and align on prioritization of financial statement areas for GAAP compliance.
- Obtain approval for a dedicated budget from authorized stakeholders within the organization to support the plan.
3. Plan Your Audit Timeline
Start early. Preparing for an audit requires time to review records, resolve discrepancies and gather documentation. Build a timeline that aligns with your reporting deadlines.
4. Focus on GAAP Compliance
Review your accounting policies to ensure they align with Generally Accepted Accounting Principles (GAAP). Key areas to address include:
- Revenue recognition policy
- Capitalization policy manual
- Journal entry approval
- Document month and close process
- Financial statement review and reporting process
5. Maintain Accurate Financial Records
Reconcile balance sheet accounts monthly and ensure there is a clear audit trail for all transactions. Accurate documentation is essential for an efficient external audit process. One of the common challenges our clients face when preparing for their first audit is accurately accounting for equity transactions and related compensation.
6. Coordinate with Key Stakeholders
Engage your finance team and external auditors early to set expectations and address questions. Open communication reduces delays and helps resolve issues before the audit begins.
It is important to note that the firm assisting with your audit preparation cannot perform the actual audit. This separation ensures the independence and integrity of the external audit process, as required by professional standards.
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Whether you’re preparing for a regulatory compliance audit, a merger, or any other significant business transaction, our team of qualified professionals can guide you through the process.
Author: Deepa Patel, CPA | [email protected]
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