It’s important that a company has strong internal controls in place before entering into a situation that would trigger an audit. Audit triggers include:
■ A company putting itself up for sale
■ Government legislation changes
■ Licensures that require an audit
■ Specific audited financial statements that are sometimes necessary for bank covenants
If, through an internal financial audit, issues are uncovered or the information a company is able to provide is not the specific, higher-level information needed, it will delay the audit process, push back deadlines and incur costs and/or reputational damage.
Smart Business spoke with Alexis C. Burch, a Senior Manager at Corrigan Krause CPAs and Consultants, about the importance of having strong internal controls in place ahead of an internal financial audit.
What’s typically covered during an internal financial audit?
The focal point in an internal financial audit is a company’s controls with an emphasis on getting a higher level of assurance regarding its financial results. While some entities are just looking for a compilation or review, an audit takes it a step further, examining detailed transactions to confirm that the information from invoices line up with what was sent to a client or what’s recorded in the financial records. These audits explore whether companies have in place and perform the controls that they’re expected to have. So, the auditors will look at bank and account reconciliations and identify areas of risk in the company’s internal controls.
What internal controls are important?
The most fundamental controls are those related to account reconciliations — taking what a company has in its financial records and making sure the details behind it line up. It’s surprising how often those things do not agree.
Another internal control is having management review financial records, comparing the prior year to the current, or the previous quarter to the current quarter, to identify anything unusual; and where anomalies are found, determine why.
Audits are also used to identify risk. It’s looking at how a company’s revenue has been recorded by reviewing invoices or something like shipping documents to help companies ensure their revenue and their inventory are appropriately stated.
Bank covenants are clearly stated in loan agreements. So, when companies take on new debt, they need to review that information and confirm the type of service the bank wants, because there are various service levels, with an audit being one of them.
When a company is up for sale, any potential buyer will want an internal financial audit, in addition to a great deal of due diligence. Audited financial statements offer a level of comfort to buyers considering a company as an acquisition target — knowing that they have internal financial controls that hold up against scrutiny.
What if a company finds its internal controls are inadequate?
If a company’s internal controls are found through an audit to be inadequate, and issues such as higher-than-reported revenue are discovered, it has a negative effect on the company’s reputation. It will also require the company to go back and change its records in cases where they company provided internal financial statements to a bank. It’s a very bad look when companies provide financial data to another entity and it’s discovered those records are inaccurate.
To ensure proper controls are in place, a company should work with key members of management to identify areas of risk and what can be done to lower that risk through policies, procedures and processes. It’s also important to document who’s responsible for what and how often the key actions occur. That’s helpful to an auditor because it gives them a clear point from which to start.
Companies considering a sale of the business or looking for new debt should prepare for an audit well before it happens. Take the steps necessary to put in place and document key processes before a CPA firm is involved. Having formal internal controls is a foundational element of good business processes. ●
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