Recently, I read an article that the Pentagon failed what is being called its first-ever comprehensive audit. While the auditors did not note any instances of fraud from the audit, it uncovered several matters the Pentagon must work to address. The Defense Department was not surprised by this as they never expected to pass it in the first place. While this audit was of a grand scale – costing $413 million and using approximately 1,200 auditors, the results are similar to what many companies can expect when their financial statements are audited for the first time. As we approach December 31, many companies are getting ready for their audit. If you are undergoing a first time audit, what should you expect?
A first time audit can be a little rough. Your auditors will spend additional time in the first year to gain a thorough understanding of your company and its internal control in order to assess the risk of material misstatement and the resulting audit procedures. This should all be done during the planning stages of the audit before year-end.
Depending upon the size of your company, you’ll likely have multiple audit team members out in the field. This means that there will be multiple audit requests that need to be fulfilled on a timely basis. This can put some strain on your employees as they juggle fulfilling audit requests with their normal day-to-day duties. In addition, your employees may not be familiar with the process of the audit and the nature of the items that are requested for testing. Your auditors work with your team to help them understand what is needed, which in turn helps them supply the appropriate requests and reduce any back-and-forth with your team.
Unlike the results of the Pentagon audit, where multiple organizations received “disclaimers,” your expectation is that you will receive a clean (unmodified) audit opinion. This states that the financial statements are fairly presented in all material respects. While this is the case in most instances, it doesn’t mean there won’t be any material audit adjustments or proposed audit adjustments that are identified but are not material, individually or collectively, to the financial statements.
In addition, a first time audit usually results in the identification of certain deficiencies in your company’s internal control. Other observations that may pertain to efficiencies or other improvements may be noted as well. Your auditors are required to communicate certain control deficiencies to management and those charged with governance.
Our goal would be to provide you with additional value on top of the audited financial statements, so we communicate all the observations from the audit in addition to the required communication items. The hope is you will look at these positively and see where improvements can be made. Not only will this reduce fraud risk or the risk of material misstatement within your company, this will also make for a smoother audit in following years.
Undergoing a first time audit is a big deal for your company. Your auditors will work with your team throughout the audit to ease any pain. While it may be difficult in the first year, the hope is that this is a valuable exercise for your company and you are pleased with the experience and ultimate end products of the audit.
Jonathan Poppel, CPA