All About Audits – Part 1
Audits | June 22
Authored by NVS Professional Corporation
Let’s face it, audits are not everyone’s favourite topic. Public opinion tends to portray them as terrifying filing room interrogations, with officious robotic types shining a bright light in your eyes, demanding to see your P&L statements.
But in reality, audits don’t have to be scary at all. In fact, they are kind of like a health check-up for your business. One done by a professional who genuinely cares about your well-being and is personally invested in your longevity.
So, if the mere mention of the word audit has you defiantly guarding your filing cabinets, stapler at the ready, then take a deep breath, put the stapler down, and keep reading.
What is an Audit?
In simple terms, an audit is basically a second opinion used to verify the accuracy of a company’s records. They are a quality control mechanism, kind of like checking your homework with a parent before handing it in to that teacher who everyone’s afraid of.
Auditors won’t just analyze your records though. They will also spend time visiting worksites, meeting with key personnel and researching the industries in which their clients operate. An audit can cover an organization as a whole, a specific arm of a company or even a standalone function.
When most people think of a business audit, their minds immediately jump to the dreaded CRA tax audit. These are the audits that give the word a bad name and have business owners diving under their desks for cover.
However, as fear-inducing as they may be, government audits actually only make up a tiny part of the entire audit picture. Business audits carried out by qualified CPA firms are far more common, and far more beneficial. These external audits are powerful tools in the business world, and many companies choose to conduct them routinely in order to strengthen their overall business operations.
Business audits conducted by a CPA firm involve a systematic analysis and evaluation of a company’s financial statements and processes in accordance with set reporting standards. They may be conducted annually as part of a business’ routine practice, or as one-off Special Purpose Audits for a targeted goal.
Broadly speaking, the purpose of a business audit is to evaluate a company’s performance and ensure their finances are represented fairly, accurately and in compliance with certain standards and legal requirements.
Companies can benefit from business audits in a multitude of areas (as we’ll see in the next section). As an added bonus they also happen to be the best defence against the ever-looming CRA audit – much like fighting fire with fire, you can prepare for audits with audits.
Benefits of Audits
So, we’ve established that audits don’t have to be scary, but they’re still a huge hassle, right?
While it is true that audits are not without their short-term inconveniences and accommodations, the value that they provide to a company makes them more than worth it.
Some of the main benefits of regular audits include:
- Ensuring compliance with industry specific standards, regulations and legal requirements
- Catching inaccuracies in financial statements to avoid future consequences
- Providing peace of mind that tax is being reported accurately
- Demonstrating a desire to improve business performance and promote transparency
- Permitting third party stakeholders a clear and accurate insight into a company’s financial movements and overall performance
- Helping to highlight and ultimately mitigate areas of risk
- Developing a record of comparative financial information. This allows clearer decision making and the ability to project future performance based on historical trends
- Identifying inefficiencies and inadequacies in internal controls and processes
These benefits encourage an environment for change and growth by improving business systems and procedures. Qualified auditors possess business acumen and detailed industry knowledge enabling them to provide critical reports and advice to enhance a company’s operations.
External audits carried out by a CPA firm provide an unbiased, third-party assessment of a company’s financial status. This means that the reports they generate can be used outside of the company to provide interested parties, such as stakeholders or investors, a clear and independent view of how the business is performing. Financial statements that have been externally audited come with a high level of assurance that they are fair and accurate, making them powerful business tools.
So instead of viewing audits as a hassle, businesses should embrace them as a means to increase efficiency, boost performance and drive future innovation.
Do all Businesses Need Audits?
In Canada, routine audits are actually a legal requirement for some businesses, including public companies, businesses that control large retirement funds and certain non-profit organizations.
While most medium-size private companies may not be legally obligated to perform regular audits, many will still choose to do so of their own volition due to the valuable benefits that they yield.
“Audits are critical steps to manage growth effectively, increase overall productivity and make informed business decisions.”
The businesses least likely to engage in audits are start-ups and small owner-managed companies. With leaner operations and just a few key decision makers, keeping processes streamlined and maintaining accurate books is generally easier for these companies. Also, when margins are tight, the costs involved with engaging in an audit may not seem financially viable.
However, these smaller companies should think twice before disregarding audits altogether. Audits are critical steps to manage growth effectively, increase overall productivity and make informed business decisions. The current business climate is also calling for ever increasing levels of transparency from companies. Customers and the community at large want to support businesses that they can trust. Audits help show that a company is willing to be open and honest with their finances and operations.
For companies that are not yet in a position to conduct an audit, Review Engagements are a highly recommended first step. These are not the same as an audit, but are still carried out by a CPA firm with the purpose of expressing a qualified opinion.
With a narrower scope than an audit, Review Engagements cannot provide the same ‘reasonable assurance’ that audits do, but instead provide what is known as ‘limited assurance’. This essentially means that the auditor has found no reason to believe that the company’s financial information has been misrepresented.
Review Engagements may not provide the high level of assurance that comes from an audit, but they still afford several of the same benefits. They give valuable insights into a company’s finances and in many cases their ‘limited assurance’ can even be enough to satisfy stakeholders and lenders. They require less budget than audits, are less time consuming and will generally reduce the cost and duration of an audit in the future.
To sum up, audits are good, not scary. They are key components to keeping a business running smoothly and efficiently. If your business isn’t utilising these powerful tools then now is the time to start.
Stay tuned for Part Two of our Audit series where we will discuss the audit process in more detail including when to conduct them and the key steps to take when preparing for one.
Can’t wait for Part Two? Contact our team of experts today to find out how our audit services can help your business:
Call us at 905.415.2511 (Markham) or 705.727.0763 (Barrie) or fill out the form below and we'll contact you to discuss your specific situation.