Common issues encountered during first financial statement audit

A financial statement audit can be nerve-wracking under any circumstances, especially when it is the first one for a company. A financial statement audit provides assurance that management has presented a fair and reasonable view of the company’s financial performance and position, and it is essential for instilling confidence that financial statements are accurate, transparent, and comply with accounting standards. In this post, we discuss the most common issues that companies may face during their first financial statement audit.

 Incomplete or Inaccurate Financial Records

The accuracy and completeness of a company's financial records are critical to the audit process. Companies may struggle to maintain accurate and complete financial records, especially during their early stages of operation. Some of the most common issues that auditors encounter include:

1. Missing documentation: Companies may not have all the necessary receipts, invoices, or other documents needed to support their financial transactions.
2. Improper bookkeeping: Poor bookkeeping practices, such as failing to record transactions or not reconciling bank statements, can lead to inaccurate financial statements.
3. Lack of financial controls: Without proper internal controls in place, it can be difficult to detect and prevent fraud or errors in financial records.

Companies should implement strong financial record-keeping practices, including maintaining accurate books, supporting documentation, and strong internal controls. This is especially important for Companies in the early stages of operation because it is the most common challenge for companies going into their first audit. Siegfried Advisory works directly with several clients to support proper internal reporting and recordkeeping every month. When it comes time for our clients to get an audit, the process of pulling records for the auditors is very easy!

Non-Compliance with Accounting Standards

Financial statements must comply with accounting standards set forth by certain governing bodies, specifically the Financial Accounting Standards Board (FASB) and the International Financial Reporting Standards (IFRS). Failure to comply with these standards could lead the auditor to issue a qualified opinion, which could have serious implications for the client. The most common accounting standard violations include:

1. Improper revenue recognition: Companies may record revenue in the wrong period or for the wrong amount, potentially leading to inaccurate revenue and receivables.
2. Inaccurate asset valuation: Assets may be over- or understated, leading to an inaccurate balance sheet. There are guidelines in place (e.g. FASB and IFRS) governing proper asset measurement methodologies.
3. Improper expense recognition: Expenses may be recorded in the wrong period, potentially leading to inaccurate expenses and liabilities.

Depending on the skill and experience of a company’s internal accounting team, consulting with a qualified accountant or auditor may be the best way to ensure compliance with accounting standards. The governing boards release new standards periodically and it is important that management be proactive in adopting the new standards to avoid complications when the audit process begins. Our clients have questions about the adoption and application of accounting standards all throughout the year, and we are often engaged to serve as technical experts to help our clients remain compliant.

Lack of Proper Segregation of Duties

A lack of proper segregation of duties can lead to fraud or errors in financial records. Segregation of duties refers to the separation of tasks between different employees or departments to ensure that no single person has too much control over the various components of financial transactions. The most common segregation of duties issues include:

1. No separation between authorization and record-keeping: If the same individual responsible for recording a transaction is also able to approve it, the possibility increases for fraudulent activity.
2. Lack of oversight: Without proper management oversight, employees may make unauthorized transactions or manipulate financial records.
3. No separation between custody and record-keeping: The same person may have control over assets and record the transactions, which can lead to asset misappropriation.

Companies should establish and document internal controls to mitigate the risks mentioned above. A policies and procedures manual can facilitate employees’ understanding of their job duties. This manual will also serve as an important check for employees or managers if they experience compliance issues. Missing internal documentation and limited segregation of duties are common in small and growing businesses, and Siegfried Advisory has been able to help numerous clients establish their internal controls documentation for their auditors and has also served as a second set of eyes on financial areas where there were none otherwise.

Lack of Preparation

The audit process can be time-consuming and require significant resources from a company. A lack of preparation will result in more time and more resources expended compared to a well-prepared company. The most common issues relating to lack of preparation include:

1. Inadequate communication with the auditor: Lack of communication with the auditor can lead to misunderstandings and delays in the audit process.
2. Lack of familiarity with the audit process: Companies may not understand the audit process, resulting in confusion and mistakes.

To avoid these issues, management should initiate communications with the auditor early and often and familiarize themselves with the audit process before the beginning of audit fieldwork. Our clients love to meet with our seasoned audit professionals for guidance before reaching out to their own auditor and often engage us to serve as a liaison between the auditor and upper management to ensure they are prepared for the audit at all times.

A Company’s first financial statement audit can be intimidating, but proper planning and education can help reduce out-of-scope audit fees, increase the likelihood of an unqualified audit opinion, mitigate fraud risks, and reduce stress.

Please contact Siegfried Advisory if you would like to learn more about your first financial statement audit and how we can assist!

This article was contributed by Jared Melone, Manager in Financial Advisory Services at Siegfried Advisory. You can contact John directly at [email protected].