An independent audit ensures the accuracy and reliability of your financial statements. Independently audited financial statements give investors, lenders, and business leadership teams confidence in your financial statements. In many cases, audits are legally required, and in other cases, they’re critical from an operational standpoint.
Wondering if your business, nonprofit, or retirement plan needs to be audited? Then, take a look at this overview. This post explains when audits are statutorily required, and it also looks at situations where there is a sound business case for audited financial statements.
Public Company
All public companies must undergo an independent audit every year. This ensures that the financial statements released by the company accurately reflect its operations.
At the end of the audit engagement, the auditors prepare a written audit report that they file with the Securities and Exchange Commission (SEC). These reports are public records that investors and any other interested parties can examine freely.
Private Company
Private companies are not legally required to submit to independent audits. However, in many cases, these companies need audited financial records for business purposes.
Lenders and insurance companies may require audited financial statements before agreeing to extend loans or certain types of insurance policies. In these situations, the audited financial statements give the other parties reassurance that they are making the right financial decisions.
Additionally, some investors may want to see independently audited financial statements before becoming a shareholder of a private company. Similarly, many private companies obtain independently audited statements before a merger or acquisition with another entity.
Retirement Fund
The Internal Revenue Service requires retirement plans with a “large” number of participants to have their financial documents independently audited. This applies to both defined contribution plans such as 401(k)s and defined benefit plans such as traditional pension plans.
To be considered large, a retirement plan must have 100 or more participants on the first day of the plan year. Anyone who is eligible to participate should be counted, even if they have opted out of the retirement plan. The participant number must also include retired, former, or deceased employees who have assets in the plan. However, there are some special caveats to the 100-participant rule.
Retirement plans with less than 80 participants don’t need to have independently audited financial statements, and they must file the Small Plan Schedule I from the Form 5500 series. Plans with 80 to 99 participants can opt to file Small Plan Schedule I or Large Plan Schedule H. If they file Schedule H, they should include audited financial statements.
If a retirement plan has between 80 and 120 participants on the first day of the year, it can file the same form as the previous year. In other words, if it filed as a small plan, it can do so this year and avoid the audit requirement. If it filed as a large plan, it must do the same this year, and it must include audited financial statements.
Once a plan has more than 120 participants, it must file as a large plan, regardless of how it filed in previous years and also must include independently audited financial statements.
How to Choose an Independent Auditor
You deserve the best possible services when selecting an auditor. This is a critical decision as your audited financial statements have a significant impact on your business. They can help you attract investors or reassure lenders or grant providers about your financial statements.
For all audits, the audit team examines financial statements and disclosures to ensure they conform with Generally Accepted Accounting Principles (GAAP) and don’t contain any material misstatements. The auditors also assess the efficiency of the company’s internal controls. These are the mechanisms and processes used to reduce the risk of error and accounting fraud.
Your audit engagement team doesn’t just ensure that your financial statements are accurate. They also help you assess your controls and identify areas for improvement. Because of their in-depth knowledge of your finances, they can provide critical insights that help drive your success.
When choosing an auditor, make sure that they have the right credentials to meet your specific business requirements. Ideally, you also want an audit team that is familiar with your industry. This helps to ensure that they understand the unique financial risks and practices of your business.
What processes does the auditor use to ensure quality? All CPA firms are required to undergo an independently administered peer review of their audit and assurance practice. Firms that are performing the best quality work will receive a report of “pass” on their most recent peer review. You deserve an auditor with extensive experience, who is committed to quality and constant professional development. This helps to ensure that they use best practices during the audit.
Finally, you need to think about the cost. When it comes to your business finances, you should never pick the firm with the lowest prices. Instead, you need to look for quality. You need an audit team that charges reasonable fees that allow them to do a thorough job.
Get Help With Audit and Assurance Services
Whether you need a full audit, a financial statement compilation, or a review, we can help you out. At DHJJ, we provide a full range of business audit and assurance services. Our audit and assurance services can provide you with exactly what you need to meet statutory or business requirements. We give you the assurance you need to be confident about the strength of your business. Ready to learn more? Then, let’s talk — contact us today.
