The objective of a financial statement audit is the expression of an opinion by an independent accountant as to whether a company’s financial statements and financial statement disclosures are fairly presented under the U.S. generally accepted accounting principles.
10 FAQs to ask when preparing for a financial statement audit
Preparing for a financial statement audit can be a complex and time-consuming process, especially for privately held healthcare companies. Below are ten frequently asked questions (FAQs) to help you navigate the process efficiently.
1. Does my company need a financial statement audit?
A privately-held healthcare company may be required to obtain a financial statement audit for, but not limited to, the following reasons:
- compliance with third-party debt covenants
- operating agreements
- state regulations
- private equity requirements
Consider asking your legal counsel or executive officers to determine if any requirements are applicable to your company. If applicable, ensure all parties confirm and understand the related timing requirements (i.e. 90 or 120 days after the company’s fiscal year-end).
2. How should we identify a firm to assist us in a financial statement audit?
Look for these key qualities to find the best partner for you:
- What is their experience? A wide range of experts should be utilized on an engagement, preferably with knowledge of the healthcare industry.
- Are they reputable? Professional and proficient services delivered in a timely and coordinated manner should be the standard. Consider requesting a Statement of Qualifications (SOQ) from each firm under consideration. An SOQ will give you additional information about the firm’s expertise and references of other companies with whom they work.
- Does the firm serve in an advisory capacity? A well-managed audit team should be consultative, knowledgeable of new or upcoming accounting literature changes, and informed on industry changes in order to assist companies in meeting and maximizing their long-term goals and objectives.
- Does the firm offer other services which we may be able to benefit from? Often times, a firm may provide other services (i.e. employee benefit plan audits or tax related services) in addition to your financial statement audit. Using the same qualified and reputable firm for all of a client’s needs can create synergies and make life easier for the client.
3. What is the product of a financial statement audit?
At the conclusion of an audit, the company’s financial statements will include an independent auditors’ report. A clean auditors’ opinion is known as an “unmodified” opinion which states that the financial statements are fairly presented, in all material respects, under generally accepted accounting principles.
Governance letters will also be provided to management at the conclusion of an audit as a means of communicating additional information. Governance letters may include recommendations to management on where process or policy improvements could be made, particularly as they relate to the internal control environment and other areas that could have an impact on financial reporting. Such recommendations provide further value to the company in addition to the auditors’ report on the financial statements.
The audit team should also be available to present the audited financial statements and governance letter to the company’s board of directors or audit committee at the conclusion of the audit, if so desired.
Although the above items represent the “product” of a financial statement audit, the client should continuously benefit from the relationship between the firm and the client through consulting with auditors on new accounting pronouncements, technical accounting areas, changes within the client’s industry and more.
4. What will the auditor ask us to provide for the financial statement audit?
At the onset of an engagement, LBMC provides a PBC list (“prepared by client”) to company management. While not fully comprehensive in a first-year audit, this generally provides a detailed list of initial information we need to begin the audit and is organized by financial statement audit area. All PBC lists are different and designed to be unique to a specific client. With that in mind, the below represent common requests that may be included on an initial PBC list:
- Trial balance and general ledger
- Company policies and procedures including documentation of internal controls
- Operating agreement, management agreement(s), lease agreement(s) and other significant agreements/contracts
- Balance sheet reconciliations for significant accounts
- Monthly bank statements
- Revenue details with relevant revenue metrics which drive the client to generate revenue
- Year-to-date payroll registers
The below tips will help the auditor maintain the most accurate and relevant PBC request lists and aim to reduce time the client may spend fulfilling requests.
- Review the PBC list directly with the auditors to identify items that are not driven by existing company reconciliations/analyses and begin working on those items first as they typically require more preparation time.
- If the auditor has not done so already, ask for a list of high priority items which the audit engagement team will need before other requests. This will allow the auditors to begin fieldwork while the client may work on other items that take longer to provide.
- Consider asking the auditor follow-up questions to requests that aren’t clear, as there may be an easier way to provide the requested information or an alternative based on how the company typically reviews a certain metric. Discussions such as these with your auditors will not only reduce the preparation time on your end but also assist the auditors with understanding your business and metrics that are important to management.
- Locate pertinent documents. Often times, some of the first PBC items requested during an audit relate to the company’s formation and operating documents, significant contracts, lease agreements, buy/sell agreements, as well as related amendments. As most of these documents are not referred to daily, locating them can sometimes prove to be challenging. If a financial statement audit is in your company’s future, making efforts now to locate and retain these documents in an easily accessible location can save time when the audit is upon you.
- Document company policies and procedures including controls that have been implemented. As part of a financial statement audit for a private company, auditors are required to obtain an understanding of the company’s internal control environment. As part of these procedures, we typically request written documentation of the company’s significant policies and procedures. For healthcare companies specifically, the most significant areas would include the revenue and accounts receivable cycle and third-party settlements (if applicable).
While documentation can require substantial efforts initially, taking the time to formally document policies around the company’s revenue recognition model, contractual allowance and bad debt reserve methodologies, and reconciliation procedures around accounts receivable and third-party settlement accounts will not only reduce effort required during the actual audit but will also help identify any breakdowns or weaknesses in the company’s internal control environment, again ensuring the company is audit-ready. Additionally, if comprehensively drafted, documentation can include the company’s important key metrics, payor-specific information, important vernacular, etc. and double as a convenient resource for internal employees.
5. How will information that contains PHI be shared between our company and the auditors?
PHI data is valuable on the black market because it is very personal static data which allows hackers to easily steal someone’s identity. Be sure the firm you choose utilizes secure software such as Smartsheet™ and Sharefile™ for confidential file transmission.
6. How long does a financial statement audit typically take?
The time required to complete a financial statement audit can vary significantly based on several factors. Below are the primary considerations that will affect the time:
- Size and complexity of the client: Larger entities with complex operations typically require more time to audit while smaller entities or those with more simple operations may require less time.
- Quality and availability of financial records: A client who is well-organized and provides accurate and sufficient PBC items in a timely manner will expedite the audit process. Poorly maintained financial records can significantly delay the audit.
- Internal Controls: Strong internal controls can ensure the quality of the financial data and support provided to the auditor. Based on planning performed, the auditor may decide to rely on certain internal controls which can reduce the amount of substantive testing needed, thereby possibly shorten the audit timeframe.
- Client’s responsiveness and transparency: Timely responses from the client to audit inquires and requests is critical for a swift audit process. In addition to timely responses, transparency from the client about potential issues or significant transactions early in the audit process will continue to expedite the process and help prevent an issue arising later in the audit which can greatly slow down the completion of the audit.
Typically, an audit timeline is included with the proposal for the audit services and agreed upon by management and the audit firm ahead of beginning the engagement. The audit timeline should be used as a tool to keep all parties on the same page and should be discussed as needed if the audit is ahead or behind schedule.
7. What are the typically stages of an audit?
Generally, the audit process is separated into three phases:
- Planning: The planning phase would typically include devoted time with management and the accounting teams to gain an understanding of the business operations, key risk factors and general management controls. This time may also encompass documentation of processes and flow of transactions, testing/or walkthrough of certain controls, testing of significant transactions during the year and interim review of significant financial statement areas. Planning typically occurs several months prior to the end of a company’s fiscal year.
- Fieldwork: The fieldwork phase focuses on substantive audit procedures on financial statement accounts and balances. Fieldwork typically occurs within a few months of the end of a company’s fiscal year. The duration of fieldwork is largely dependent on the size and complexity of a client.
- Wrap-up: The wrap-up phase includes primarily assistance with and/or review of the company’s financial statements. At this stage, the audit file has likely been through manager, shareholder, and some for of quality control review. Given these levels of review there may be additional discussions and documentation needed from the client to close out our audit file. The wrap-up phase generally happens as soon as the team completes fieldwork.
8. Who will be to be involved in the planning, fieldwork, and wrap up stages of a financial statement audit?
Audit engagement team: During each of these stages the client will likely have some level of communication with all members of the engagement team (i.e. staff, senior, manager/senior manager, shareholder. The senior is likely the day-to-day point of contact and will be driving the majority of communications, however, that does not mean all communications must go through the senior.
Client: The individuals involved in the audit stages vary from client to client dependent on the organizational structure, however, we generally include the CFO, CEO, controller, accounting manager, compliance officer, human resources representative and staff and senior accountants, as applicable, in various discussions during the audit process.
9. Who prepares the company’s financial statement? The firm or the company?
The firm should be happy to assist with the company’s preparation of the financial statements. However, the management of the company is responsible for the financial statements and any accompanying information. As such, management must assume all responsibilities relating to the financial statements and related notes.
10. Will the firm assist with new accounting pronouncement implementation and/or offer technical accounting support?
Yes, the firm’s healthcare industry experts should be available to assist with consultation regarding new and upcoming accounting pronouncements as well as other technical accounting issues. However, as with financial statement preparation, management must assume responsibility for all decisions reached.
Content provided by Hunter Johnson, CPA, Manager in the Audit & Advisory department of LBMC, PC.
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