Congratulations, your game changing tech company has just secured its first round of funding and you are about to close out a successful fiscal year of operations. It is not uncommon at this point for a venture capital firm to request audited annual financial statements as your team gets the company off the ground.
For those who may be unaware, an audit of your Financial Statements is an examination of your corporate records and accounts by an independent body. The independent body must be licensed and in good standing with the provincial regulatory of auditors. Audits of external financial statements are required to comply with specific audit (“assurance”) standards. In order to validate management’s assertions on the financial statements, the auditors will likely take a “risk-based approach” to determine that they are fair and not materially misstated.
All audits start with a solid planning phase. At this stage the auditor will ask for a copy of your latest financial statements and access to your internal accounting records/software. The audit team will use these internal records to determine the level of risk, audit approach, materiality level, and what procedures will be performed.
For the most part the procedures are where management will be more involved with the audit process. Auditors will use seven main audit techniques: Inspection, Observation, Confirmation, Analytical Procedures, Recalculation, Re-performance, and Enquiries. This is the “evidence collection” phase of your audit which will allow auditors to see the full transaction flow and operational abilities of your finance team. Using these audit techniques the auditor obtains the evidence it requires to conclude on the appropriateness of the accounting and disclosure.
It is important to keep in mind that auditors are required by their professional code of conduct to keep your information confidential. The auditors have been engaged by the shareholders or board of directors to inspect the accounting records. Do not hold back information from auditors as they will make management recommendations based on findings. In addition, if an auditor suspects that information is being withheld, they may choose to expand their scope which could mean a lengthy audit process and hence larger fees and more disruption to the management team.
Once the audit testing is complete, the auditor will prepare the engagement deliverables. While the venture capital investors may have specific requirements, a typical package of documents from this process includes the Audited Financial Statements and a Letter to Management indicating audit findings and recommendations on best practices.
Management’s responsibility is to provide sufficient and appropriate audit evidence to support the accounting records. When management delivers on this requirement, an unqualified opinion will be issued in the Auditors Report on the Financial Statements. An unqualified opinion states that the financial statements are presented fairly in all material respects in accordance with the specified accounting framework.
The audit is a due diligence tool for your investing stakeholder to ensure that their investment is secure and in the hands of competent management. While the first financial statement audit is usually a learning process for management, having an independent body provide a report on best practices can be invaluable in the early stages of operations. Implementing the recommendations and best practices in the Letter to Management can help safe guard corporate resources, lead to a higher level of operations effectiveness and efficiency, as well increase the reliability of financial reporting, and compliance with laws, regulations, and policies. Your auditor should provide value beyond the compliance component of the audit via their technical background and knowledge of the industry and best practices. Leverage your auditor by keeping them updated on key developments in the business throughout the year and getting their accounting, audit, tax or general business perspective on the developments.
Matthew Blostein, CPA, CA