Accounting
Audit (Financial Statement Audit)
An independent CPA's examination of a company's financial statements, resulting in an opinion on whether they fairly present the business under GAAP.
A financial statement audit is the highest level of assurance a CPA firm can provide. The auditor tests transactions, confirms balances with banks and customers, evaluates internal controls, and issues an opinion — 'unqualified' (clean) being the goal — that lenders, investors, bonding companies, and buyers can rely on.
It sits at the top of a three-tier ladder: a compilation (CPA assembles the statements, no assurance), a review (analytical procedures, limited assurance), and an audit (full testing, positive assurance). Each step up costs more; most private businesses only climb when someone with leverage — a bank covenant, an investor, a bonding requirement, a 100+ participant 401(k) plan — requires it.
This is distinct from an IRS audit, which is a tax examination, not an opinion on your financial statements. A business can sail through a financial audit and still have tax exposure, and vice versa.
First audits are the painful ones: they typically force accrual/GAAP conversion, revenue recognition cleanup under ASC 606, lease capitalization under ASC 842, and a documentation standard most owner-led books haven't met before. Starting that cleanup a year ahead of when the audit is needed is dramatically cheaper than doing it under deadline.
Common pitfalls
- Agreeing to a loan covenant requiring audited financials without pricing the audit and the GAAP-conversion work it triggers
- Buying a review when the lender's covenant says audit (or paying for an audit when a review would satisfy everyone)
- Missing the employee-benefit-plan audit trigger at 100+ participants with balances — a commonly overlooked, separately required audit
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