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', meaning clean, is 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 small-business 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
Related service
See accounting servicesHave a Audit (Financial Statement Audit) situation in your business?
Monthly close, accrual-basis financials, and a ledger that holds up when a lender, a buyer, or an examiner asks to see it.