process

Audits play a crucial role in providing transparency for clients and fostering confidence in a company’s financial reporting. An audit is particularly reassuring in uncertain business environments. At their core, audits are designed to assess whether a company’s financial statements are materially accurate and fairly reflect its financial position in accordance with applicable accounting standards.

Not all businesses are required to undergo an audit. Generally, audits are mandated for public companies, companies operating in regulated industries and some private companies. Small private businesses typically do not need an audit, although some choose to do so voluntarily — for example, when seeking financing, attracting investors or strengthening internal financial discipline.

Preparation is essential: Companies that understand the scope and purpose of an audit are better positioned to navigate the process with fewer surprises.

Who conducts audits

Formal audits differ from the internal reviews companies often undertake to monitor compliance and identify issues; these audits must be performed by independent external auditors. In the United States, audits are generally conducted by certified public accountants who are independent of the company being audited. External auditors are required to follow professional auditing standards that govern how audits are planned, performed and reported.

Auditors must be free of conflicts of interest so that their conclusions can be relied upon by investors, lenders, regulators and other stakeholders.

What auditors examine

Audits generally focus on several key areas of a company’s operations and controls.

First, auditors review financial records to ensure reasonable accuracy and completeness. The records they review typically include financial statements; the general ledger; revenue and sales records; lease agreements; documentation supporting asset, liability and equity accounts; paid invoices; investment accounts; significant contracts with customers and suppliers; and budget information.

Second, auditors examine tax-related records, including federal, state and local tax returns and sales tax documentation, to evaluate whether tax-related amounts and disclosures in the financial statements are reasonable and consistent with applicable requirements.

Third, auditors review employee and payroll records, which typically include payroll reports, employment contracts, benefits documentation and timekeeping systems, evaluating them for accuracy and the effectiveness of related controls.

Fourth, auditors consider industry-specific regulatory requirements that may materially impact the company’s financial statements. Depending on the company, this may include environmental regulations, licensing obligations or other rules affecting financial reporting.

Finally, auditors evaluate internal controls relevant to financial reporting. This includes controls over approvals, segregation of duties, access restrictions and other processes designed to reduce the risk of material misstatements due to fraud or error.

Understanding the audit report

At the conclusion of the audit, the auditor issues a formal audit report expressing an opinion on the company’s financial statements. There are four primary types of audit opinions.

An unqualified opinion indicates that the auditor concluded the financial statements are presented fairly in all material respects, in accordance with the applicable accounting standards.

A qualified opinion signifies that the auditor identified a material issue or was unable to obtain sufficient evidence related to a specific area but that the financial statements are otherwise presented fairly.

An adverse opinion means the auditor determined that the financial statements contain material and pervasive misstatements. This outcome can have serious consequences, including a loss of investor confidence, and typically requires corrective action by the company.

A disclaimer of opinion is issued when the auditor cannot obtain sufficient appropriate evidence to form an opinion and the possible effects of the missing information could be material and pervasive. Like an adverse opinion, a disclaimer of opinion can carry negative implications and should prompt immediate attention.

Why audits matter

Whether required by regulation or undertaken voluntarily, audits can help identify weaknesses in controls; increase confidence among investors, lenders and other stakeholders; and support reliable financial reporting.

Audits are complex, and this overview simplifies a detailed and technical process. Companies often benefit from working with qualified accounting and advisory professionals throughout the audit cycle to clarify expectations, prepare documentation and address issues proactively.

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