chapter 06
Preparing for an External GAAP Audit
Get ACCOUNTING HELPAn external GAAP audit involves hiring an independent auditor to review your financial reporting processes and issue an opinion on your financial statements. It’s an essential part of annual GAAP compliance that helps assure stakeholders they can trust the information you publish.
At the end of each audit, you’ll receive one of four opinions on your financial statements:
01 Unqualified
Also known as an unmodified or clean opinion, this means that the auditor believes your financial statements are free from material misstatements. This is the ideal result and generally the only opinion that satisfies stakeholders like lenders or investors.
02 Qualified
A qualified or modified opinion indicates that material misstatements are present in the financial statements but not pervasive. Though not as negative as an adverse opinion, it’s still problematic and can negatively impact relationships with third parties.
03 Disclaimer of Opinion
This indicates that the auditor couldn’t gather enough evidence to issue an opinion. It can be due to circumstances outside your control, such as a natural disaster destroying certain records, but it may still damage third-party confidence in your financial statements.
04 Adverse
This is the least favorable outcome and indicates that the auditor found pervasive material misstatements in your financial statements. In other words, they deviate significantly from GAAP and should not be relied upon to make decisions.
External audits arrive at these opinions in specific ways, and there are steps you should take to prepare for them.
Stages of the Audit Cycle
External audits are governed by a set of rules known as Generally Accepted Auditing Standards (GAAS). Thus, while the specific procedures involved in the process may vary depending on the nature of your business, the same fundamental steps are generally followed.
Planning
In this preliminary stage, auditors work with you to ensure both parties understand the audit scope. They’ll learn about your financial reporting, identify areas of risk and develop an audit plan that includes the procedures they’ll follow and an estimated timeline.
Fieldwork
Also known as the execution stage, this is when external auditors gather and examine their evidence. That generally involves performing various tests to evaluate the strength of your internal controls and the accuracy of your financial statements.
Reporting
Once fieldwork is complete, the auditor will compile their findings and provide an audit report that contains their opinion on your financial statements. They’ll also often provide recommendations for improvements to your financial reporting, such as ways to strengthen internal controls.
Follow-Up
After the opinion is issued, the auditor will follow up with you about the recommendations they provided. That includes validating that you’ve taken the suggested steps to improve your financial reporting processes.
How to Prepare for an External GAAP Audit
External audits require extensive collaboration between the audit team and your accounting staff. As a result, preparing for the process is essential to minimize the disruption of your regular operations during fieldwork and ensure the auditors have timely access to the information they need. Take the following steps to help ensure your audit goes smoothly.
Prepare PBC Documents
External auditors require certain “Provided by Client” (PBC) documents to conduct their tests. If you prepare them in advance, they won’t need to bother you or your accounting staff as much during fieldwork.
Your auditor should provide a comprehensive and personalized PBC checklist during the planning phase, but some examples of commonly required PBC reports and documents include:
Prepare Your Personnel
Your accounting team can minimize the burden of undergoing an external audit by producing accurate PBC documents in advance. However, auditors will still need their help during the process. Make all parties’ lives easier by:
Enforcing a Monthly Close
If your accounting team closes the books on a monthly basis throughout the year, it’ll be much less work for them to prepare the documentation the auditor requires at year-end.
Setting Expectations with Staff
Tell your staff what to expect during the audit, including their role in the process. Explain the importance of responding quickly to auditor requests and provide guidance on how to juggle that responsibility with their day-to-day tasks.
Ensuring Employees are Available
Coordinate schedules to ensure that the necessary personnel are available to answer questions during the audit. That may require adjusting vacation times or workloads for certain employees, such as IT specialists who are often in high demand elsewhere.
