No matter the size of your business, financial audits are time-intensive, expensive, and intrusive – but many are far more painful than they need to be.
Audit fees for private companies average $139,000, while audit fees for public companies average a whopping $9.8 million with a median of $3.7 million. An audit for even the smallest business will likely run you $10,000.
There are several reasons why these audits are so expensive, aside from the billable hours and number of individuals involved. The main reason, though, is a bloated process due to not adequately preparing your accounts and documents, and not effectively communicating your financial processes and discrepancies. This ends up making more work for the auditor and costing you a lot of extra money.
An audit, while all-encompassing, will be primarily focused on aspects of your finances that are considered material – areas where omissions or misstatements in ledgers and financial statements would have the biggest impact on taxes or stakeholder relationships. As these areas are where the bulk of the auditors’ efforts will be focused, any effort that can be done to optimize for their work in these areas can make a huge difference in cutting down the cost.
Hiring an outsourced CPA firm to help you navigate the preparation checklist to ensure the audit moves smoothly can help save thousands of dollars in audit fees. The outsourced firm may also assist in long-overdue processes such as optimizing your accounts payable and accounts receivable to make reporting and future audits easier.
Though an audit is often a painful necessity, it can also be viewed as an opportunity to gain a valuable third-party perspective on your financial strategy, systems, and processes.
Outsourced CPAs Can Optimize in the Planning Stage
Most of the optimization in any audit will occur during the planning phase. The auditor will want to learn as much about the company as possible, determine the audit methodology, perform an audit risk assessment, and then refine the methods as necessary.
Time can be saved by communicating with the auditors ahead of time about various business factors including:
Any recent significant changes in the organization
Recent business acquisitions
Accounting method and process changes
Significant new customers or investors
Here are a handful of ways that hiring a CPA to prepare for an audit can help you save on audit costs:
1. Use materiality scores (and experience) to determine where to focus efforts
Auditors will send over a preparation list to company managers prior to starting the audit, along with the financial benchmarks that constitute materiality in areas such as revenue streams and accounts receivable. Materiality scores are often assigned, with a percentage of an acceptable degree of error based on the perceived risk of any transaction logging errors.
It’s impossible to know exactly which transactions, ledgers, or inventory will be audited across an entire organization, but an outsourced CPA firm specializing in audit preparation can utilize the preparation checklist, the materiality scores, and their own vast experience to determine where to focus on getting books in order.
2. Ensure transactions are recorded properly for accounts and improve controls
A CPA’s number one priority in preparing you for an audit is to ensure your ledgers and accounts are in order to save the auditor headaches and time. They will determine where any significant gaps exist in your revenue reporting cycle, repair those gaps, and also help implement a more rigid series of checks and balances on transaction recording, authorization, and custody. They will also ensure that your various documentation such as contracts, sales orders, invoices, etc. are organized for easy access.
The CPA will then provide the auditor with control procedure documents related to the preexisting structure of your accounts so the auditor can determine if the materiality risk is lower with this new information.
3. Perform historical and seasonal financial analysis ahead of time and report on unusual fluctuations
Outsourced CPAs employ many of the same analytical tools as an auditor would use, and can run a YoY analysis on accounts to determine the explanation for why significant deviations exist. Along with this analysis, the CPA will also report on the various factors that have contributed to abnormal situations including acquisitions, new debts, product changes, credit policies, etc.
Preparation is Key
At the end of the day, you can’t change how an audit is conducted; all you can do is make the auditor’s job easier. By leveraging the capabilities of an outsourced CPA firm that has experience preparing hundreds of businesses for independent audits, you’ll be saving yourself both time and money.