As year-end reporting wraps up, external auditors are working behind the scenes to prepare for audit season. Here’s how you can make the audit planning process go more smoothly.
Audit risk assessment
Auditors can’t review every transaction, estimate, or document during their fieldwork. Instead, they customize their approach to minimize audit risks.
The process kicks off with evaluating audit risks—the chance that an auditor might mistakenly issue an adverse opinion when financial statements are actually in line with the U.S. Generally Accepted Accounting Principles, or an unqualified opinion when it should be modified or adverse.
Two types of audit risks
First, auditors evaluate inherent risk—the likelihood of material misstatements due to factors like complexity, transaction volume, accounting team competence, the size of the company, and reliance on estimates.
Next, they assess control risk—the risk that internal controls fail to prevent or correct material misstatements.
Auditors perform risk assessments both at the financial statement level and for each major account including:
- Cash
- Receivables
- Inventory
- Fixed and other assets
- Payables
- Accrued expenses
- Long-term debt
- Equity
- Revenue
- Expenses
High-risk accounts like inventory, require more thorough audit procedures and should be assigned to more experienced team members than those with lower risk, like equity.
Risk assessment process
External auditors rely on checklists and prior year’s workpapers to assess audit risks, but each year requires a fresh evaluation. Even with the same auditor, internal and external factors change. For example, there may be new government or accounting regulations, personnel shifts, or updates to accounting software that can alter the company’s risk profile. As a result, audit procedures can vary year-over-year or between firms.
Auditors can’t simply go through the motions during an audit. They have to dig deep to determine current risk levels.
In addition to reviewing public information and your company’s website, your auditor might reach out to ask open-ended questions or arrange a visit to your facilities to assess the effectiveness of your internal controls. Be sure to respond promptly to these requests to help your auditor tailor their approach and reduce potential audit risks.
Help us get it right
The effectiveness of audit fieldwork hinges on a solid risk assessment. Evidence gathered during the audit process is only valuable if properly linked to an identified risk.
You are essential in helping your audit team grasp the risks your business encounters and the challenges you've faced in reporting financial performance. Collaborating with your accountant during the planning stages can help ensure a seamless audit process and accurate financial statements that reflect your company’s 2024 results.
Partner with your Smolin advisor early on to ensure your company’s results are spot on.