The objective of a financial statement audit is the expression of an opinion by an independent accountant as to whether a company’s financial statements and financial statement disclosures are fairly presented under the U.S. generally accepted accounting principles. Use these 10 FAQs to ready your company and minimize surprises as you prepare for a financial statement audit.
1. Does my company need a financial statement audit?
A privately-held healthcare company may be required to obtain a financial statement audit for compliance with third-party debt covenants, operating agreements, state regulations, private-equity requirements and many other reasons. Consider asking your legal counsel or executive officers to determine if any requirements are applicable to your company. If applicable, ensure all parties confirm and understand the related timing requirements (i.e. 90 or 120 days after the company’s fiscal year-end).
2. What is the product of a financial statement audit?
At the conclusion of an audit, the company’s financial statements will include an independent auditors’ report. A clean auditors’ opinion is known as an “unmodified” opinion which states that the financial statements are fairly presented, in all material respects, under generally accepted accounting principles.
Governance letters will also be provided to management at the conclusion of an audit as a means of communicating additional information. Governance letters may include recommendations to management on where process or policy improvements could be made, particularly as they relate to the internal control environment and other areas that could have an impact on financial reporting. Such recommendations provide further value to the company in addition to the auditors’ report on the financial statements.
The audit team should also be available to present the audited financial statements and governance letter to the company’s board of directors or audit committee at the conclusion of the audit, if so desired.
3. How should we identify a firm to assist us in a financial statement audit?
Look for these key qualities to find the best partner for you:
- What is their experience? A wide range of experts should be utilized on an engagement, preferably with knowledge of the healthcare industry.
- Are they reputable? Professional and proficient services delivered in a timely and coordinated manner should be the standard. Consider requesting a Statement of Qualifications (SOQ) from each firm under consideration. An SOQ will give you additional information about the firm’s expertise and references of other companies with whom they work.
- Does the firm serve in an advisory capacity? A well-managed audit team should be consultative, knowledgeable of new or upcoming accounting literature changes, and informed on industry changes in order to assist companies in meeting and maximizing their long-term goals and objectives.
4. How do we prepare for a financial statement audit?
Read firsthand from two LBMC clients who completed their first audits to ask what advice they would give others to aid in their first-year audit preparation. While an audit opinion is an ultimate deliverable, we always want to find a solution to make the process of completion as efficient and effective as possible.
5. How will our accounts receivable and revenue recognition policies be tested?
The accounts receivable valuation is typically one of the largest and most important pieces of a healthcare company’s financial statement audit. The accounts receivable and revenue recognition is typically testing during planning and final fieldwork. Auditors will request process narratives surrounding the revenue and billing cycle in order to develop the appropriate audit procedures.
6. How will information that contains PHI be shared between our company and the auditors?
Be sure the firm you choose utilizes secure software such as Smartsheet™ and Sharefile™ for confidential file transmission. For additional information on how best to safeguard PHI data, read here.
7. How long does an audit typically take?
The duration of an audit can vary depending on the company. Typically, an audit timeline is included with the proposal for the audit services and agreed upon by management and the audit firm ahead of beginning the engagement. Generally, the audit process is separated into three phases:
- Planning: The planning phase would typically include devoted time onsite with management and the accounting teams to gain an understanding of the business operations, key risk factors and general management controls. This time may also encompass documentation of processes and flow of transactions, testing of certain controls, testing of significant transactions during the year and interim review of significant financial statement areas. Planning typically occurs several months prior to the end of a company’s fiscal year.
- Fieldwork: The fieldwork phase is typically completed onsite with the duration dependent on the size of the company. Management should anticipate at least one to two weeks of onsite fieldwork. During this time, auditors perform final audit fieldwork and substantive audit procedures on financial statement accounts and balances. Fieldwork typically occurs within a few months of the end of a company’s fiscal year.
- Wrap-up: The wrap up phase includes primarily assistance with and/or review of the company’s financial statements as well as audit file documentation steps.
8. Who will be to be involved for onsite planning and final fieldwork?
Depending on the company, we generally include the CFO, CEO, controller, accounting manager, compliance officer, human resources representative and staff and senior accountants, as applicable, in various discussions during the audit process.
9. Who prepares the company’s financial statement? The firm or the company?
The firm should be happy to assist with the company’s preparation of the financial statements. However, the management of the company is responsible for the financial statements and any accompanying information. As such, management must assume all responsibilities relating to the financial statements and related notes.
10. Will the firm assist with new accounting pronouncement implementation and/or offer technical accounting support?
Yes, the firm’s healthcare industry experts should be available to assist with consultation regarding new and upcoming accounting pronouncements as well as other technical accounting issues. However, as with financial statement preparation, management must assume responsibility for all decisions reached.