Audit engagement

What an audit involves

In an audit, the accountant requests and examines supporting documents, assesses internal controls, tests figures, may perform spot checks and may observe an inventory count or evaluate whether receivables can be collected. The result is an opinion on whether the statements fairly represent the company’s financial position.

Auditors do not examine every transaction. They sample, so the conclusion is not that the statements are exact but that they contain no significant inaccuracies. Audited statements were previously called verified statements.

A simple illustrative example

Suppose a growing Ontario company is seeking a substantial loan or outside investment. The lender or investor wants audited statements. The auditor selects a sample of sales invoices and traces them to bank deposits, assesses whether receivables look collectible, attends the year-end inventory count and reviews loan agreements. The figures in this example are illustrative only.

Do not confuse it with a CRA audit

An audit engagement is something you hire an independent accountant to do for the benefit of readers such as lenders, investors or owners. A CRA audit is a tax examination of your return and records by the government. Audited statements do not prevent a CRA audit, and a CRA audit does not produce audited statements. For that topic, see the CRA audit support service.

The audit trail in your own bookkeeping, meaning the path from a reported figure back to the source document, is also a separate idea, although a clear trail makes any audit easier.

What to discuss with your accountant

Ask whether an audit is actually required. The requirement may come from a lender, an investor, a shareholder agreement or the rules governing your type of organization, and a review may sometimes meet the need at lower cost. Ask how much staff time to plan for, which records will be sampled and when the work should start relative to your year-end.

Reports on financial statements are produced by chartered professional accountants (CPAs) external to the business, so ask whether your accountant provides this work or can refer you. Prepare reconciled accounts, complete supporting files, inventory records and contracts. An audit generally involves more work than the other two levels, so compare what each level would give the reader.