With audit firm challenges on the mind of every small business the question comes up of just who should have an audit performed, and when do you really need one? An audit for a small business can cost anywhere from $500 to $Whatever, and that is a lot of money to spend for someone to just look over your books.

WHY AUDIT?
For most small businesses, the chances of needing an audit arises if you run a company that issues stock to the public, if you are trying to borrow a very large sum of money, and in some cases, when you do work for the government. There are other reasons to have an audit performed, but for most firms, these are the most compelling.

Many small firms either do all their own bookkeeping in-house with a CPA doing the year-end work or do the daily account postings with an outside source compiling the monthly and annual totals for tax purposes. Some businesses combine in-house posting with the assistance of a bookkeeping service that performs similar functions, using a CPA for end-of-year work. Although these people are honest and accurate, they do not perform the detailed analysis that an audit requires.

So when do you need an audit? Primarily when you need to borrow a large sum of money, or when your business is large enough to fall under certain laws, rules, or regulations. Your CPA is the best person to guide you through this analysis. If you do require an audit, the place to begin is with a CPA firm in your area that specializes in audit work and does not perform accounting or audit work for you, your competitor, or your money source.

ALTERNATIVES
Yes, there are four levels of services provided by auditing firms: audit, review, and compilation (with or without disclosures). You may only need one of the lower cost audits, even if the money lender talks about a full and complete audit, so always suggest the Review Audit process as a less costly alternative.

FULL AUDIT
Full audits are used by governmental and non-profit agencies who must report to the public, by businesses wishing major financing, by businesses undergoing restructuring, and by businesses being purchased or sold. A full audit for a small business usually begins around $5,000 and increases with the size of the company or the complexity of the audit. The full audit includes investigating and examining your company’s financial statements with the aim of testing and verifying the error detection and fraud prevention controls which should be in place.

Another part of the investigation includes verifying through actual checking (or statistical sampling) of all monies due and payable by and to the company, and a complete financial health check of the company including the officers and directors. A full audit usually contains an analysis of ratios with suggestions to management for improvement, ending with a statement from the auditing firm that expresses an opinion indicating the data presented is fairly stated in accordance with generally accepted accounting principles.

REVIEW AUDIT
This cost begins around $2,500 and the report is nearly identical to a full audit with the exception the audit firm does no investigation or examination of the business, relying on your firm to supply answers to questions for all necessary data. A review contains a statement from the audit firm containing a disclaimer indicating all information was supplied by management. A review does contain an analysis of business ratios and a fairly comprehensive report to management.

COMPILATION (With Disclosures)
Compilation costs begins at $1,000 and the report is similar to a review with the exception the auditor relies specifically on the firm to supply all data and all answers to questions. Ratio analysis is not part of a compilation nor is a management report. The disclaimer will indicate that the audit firm did not examine any of the data, relying on management for all information.

COMPILATION (Without Disclosure)
This cost begins at $500 and contains what you usually obtain from accounting and bookkeeping services. No investigation is made, no footnotes are generated, and the accuracy of the data is only as accurate as the data supplied by the business. A small firm might consider using a less expensive accounting or bookkeeping service for this type of report.

(NOTE TO EDITORS: PLEASE INCLUDE THE FOLLOWING.)
Paul Tulenko is a Small Business Success Consultant based in New Mexico. Additional tips and suggestions are available at www.tulenko.com or call (toll-free) 1-866-TULENKO.