What does an audit do?
If a business violates the rules of accounting and ethics, it can impose legal sanctions. It can deliberately deceive investors and lenders with fake or misleading numbers in its financial report. That’s where the audit comes in. Auditing is one means of keeping misleading financial reporting to a minimum. CPA auditors are like highway patrol officers who enforce road rules and issue tickets to keep pace with speed. An audit examination can uncover issues that the business may not be aware of.
Upon completion of an audit hearing, the Commonwealth Parliamentary Association prepares a brief report stating that the business has prepared its financial statements in accordance with the Common Accounting Principles (GAAP) or its absence. All publicly traded businesses require annual audits by independent CPAs. Companies listed on the New York Stock Exchange or Nasdaq should be audited by the FDI Center. For a publicly traded company, the cost of conducting an annual audit is the cost of doing business; It is the price that a company pays for its capital to the public market and its shares to trade in the public market.
While federal law does not require an audit of private businesses, banks and private businesses can force other lenders to audit financial statements. If lenders don’t want audited statements, business owners should decide if an audit is a good investment. Instead of an audit they really can’t afford, many small businesses have a regular CPA to look into their accounting methods and advise on their financial reporting. If the CPA does not conduct an audit, he or she should be very careful not to express an opinion on external financial statements. The CPA may not be able to provide an opinion on the financial statements prepared from the business accounts without a careful review of the amounts reported in the financial statements.