By Ivan Alvarez, CPA
Many small businesses, specially construction contractors, that require an audit maybe surprised by additional requirements CPA's must comply with when issuing an audit opinion.
First, it seems that small entities, generally speaking, have much to be desired when it comes to internal controls. Many firms believe that internal controls is something that CPA's "do." This is incorrect. Management is responsible for internal controls. Further, your CPA auditor has to be independent, hence, auditors cannot be involved in the design and implementation of internal controls without losing their independence. Hence, the audit is not going to "fix" your internal control issues. Internal controls should be designed and operating effectively to prevent, detect, and correct a material misstatement before the audit begins.
What if internal controls are not designed or operating effectively when the audit begins? Well, more than likely, material adjustments will be made by the auditor (see below, material adjustments discovered during an audit are not optional1). If such material adjustments are proposed by the auditor then these proposed adjustments are evidence that a deficiency in internal control exist since internal controls did not prevent, detect, or correct the material amount.
Okay. A deficiency in internal control exist. So what? The big deal is that in addition to an audit opinion letter, the client (management and those charged with governance) will receive an internal control deficiency letter that must be shared with outsiders relying on the audit opinion. This deficiency letter can affect lenders decision to lend or surety companies from underwriting.
Now, what if you don't require an audit? Well, internal controls, when properly designed should be cost-effective and help your business reduce waste. According to a leading fraud reporting organization, fraud costs the typical organization about 5% of annual revenues. This 5% can be made up of employees doing personal errands on company time, employees padding expense reports with personal expenses, stealing supplies, etc.
How do you fix internal controls if you have an issue or how do you design internal controls effectively? Well, the best equipped person to help you with is your local Certified Public Accountant or experienced business consultant. You can always try to do this on your own, but internal controls do require some professional judgement. A CPA should help you prioritize which controls are essential and help you implement the right controls.
1-If the adjustments proposed are material, the client must accept the adjustment or an alternative adjustment to prevent their financial statements from being "materially misstated." No auditor will sign an audit opinion if the financials are materially misstated.
Many small businesses, specially construction contractors, that require an audit maybe surprised by additional requirements CPA's must comply with when issuing an audit opinion.
First, it seems that small entities, generally speaking, have much to be desired when it comes to internal controls. Many firms believe that internal controls is something that CPA's "do." This is incorrect. Management is responsible for internal controls. Further, your CPA auditor has to be independent, hence, auditors cannot be involved in the design and implementation of internal controls without losing their independence. Hence, the audit is not going to "fix" your internal control issues. Internal controls should be designed and operating effectively to prevent, detect, and correct a material misstatement before the audit begins.
What if internal controls are not designed or operating effectively when the audit begins? Well, more than likely, material adjustments will be made by the auditor (see below, material adjustments discovered during an audit are not optional1). If such material adjustments are proposed by the auditor then these proposed adjustments are evidence that a deficiency in internal control exist since internal controls did not prevent, detect, or correct the material amount.
Okay. A deficiency in internal control exist. So what? The big deal is that in addition to an audit opinion letter, the client (management and those charged with governance) will receive an internal control deficiency letter that must be shared with outsiders relying on the audit opinion. This deficiency letter can affect lenders decision to lend or surety companies from underwriting.
Now, what if you don't require an audit? Well, internal controls, when properly designed should be cost-effective and help your business reduce waste. According to a leading fraud reporting organization, fraud costs the typical organization about 5% of annual revenues. This 5% can be made up of employees doing personal errands on company time, employees padding expense reports with personal expenses, stealing supplies, etc.
How do you fix internal controls if you have an issue or how do you design internal controls effectively? Well, the best equipped person to help you with is your local Certified Public Accountant or experienced business consultant. You can always try to do this on your own, but internal controls do require some professional judgement. A CPA should help you prioritize which controls are essential and help you implement the right controls.
1-If the adjustments proposed are material, the client must accept the adjustment or an alternative adjustment to prevent their financial statements from being "materially misstated." No auditor will sign an audit opinion if the financials are materially misstated.
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