The objective of an audit is to provide assurance that the entity’s financial statements are in conformity with Generally Accepted Accounting Principles (GAAP). Private companies, publicly traded companies, nonprofit entities, and government entities undergo audits. An audit will provide the highest level of assurance that an entity’s statements are in conformity with GAAP when compared to a financial statement review or compiled financial statement.
An Auditor’s work includes but is not limited to a review of an organization’s internal controls and testing of selected transactions and communications with third parties. Often experts will be consulted to confirm values of certain segments of the entity’s balance sheet.
An audit may be voluntary or required by an entity’s stakeholders. Some of the more common situations that trigger an audit include but are not limited to:
Banks issuing loans and lines of credit to entities want to be sure that the entity has the cash flow and asset store-pay the loan or line of credit.
Federal Awards & Grants Management
Organizations receiving and expending federal grant awards of $500,000 or Grants Management more are required to undergo an audit. This type of audit is more commonly referred to as an A-133 audit or Yellow Book audits. Cromwell & Company is a member of the AICPA’s Governmental Audit Quality center which focuses on promoting quality of yellow book auditing.
State Specific Audit Requirements
In the realm of non-profit entities, each state may set certain requirements dictating whether or not an entity would be required to undergo an audit. For example, in the state of MD, an organization soliciting donations of $500,000 or more are required to undergo an audit. This financial statements audit could be in addition to an A-133 audit for federal grant awardees.
Often construction companies are required to undergo financial statement audits as part of bonding requirements. Insurance and bonding companies want to be sure contractors cash flow and assets will support the level of bonding provided by those companies.
Pension and Welfare Benefit Plans
Generally pensions, 401(k) plans, 457 plans, and health and welfare plans with 100 or more participants are required to undergo a benefit plan audit to ensure compliance with the Employee Retirement Income Security Act (ERISA). Cromwell & Company is a member of the Employee Benefit Audit Quality Center which promotes quality benefit plan auditing. Employee benefits plan audits are overseen by the Department of Labor. Many firms offer employee benefit plans as an ancillary service to their core audit practices. Firms taking this approach therefore assign inexperienced auditors and utilize benefit plan audits as a “training ground” for new auditors. At Cromwell & Company, we believe this approach is inconsistent with the level of risk to both the auditor and the benefit plan administrator.