← Back to Insights

How a start-up should prepare for its first-time audit

21 November 2022

Gathering the right data is the crucial first step in preparing for the first audit of a new company, but it must be clearly organized and presented, and staff must be engaged throughout the entire process.

Start-ups are typically laser-focused on turning their visions into reality, but keeping track of progress is vital for companies as they prepare for their first-time audit.

There is no formal requirement for early-stage, innovative, privately-owned businesses to request for an audit, but updating and maintaining the information required to carry one out is essential.

This is because there are certain situations where companies may need to engage an independent audit for the first time. This is likely to be required by the company’s board, prospective investors, potential lenders, or ahead of an initial public offering ("IPO").

Maintaining accurate financial records and supporting legal documentation is also vital in support of the upward trajectory of a start-up, because being able to provide the right information, whenever asked, could be a crucial factor in the next step of its progression. Late or inaccurate data can lead to unexpected issues, such as a gap in cashflow, which can styme growth, or worse.

A start-up’s most senior finance staff should be aware of the requirements for a firm’s first-time audit, but it is advisable to secure expert external guidance to ensure the process runs smoothly.

No room for error

With nearly 700 companies – including some of the US’s largest – hit with enforcement action by the Securities and Exchange Commission ("SEC") last year, including for reporting errors and a lack of accounting controls, getting an audit right is essential and can take significant time and resources.

This is why the use of an expert US business advisory team at a leading financial services provider, like Apex Group, to work with your Certified Public Accountants ("CPA") firm, and alongside your internal financial team gives start-ups the best chance of being ready as the process begins.

Knowing what information is required and where to find it, especially if it hasn’t been well documented, could help bring down audit costs and will alleviate auditor concerns, especially given the breadth of information required.

For a seamless audit process, companies generally require records related to:

  • Cash accounts
  • Inventory
  • Fixed assets
  • Accounts payable
  • Revenue recognition process
  • IT controls processes
  • Monthly or year-end processes and controls
  • Accounting for contingencies and lease agreements
  • CapX tables

If any of these areas have not been recorded properly, then it makes sense to engage an external support team to ensure that complete and robust financial data is gathered and reconciled before the audit begins.

Working with the expert US team at Apex Group can help to ensure potential obstacles are navigated and the correct documents are readily available before the CPA firm begins.

Degrees of scrutiny

The word ‘audit’ is a broad term, but a financial and legal review of a CPA firm can be carried out at three main levels of scrutiny:

  1. Compilation
  2. Review
  3. Audit

A compilation is often satisfactory for creditors lending smaller sums or where borrowers have significant collateral in place.

Given that a compilation does not include the same level of assurance on the accuracy of financial statements as the other levels of audit, engaging a professional and independent CPA firm will provide that assurance for external stakeholders.

A review is intended to provide lenders and other external parties with a basic level of assurance as to the accuracy of financial statements and is more routinely linked to larger and more complex financing deals.

During this process, the CPA secures what is known as ‘limited assurance’ on the financial statements by engaging in certain procedures and inquiries with the firm.

An audit is the most in-depth assessment, intended to give creditors and investors a high level of comfort on the accuracy of financial statements by obtaining ‘reasonable assurance’ about whether the financial statements are free from material misstatement.

Collaborative approach

Whichever level of scrutiny a start-up requires, it is vital that firms engage their accounting departments in the process.

Communication ahead of an audit is essential because a firm’s employees know where required information is held and can describe how the process of recording documents works.

Employees must understand the need for transparency when working with the CPA firm, to ensure that the process is carried out efficiently and effectively.

By working together collaboratively with your internal team, Apex Group can help you select a CPA firm that’s right for you, assessing that the auditor has subject matter expertise in the start-up’s industry.

Speak with us today to find out more about how we can support your first-time audit as a start-up.

Get in touch with our team

Contact Us