Consumer confidence is rocked whenever there is a corporate scandal. Due to events ranging from the bank bailouts of 2008 to the more recent Wells Fargo account fraud, consumers need reassurance that the companies they work with are honest and above board. Auditing is a powerful tool to reassure your company’s stakeholders. It lets them know that your business is following the appropriate standards for accounting.

Although it’s natural to worry if your business is being audited or is conducting an audit, it’s an opportunity to review your accounting practices and find areas for improvement. Once your audit is completed, your auditor will review his findings. If you’re conducting an internal audit, you should report your findings in a similar manner. Typically, auditors share their audit findings in a standardized written format that you can review and implement.

What Is an Audit?

An audit is an objective review of your company’s financial practices. Typically, it will include a review of your financial statements and other financial records by a licensed accountant. The accountant will compare your business’s financial statements with your accounting books and ensure everything is accurate. Some types of organizations, such as nonprofits and publicly traded companies, are required to periodically have third-party audits to ensure they are using the funds entrusted to them by consumers in a responsible way.

What Are the Different Types of Audits?

There are two primary types of audits: internal and external. An internal audit is an audit that you conduct on your own business. You or your company appoints a person who is knowledgeable and experienced in accounting practices to review your books and financial statements and ensure everything is in line. Internal audit findings are then reported to your company’s decision makers, which may include managers, the board of directors or other stakeholders.

An internal audit gives you and your business an opportunity to identify and manage any risks and ensure your company’s policies are being followed. You can conduct internal audits periodically or on an ongoing basis. Internal audits are more flexible than external audits and can incorporate specific departments and the larger goals of your company.

External audits are conducted by a third party that is not associated with your business. They may be conducted or overseen by regulatory organizations such as the Public Company Accounting Oversight Board. The PCAOB sets the auditing standards for publicly traded companies and brokers. These external audits report their audit findings publicly.

There are several types of external audits, including compliance audits, operational audits and financial statement audits. Compliance audits ensure your business is complying with any regulatory requirements. Operational audits review the performance of your organization and provide recommendations for improvement. Financial statement audits are also referred to as attest audits, and in this type of audit, the auditor reviews your business’s financial statements and accounting operations.

What Are the Steps of Auditing?

If you are considering an internal or external audit for your business, it’s important to know the steps involved. A thorough audit is time consuming, but the resulting peace of mind is worth the time commitment. What are the steps of auditing? In general, an audit includes planning, gathering evidence and issuing a report with the audit findings.

In the planning stage, you clarify the scope of the audit and how long the audit will last. You also schedule any needed meetings or onsite visits so the auditor can review your procedures. The next step is gathering evidence. Gathering evidence includes observing your accounting practices and procedures, testing your company’s control procedures and obtaining and reviewing financial records and statements. The auditor analyzes and inspects the evidence to prepare for the next step.

In the last step, your auditor prepares a report with the audit findings, which is sometimes called an audit opinion. The auditor will present the report to the required stakeholders and may also release the results publicly depending on the type and scope of the audit.

How to Report Audit Findings

If you are conducting an internal audit, you may wonder how to report audit findings. Typically, internal and external audit findings are reported in writing as well as delivered verbally to stakeholders.

For external and internal audits, there is a general structure that most written reports follow. For compliance audits, the overseeing organization may have specific requirements for what needs to be included in the written report. A written audit report should be written concisely and in a way that’s easily understood by the reader. It should also include evidence for any audit findings.

In general, an audit report has three sections: an introduction, a section which describes the scope of the audit and the auditor’s opinion, which describes the audit findings. The introduction states the auditor’s responsibilities and your business’s responsibilities regarding the audit. It would typically also include the names of the auditor or auditors and the dates of the audit.

The scope section describes the auditing process. It states the areas that were audited, who completed the audit and when and what criteria were used to perform the audit. If it is an external audit, for example, it would state which governing body’s standards were being used to measure the results of the audit. For an internal audit, it would refer to the company standards and policies that were being used. The scope section also describes exactly what the auditor did. The auditor would include what financial statements she reviewed and what tests she performed.

The auditor’s opinion is the final section of the report. This is where the auditor states what she found and whether your business conforms to the criteria of the audit. Depending on the type of audit, the auditor may also include recommendations for improving or solving issues that were found during the audit.

After writing her report, the auditor will typically present her findings to stakeholders within the company. In a large nonprofit organization, for example, she would present her findings to an audit committee, which oversees the auditing process. The committee would discuss the audit findings with the auditor and ask clarifying questions before they present the audit report to their board of directors.

If you are conducting an internal audit, the best approach for how to write audit findings and recommendations is to clearly state what you did, when you did it and what you found. Your report doesn’t need to be lengthy. It does need to be clear and compelling so that your business’s managers and executives will take action based on your results, especially if you find areas that need improvement.

What Are the Different Types of Audit Findings?

A thorough audit may uncover areas of weakness that need to be improved. In the worse case scenario, it may uncover fraud or mismanagement that you need to appropriately report to authorities and address. External audits typically report the audit findings as one of the following: an unqualified or clean opinion, a qualified opinion, an adverse opinion or a disclaimer of opinion.

An unqualified opinion is the best-case scenario if your business is going through an external audit. It means that the auditor was able to complete the audit and that your business was in compliance with the criteria of the audit. For example, in a financial statement audit, an unqualified opinion would mean that the statements conform to generally accepted accounting principles.

A qualified opinion means that there was an issue with the audit. The auditor may not have been given access to all the information and documents he needed, for example, or there may not have been compliance with the accepted standards for the area being audited. In a financial statement audit, this may mean that the auditor found one or more areas where generally accepted accounting principles were not being followed. Although this isn’t the ideal result for your business, it can be quickly and easily addressed.

An adverse opinion is much more serious. It indicates that the auditor found a misrepresentation or misstatement in the area being audited. In the case of a financial statement audit, an adverse opinion means that the auditor found that your company’s financial statements don’t align with generally accepted accounting practices. This result is relatively rare, and it can have a negative impact on publicly traded companies. Some companies have seen a fall in their stock prices, for example, after an adverse opinion has been issued.

A disclaimer of opinion means that the auditor was unable to complete the audit. This may be because the financial statements weren’t available or that the auditor wasn’t given full access to the information he needed. It may also mean that your company’s management was not cooperative with the auditor. It sometimes also indicates that there was a conflict of interest on the part of the auditor. For example, he may have a financial interest in the company being audited.

Although a disclaimer of opinion isn’t the best scenario for you or your company, it isn’t the worst, either. It essentially means that there is no opinion and that the audit should be completed at a future time.

How to Respond to Audit Findings

If your business has recently completed an internal or external audit, it’s critical to respond to the audit findings. The first step is to carefully review the audit report with the auditors. Ask the auditors questions to clarify the findings and their experience when working with your company. You may ask about how cooperative your staff members were with the auditors, for example. You might also ask if there were any changes to the original audit plan or if the auditor experienced any difficulties during the audit process.

If the auditor found areas that need improvement, ask about specifics. Make sure you explain what the issue is and what document or test uncovered the issue. You may also ask if the auditor has any specific recommendations for resolving the area.

Even if no issues were found, you can still take advantage of your auditor’s knowledge and experience. You can ask how your organization compares to other similar organizations, for example. You can also ask for general recommendations for improving your accounting procedures or reporting practices.

In the event of an adverse or qualified opinion, you should consider providing a formal, written response. You may be required to respond in writing, depending on the policies of your company or the governing body overseeing your audit. Your response should directly address each issue raised in the report and discuss your plan for resolving the issues raised in the audit findings. You should include specific, measurable steps for improvement and a timetable for when those steps will be completed. In the case of an adverse opinion, you may want to consult an attorney before finalizing or publicizing your response.

The most important aspect of responding to audit findings – and perhaps the entire auditing process – is to remember that the auditor is not an enemy. The auditor is there to help you improve and ensure that you maintain public trust. Although going through an audit can be a stressful and frightening process, it can give you and your business the opportunity to improve. You may be able to find ways to improve your accounting process, for example, which may ultimately save you time and money.