Member of Russell Bedford International, a global network of independent professional service firms.
Cray Kaiser has decades of experience in audits, including specialized audits for nonprofits and employee benefit plans. And today, we’re excited to announce the addition of another specialization: transnational audits.
Working with Russell Bedford, our firm underwent a strict AQC process to ensure the quality of our audit practice. From this certification process, it was determined that CK:
We are incredibly proud of our audit team for completing this rigorous certification process over the course of the last few months. As a result of the Approved Transnational Audit Firm certification, we are now able to perform audits for organizations across the globe through Russell Bedford. We look forward to offering our services and extending the CK family internationally.
To learn more about Cray Kaiser’s audit services, please click here. If you’d like assistance with an audit you can contact us at 630-953-4900.
As businesses are formed and as they grow, one question often asked by owners and chief financial officers is whether their companies would benefit from an audit. As you might have guessed, the answer depends on a number of factors specific to each company. Below is helpful information about audits to keep in mind as you decide whether or not an audit is right for your business.
Although audits, reviews, and compilations all involve a report on financial statements, an audit provides a higher level of assurance compared to a review or a compilation. Here’s what each consists of:
The most basic of the three, a compilation is when the accountant assists management in presenting financial information in the form of financial statements without providing any assurance that there are no material modifications needed to the financial statements.
In a review engagement, the accountant performs analytical, inquiry, and other procedures to obtain limited assurance that no material modifications should be made to the financial statements.
An auditor obtains reasonable assurance about whether the financial statements are free of material misstatements. In order to obtain this assurance, auditors are required to gain an understanding of an entity’s internal controls and fraud risk. During the audit, tests of balances and transactions through third-party confirmations, physical inspections, observations, and other procedures are performed. Due to its greater scope, an audit is higher in cost, but the benefit is that it is more thorough and provides a higher assurance of accuracy.
There are many reasons why a business may benefit from an audit. Here are a few examples:
As auditors gain an understanding of internal controls, they are required to communicate any weaknesses they identify to the company board and management. These auditor communications can be a valuable resource in helping management and ownership take action to establish or strengthen procedures that safeguard assets, reduce the risk of fraud, and improve the financial reporting process. As a result, the company will have more effective and efficient financial reporting and accounting processes, which may lead to even more operational efficiencies.
At Cray Kaiser, we recognize that every business has unique needs and considerations when it comes to audits. If you have questions about whether an audit may be right for your business, contact us today.
We recently shared what you should do if you receive notification of a tax audit (and why you should never take on the IRS alone!). But have you ever wondered what the odds are of your return being audited? This is somewhat of a mystery to taxpayers and unfortunately there is no concrete answer. Audits are generally selected at random, but there are a few things that may flag your return for an audit. Here are some considerations to keep in mind:
Before you panic when you check the mail and find a letter from the IRS, know that not all notices are audit notices. Taxpayers often receive notices about information on tax returns that does not agree with government tax records. These are known as computer-generated CP2000 notices. They generally cover the data mismatches of income and deductions on your tax returns when compared to the data the IRS receives via W-2s, 1099s, and 1098s. Most importantly, CP2000 notices are NOT audits.
There are other types of notices requesting additional information to allow for a deduction or simply to verify reported data. These are also NOT audits. If you ever receive a notice from the IRS and you’re not sure what it means, contact your tax advisor right away.
Overall, there has actually been a decrease in audit rates over the last few years. In 2018 there was a 7% drop in audit exam rates compared to 2017 for all tax returns.The 2018 individual audit rate was just 0.59%, which means one out of every 170 returns filed was audited. 81% of those audits were correspondence exams and 19% were conducted in person at IRS offices or at the taxpayer’s business. In other words, only about one out of every 900 returns required in-person audit meetings.
There were also less business return audits in 2018. The C corporation exam rate was 0.9% and exam rates for both partnerships and S corporations was only 0.2%.As the IRS audit staff is reduced, fewer audits are being performed. However, with the increased application of computer-assisted audits and reviews, we believe audits will continue for taxpayers that are at high risk.
There are many red flags that can increase your chance for an audit. Some are identified by IRS computer formulas while others are issue-focused compliance campaigns by IRS’s Large Business and International Divisions. Here are the most common audit triggers:
If you are concerned about your tax audit risk, we can review your situation and advise if we identify any potential red flags. Call Cray Kaiser if you would like a risk assessment or if you receive any tax notices that you are uncertain about.
It’s another normal day at the office, until you receive a letter from the IRS. You’re being audited. What do you do now? The first thing you should do is call your tax advisor! While you might be up to navigating an audit on your own, there are many reasons why utilizing a professional’s help will make or break the outcome of your audit. Here’s why:
Seasoned IRS agents have seen your situation many times and know the rules better than you. On top of that, they are under no obligation to teach you the rules. Just like a defendant needs the help of a lawyer in court, you need someone in your corner that knows your rights and understands the correct tax code to apply in correspondence with the IRS.
When selected for an audit, the IRS will typically make a written request for specific documents they want to see. The list may include receipts, bills, legal documents, loan agreements and other records. If you are missing something from the list, that’s when things get tricky. It may be possible to reconstruct some of your records, but generally the IRS wants your records to be contemporaneous. Your tax advisor can help you gather the information necessary to meet IRS standards, and avoid additional taxes (plus a possible 20% negligence penalty).
While most audits are limited in scope, the IRS agent has the authority to increase that scope based on what they find in their original analysis. That means that if they find a document or hear something you say that sounds suspicious, they can extend the audit to additional areas. Being prepared with the proper support from your advisor and concise, smart answers to their questions is the best approach to limiting further audit risk.
When you receive the original audit request, it will include a response deadline (typically 30 days). If you miss the deadline, the IRS will change your tax return using their interpretation of findings, not yours. This typically means assessing new taxes, interest and penalties. If you want your point of view to be heard, get help right away to prepare a plan and manage the IRS deadlines. While you might think you have time to take this on, you don’t want to risk paying the price of a missed due date.
Tax audits are never fun, but they don’t have to be pull-your-hair-out stressful. Together, you and your tax advisor can map out a plan and take it step-by-step to ensure the best possible outcome. You’ll rest easy knowing your audit situation is being handled by someone with the proper expertise that also has your best interests in mind.
It’s not fun to think about, but there’s no way to be completely immune from the possibility of an IRS audit. But if thinking about it isn’t pleasant, going through an audit can be even worse. If you do get audited, you’ll have a better chance of an easy audit experience if you start planning for it now. Since we’re in tax season, it’s wise to prepare for a potential audit while your tax information for the previous year is at hand. Here’s how to prepare for an IRS audit:
Use your current tax return to guide you in gathering all the components of your tax return and putting them together in one file. That way, if the state or federal tax authorities decide to review your return, you’ll have the right documents readily available.
It’s a good idea to organize your documents by year, as well as income and expense type. Including a summary of transactions for each year as a quick guide for yourself and the auditors will also be helpful.
You can anticipate by looking over anything that could potentially trigger an audit. Anything that looks out of the ordinary like foreign bank accounts, large tax losses, or significant business tax deductions are all flags for auditors. It’s best to have explanations for those items in advance. It’s an auditor’s job to ask tough questions, so be prepared!
Audits aren’t known for being enjoyable, but there are ways you can make them stress free by being proactive. If you do get audited, Cray Kaiser is here to help you through the entire process. Please don’t hesitate to contact us if you have questions on how to prepare for an IRS audit or how to avoid an audit.
Employee benefit plan (EBP) audits are much more than a simple audit of net assets and income contained in the benefit plan’s financial statements. They also serve as a safeguard to participants, plan management, and plan fiduciaries through compliance testing procedures. In addition to testing the plan’s operational compliance in accordance with DOL/IRS regulations and the plan document, auditors will also note areas for improvement in internal controls and other matters through written communications with management.
It is very important to operate the benefit plan in accordance with the DOL/IRS and plan document for many reasons, such as:
Cray Kaiser has extensive experience with EBP audits. Often, when we work with a new client on an EBP audit, it’s their very first benefit plan audit. We also see many cases where the client’s plan was previously audited by a firm without the training and expertise needed in the complex area of EBP audits. During the most recent audit season, we performed an EBP audit for a plan whose previous auditor had stopped performing EBP audits altogether. We discovered numerous operational deficiencies, which if left uncorrected could have jeopardized the plan’s tax-exempt status and potentially exposed the plan sponsor and fiduciaries to fines and penalties. We worked with plan management to identify corrections and processes to prevent the issues from occurring again. Internal control weaknesses were also brought to management’s attention.
Often, plan auditors are selected solely based on fees. While fees are an important consideration, there are other crucial factors to consider when selecting a plan auditor. EBP auditing is a specialized area with complexities not found in traditional audit engagements of company financial statements. For this reason, it is essential to select a firm that:
At Cray Kaiser, we are committed to quality EBP audit engagements. Our highly experienced EBP audit team continually monitors developments and changes in the industry. Cray Kaiser is also a member of the American Institute of Certified Public Accountants’ Employee Benefit Plan Audit Quality Center, a select group that provides EBP audit resources and industry updates to member firms. Our experience and resources ensure that our EBP audit clients receive rigorous, precisely executed audits to support plan operations and help plan fiduciaries fulfill their responsibilities. If you would like more information on EBP audits, please contact us.
It’s already midyear, and that means it’s the perfect time to review the audit requirements for your company-sponsored employee benefit plans. One of the most important and complex audits is the annual audit of your 401(k) plan. Here are some general tips and guidelines to help you understand benefit plan audits, when you’ll need one, and what to expect during the process.
If you’re involved in maintaining your company’s 401(k) plan, you’re already familiar with the Form 5500. The annual process of filling out the required Form 5500 has a helpful side benefit of determining your plan’s exact number of participants. Lines 5 and 6 on the Form 5500 are used to tally the total number of plan participants at the beginning and end of the plan year. Participants include people in the following four categories:
If your plan has never had an audit, or if your participant count fluctuates from year-to-year, you’ll need to follow what’s called the 80-120 rule. In short, the 80-120 rule spells out your plan’s annual filing requirements if it is hovering somewhere between 80 to 120 participants.
For plans with participant counts in this range, the Department of Labor (DOL) allows the plan to use the same filing status as it used in the filing of its prior year Form 5500. There are two filing statuses, known simply as “large” plan (100+ participants) and “small” plan (under 100 participants). Plans filing as “large” plans generally have an annual audit requirement, while plans filing as “small” plans do not.
The 80-120 rule prevents plans with fluctuating participant counts from having to continually change from a “large” plan to a “small” plan each year. For example, the 80-120 rule allows a plan with 90 participants at the beginning of the previous year and 110 participants at the beginning of the current year to continue to file as a “small” plan in the current year. If the 80-120 rule were not in place, there would be unnecessary disruptions caused by the 100 participant cutoff.
While you won’t need your first audit until you exceed 120 participants at the beginning of a plan year, you’ll want to start preparing for a plan audit as you approach that figure. If your business is expanding, acquiring another business, or simply experiencing organic growth, you’ll want to contact us to ensure you’ll be in good shape for next year’s audit deadlines.
To prepare for your annual 401(k) plan audit, you’ll want to have all of your materials in order ahead of time so that the process is as efficient as possible. Here’s a list of documents to prepare in advance:
In addition to issuing an audit report on the 401(k) plan’s financial statements, plan auditors will also communicate to management any internal control or operational deficiencies that they noted during the audit. Since 401(k) plans can be complicated to administer, it’s crucial that plan sponsors and administrators understand the plan documents and amendments. Most deficiencies result from inadvertently not following the provisions of the plan document. The resulting consequences can range from having to voluntarily correct the issues, being fined by the Department of Labor, or in the worst-case scenario, having the plan disqualified.
At Cray Kaiser, we recognize that having a sound 401(k) plan is one of the pillars of security that your employees count upon. Since every business has unique needs and methods, you’ll want to make sure you’re working with a team that has extensive small business experience and can be flexible to your specific plan. Contact us today so that we can make sure you’re well prepared for benefit plan audits.
Now that you have determined the need for a nonprofit financial statement audit, it is time to select an accounting firm and begin the process. This can be an overwhelming experience, but it doesn’t have to be. With the right team on your side and all the documentation you need prepared ahead of time, you’ll be ready to execute a successful audit.
As soon as the need is determined, you can start the process of selecting an accounting firm for your financial statement audit. In addition to selecting a firm that’s certified to perform audits in the state of Illinois, you’ll want to make sure that you choose a team that truly understands your operations and transactions. It’s critical that the firm has extensive nonprofit experience since the regulations differ significantly from those of for-profit businesses. It is highly recommended to ask all potential accounting firms to provide a copy of their most recent peer review certificate and report.
After your firm has been selected, you’ll start the organizational and preparation processes. Your audit team should clearly communicate what documentation you’ll need to have ready initially. You’ll also meet with your auditors to understand what metrics, such as key balances from your balance sheet, will be important to the process. The auditors will go over your risk assessment and internal controls to ensure that they’re working properly. In a perfect world, those meetings should take place throughout the year so that nothing is missed. Finally, the team will review your accounting and personnel policies to ensure everything is up to date. Based upon these discussions, your audit team will determine the procedures that will take place during the audit.
Once you’re ready to move forward, the most critical element of a successful audit is good communication between the auditors and your internal team. The audit team will relay which key documents will be necessary. Having all of your documentation and reporting ready in advance of any on-site visits will save you time and money. Since most firms bill by the hour, the less time that’s spent on the audit means more resources to devote towards fulfilling your mission.
As a final note, there are going to be updates to the financial statements themselves. There are new reporting standards that will take effect for 2018’s audits. These changes are going to require major revisions to the current accounting policies and reporting for nonprofits. It’s important to start implementing these changes prior to the end of this year so that you’re prepared for next year. Click here for more information.
An unqualified audit report from the audit firm will provide reasonable assurances to your governing bodies, lenders, and donors that you’re running your organization responsibly. It can help open doors for more funding so that you’ll be able to pursue your mission to the fullest. Contact us today if you have questions about whether you need an audit or to see how we can make the process as seamless as possible.
Most people hear the word “audit”, think of the IRS, and shiver. But in the business and nonprofit worlds, a financial statement audit is simply a commonplace process used to provide information to various groups, including banks, investors, grantors and the state. Savvy business owners and nonprofit leaders know a well-kept secret: audits identify ways to improve internal controls, the bottom line and convey that information to all interested parties.
At Cray Kaiser, we say financial audits reveal blind spots. But we prefer the comparison a client recently made that equated audits to opportunities. He appreciated the chance to learn more about the financial operations of his company, specifically identifying ways to increase the financial reporting requirements, identify areas to reduce costs, and strategically identify opportunities that affect growth.
Financial Statement Audits Explained
Beyond the typical association of financial audits with the IRS, most people believe that an audit is being conducted any time they see professional accountants in their place of business. However, an audit is just one of three kinds of financial assurance procedures. From least expensive and least involved to most, financial assurance procedures include compilations, then a review and finally, an audit. An audit is the most detailed and involved financial assurance procedure, and it provides the most data to businesses that want to sharpen their financial reporting, identify internal control deficiencies and grow strategically. [Be sure to follow our blog to catch an upcoming post describing the differences between the three kinds of financial assurance procedures.]
Added Benefits of Financial Audits
Beyond meeting requirements from banks or potential investors, or as part of nonprofits annual tax filings, financial audits provide additional benefits and opportunities to create efficiency and influence strategy and growth.
Is a Financial Audit Right for Your Business?
According to Cray Kaiser Principal, Deanna Salo, “Management cannot make the right decisions without accurate, timely financial statement reporting. Having a financial audit, even if not required by bankers, investors or shareholders, can be a good way of re-tooling the accounting department and streamlining procedures and processes.” She also notes that an audit helps companies be proactive instead of reactive. One of the by-products of an audit is a management letter which includes recommendations for management. Audit recommendations always carefully balance the need for checks and balances with the cost of the employee time involved. Is an audit right for your business? Contact us to learn more.