What Is a GAAP Audit?

Mary McMahon

A Generally Accepted Accounting Principles (GAAP) audit determines whether an organization is maintaining financial records appropriately. This may be required for some companies and in other cases can be recommended because it will improve public perceptions or smooth the process involved in applying to be publicly traded. The procedure is performed by a third party without an interest in the company who can be trusted to review records fairly, accurately, and honestly. It may be quite extensive, and can involve a team of auditors to go over all the available information.

Woman posing
Woman posing

During the course of a GAAP audit, auditors look at internal financial documents, disclosures, and any documentation related to the company’s financial activity. They test it for accuracy, reliability, and consistency and determine whether it conforms with industry standards and practices. This can include specific procedures set out for particular kinds of financial statements, as well as situations in which there may be more room for judgment.

Effectively, the auditor considers whether the financial statements would look the same if another accountant prepared them with the same information, and if they meet disclosure standards. The results of the GAAP audit can indicate whether a company is behaving appropriately, or concealing financial information that may be important. Auditors can point to specific issues, like accounting tactics designed to minimize losses, or failure to disclose certain transactions. They can illustrate that these practices are not in keeping with the industry standards, and indicate a problem with the records.

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Some companies are required to commission an annual GAAP audit and make the results available to shareholders and members of the public. Others may choose to do so in order to maintain financial integrity. Auditing can also be useful for organizations like nonprofits. Depending on the law, they may not be required to hold an audit, but auditing can be useful for a demonstration of transparency and a commitment to sound accounting practices. The GAAP audit results can be released to shareholders and the public to provide information about how the charity operates.

Costs for a GAAP audit can depend on the amount of material to review and its complexity. It can also require varying lengths of time. Accounting firms should be able to provide estimates before starting work, on the basis of available information. Organizations can solicit multiple quotes to determine which accounting company is most likely to suit their needs.

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