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What is a Preaudit?

Preaudit

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Preaudit

A preaudit, as the name suggests, is an audit conducted before the final or official audit, often to ensure the accuracy and compliance of financial transactions before they are posted to the general ledger or before financial statements are prepared and released. The objective of a preaudit is to prevent errors, irregularities, and illegal acts rather than detect them after the fact.

During a preaudit, the auditors might review a sample of transactions to check for accuracy, compliance with internal controls, and adherence to applicable accounting standards and regulations. If any issues are detected, corrective action can be taken before the official audit, reducing the risk of audit findings, penalties, or restatements of financial statements.

In the context of a project or grant management, a preaudit might also refer to an internal review conducted before an external audit to ensure compliance with the terms of the grant or project guidelines.

In essence, a preaudit can act as a “health check” for a company’s financial system, helping to ensure accuracy, integrity, and compliance, and potentially saving time and effort in the final audit.

Example of a Preaudit

Let’s consider a hypothetical example involving a corporation and its routine financial operations.

Suppose ABC Corporation has a policy that all expenditures above $5,000 require approval from the department head and a member of the executive team. This policy is part of ABC’s internal controls to prevent unauthorized spending.

As part of their preaudit process, the internal audit team at ABC randomly selects a sample of transactions each month that are above $5,000 to verify that they have the appropriate approvals. This review takes place before the transactions are finalized and posted to the general ledger.

During one of these preaudits, the team discovers a transaction for $6,000 that only has approval from the department head, not from the executive team. This allows the company to address the issue immediately – perhaps it was an oversight, or perhaps there’s a misunderstanding about the policy. Either way, the issue can be corrected before the transaction is finalized, helping to maintain the integrity of ABC’s financial records and internal controls.

This preaudit process allows ABC to proactively manage its financial controls, rather than waiting for an external auditor to potentially discover the issue during the annual audit. It’s a way to prevent problems and ensure ongoing compliance with the company’s internal policies.

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