An external audit can help a business or nonprofit organization avoid costly and embarrassing errors, and proper preparation can greatly ease the process, minimize surprises, and potentially reduce costs.
These key steps could help simplify and maximize your next audit:
Keep a positive attitude
CFOs, finance directors, and controllers sometimes see audit fieldwork as a disruption to their workplace routine. Cooperation and planning with your audit team can lead to a more efficient process, allowing you to get back to normal business.
Audits aren’t intended to be adversarial. An external audit team is a professional resource that can provide assurance about your financial reporting to financial statement users, such as lenders and investors. An audit can also provide fresh insights, accounting advice, and solutions to strengthen internal controls and minimize risks.
Before fieldwork begins, gather your accounting team to explain the purpose and benefits of your upcoming audit. It may be important to distinguish your financial statement audit from an IRS audit, which could lead them to be guarded and skeptical. Be open and candid to put minds at ease and lessen anxiety.
Assign a liaison
Pick a knowledgeable person in the accounting department to be the auditor’s go-to source for questions and document requests. This will minimize confusion and duplication of effort within the accounting department, and it could minimize the time that external auditors are on your premises.
Establish a timeline
Creating a schedule for your audit team that includes the most important dates can make a difference in the time required between starting the audit to receiving a final report. Good communication on the timeline will benefit everyone. Consider the following dates:
- Preliminary planning time
- Start of fieldwork
- Agreement on adjusting journal entries and the adjusted trial balance
- Presentation of a draft of the financial statements
- Final issuance in time for deadlines, governance meetings, or bank requirements
Review this timeline for potential scheduling conflicts such as vacations, holidays, medical leaves of absence, business conferences, and regulatory deadlines.
Before fieldwork starts, all transactions should be entered into the accounting system for the year, and each account balance should have a schedule that supports its year-end balance. Amounts reported on these schedules should match the financial statements. Be ready to explain and provide evidence supporting any estimates that underlie account balances, such as allowances for uncollectible accounts, warranty reserves, or percentage of completion for work-in-progress inventory.
Ideally, a separate member of the accounting department should review the schedules for errors, discrepancies, and unexpected variances based on the company’s budget, expectations, or the prior year’s balance. An internal review is one of the most effective ways to minimize errors and adjust journal entries during a financial statement audit.
Assemble information to provide auditors
Auditors are grateful when clients prepare their own audit workpapers to support account balances and transactions. Your accounting team already created many of these schedules when they reconciled account balances to the general ledger. Examples generally include:
- Preliminary trial balances and financial statements
- Bank reconciliations
- Accounts receivable aging reports
- Fixed asset listings (including purchases, disposals, and donations)
- Schedules of prepaid items, accrued expenses, and repairs and maintenance expenses
Review last year’s audit document request and collect the prepared-by-client (PBC) work papers. The audit team may not be aware of all significant activity that took place during the year. There may be additional documents that would be helpful if provided early in the process to help avoid last-minute questions. Examples of these may include:
- Significant sales contracts
- New leases
- Loan agreements
- Insurance policies
- Minutes of board meetings noting significant decisions
- Legal documents
- IRS or other notices
Compile these documents in your audit binder before your audit team arrives. Providing information piecemeal can delay the fieldwork process and may cause the audit team to have to fit in working through open items after the scheduled fieldwork timeframe has passed.
Evaluate internal controls
Patching gaps in internal controls minimizes the risks of fraud and financial misstatement. If you correct any deficiencies in internal control policies (such as a lack of segregation of duties, managerial review, or physical safeguards) or documentation of these controls before fieldwork, your audit will proceed more smoothly, and it could result in fewer recommendations to report when the audit is completed.
Remember that the COVID-19 pandemic has changed how transactions are processed by accounting teams, because those teams might work remotely rather than on-site. Your auditor will be on the lookout for changes that your company made (or should have made) in response to remote working arrangements. He or she needs to be able to determine whether the controls were adequately designed, put in place, and operate effectively. Changes made to the financial reporting process should be communicated to the audit team during planning through updating internal control forms or other means.
The audit can be beneficial
Financial statement audits should be a learning opportunity and an investment in your company’s future. Preparing for your auditor’s arrival not only facilitates the process and promotes timeliness, but also helps build a beneficial partnership between in-house and external accounting resources.
The KraftCPAs assurance services team can work with you to get ready for your next audit. Reach out to one of our professionals if you have questions.
© 2022 KraftCPAs PLLC