The term “annual audit” shouldn’t fill you with dread. Financial statement audits should be something you look forward to.
Why?
Because they are great feedback mechanisms. Your annual audit can:
- Catch simple mistakes before they turn into larger problems
- Identify deficiencies in internal controls
- Point out when operational procedures need to be revamped
- Help make mid-year projections more accurate
However, an annual audit will only be a value-added service if (1) you are open to accepting feedback, (2) you have the capacity to make changes with insights gained through the audit process, and (3) the audit goes smoothly. Although we’ll handle most of the audit work, there are a few simple things you can do to prepare for an audit and help us make the process efficient and fairly painless.
Collect documentation as requested.
Your auditor will send you a list of documents and other information the audit team will need you to prepare for an audit before any of the real work can begin. Do your best to collect everything on that list prior to the audit start date so they can hit the ground running. Most items on the request list may not change from year to year, but each year there is bound to be at least one new item they’ll have questions about.
For example, when the new lease accounting standard goes into effect for nonpublic entities next year, your auditors will request more information about your leases than they have in the past. Have a quick conversation with your auditors about these new document requests.
Familiarize yourself with the audit process
Be familiar with the general flow of audit work. Roughly, this is how most audits will progress:
1. Planning
In the planning phase, your auditors will define the objectives of the audit, select an audit team, review your company’s unaudited financial statements, identify risks, determine materiality, and establish a time frame for audit work. Also during this phase, auditors will dive into your processes and procedures, including your use of technology. Your auditors will likely ask for your input in some of these areas, and the timeliness and accuracy of your responses are critical to the development of their audit plan.
2. Fieldwork
During the fieldwork stage, the auditors continue to gather information regarding your processes and procedures, conduct interviews of your employees, test transactions and balances, and document their findings and conclusions. During the fieldwork stage, it’s important that you have a single person at your organization to be the main point of contact with the auditors. Free up that person’s schedule so your auditors can get in, ask questions, get answers, do their work, and get out.
3. Reporting
During the reporting stage, the auditors will prepare the audit report and issue an opinion on your financial statements. During this phase, the auditors will provide a draft of the audit report and any other communications to you for review and input. Review the draft financial statements and note disclosures carefully. Remember, the financial statements and note disclosures are your responsibility, not theirs. The auditors may also have a few wrap-up requests during this phase as well.
4. Follow-Up
We like to meet with our clients after an audit is complete to get feedback. We want to see what you thought went well and talk about how we can work together even better next year. It is during this stage we will recommend changes you can make to your operations or reporting processes. Come to this meeting with targeted questions for our team.
READ MORE: Top IRS Audit Triggers
Perform month-end close procedures – no exceptions.
Month-end close procedures are essential, and help you prepare for an audit. Don’t skip them. A good month-end close process will include the following tasks:
- Record incoming and outgoing cash, as well as reconcile cash balances to the bank statement
- Update A/P and A/R
- Input last-minute bills and invoices
- Reconcile accounts to internal and external reports
- Record monthly income and expense accruals
- Run your financials and spot-check against prior periods and your own expectations of what balances should be
If you don’t finalize your books each month, mistakes will not only be difficult to find, but difficult to fix. If you prioritize a clean month-end close, your year-end close will go off without a hitch, and your annual audit will be set up for success.
Talk to your auditor mid-year.
If you have a question about how to book an entry, how to adopt a new standard, how to fix a reporting problem you’ve been having, or how to reconcile an account balance, don’t wait to talk to your auditor until it is audit time. That is too late and could compromise audit efficiency! A good auditor will happily talk to you about an issue mid-year because they know addressing problems now benefits you both in the long run. You’ll be more confident booking similar entries the rest of the year, and your auditors will have a cleaner starting point when they come in to perform the audit.
READ MORE: Compilation, Review or Audit: Which do You Need?
Use technology.
Technology isn’t essential for a successful audit, but it can speed up the process. A few categories of technology you can use are:
Cloud-based accounting software.
If your auditor can access your financial reports, general ledger and trial balance during the audit via the cloud, they won’t have to contact you as frequently to run reports. This will ensure they get the information they need timely, eliminating delays in the audit, and you’ll be freed up to spend time on more important aspects of the audit, like assisting with process and procedure discussions or performing account analysis.
Digitized reports.
Even if you don’t have a cloud-based software, you can send your reports to your auditors in a digital format. If your auditors can manipulate numbers electronically, they will have to spend less time ticking and tying paper reports.
Enterprise resource planning systems.
Enterprise resource planning (ERP) software automates business processes for you. For example, an ERP software can connect your inventory system with your general ledger, flagging inconsistencies between balances. ERP systems can also play an important role in establishing good internal controls. If an ERP system talks across platforms, your employees will not need to manually input information from one system into another, eliminating the risk of human error.
Next Steps
Being prepared for your audit allows you to use it as a value-added service rather than a simple compliance requirement. If you want to discuss your upcoming audit with our audit team, we’d be more than happy to chat, even if it’s mid-year. Please reach out to us at Landmark if you have a question or want to learn more about the audit process and how to prepare for an audit.