It’s almost audit season for calendar-year entities. A little preparation can go a long way toward facilitating the audit process, minimizing audit adjustments and surprises, managing (or even lowering) your audit fees and getting more value out of the audit process. Here are some ways advance planning and scheduling might help.
The right mindset. Before audit fieldwork begins, meet with your office team to explain the purpose and benefits of financial statement audits. Novice staff members may confuse financial audits with IRS audits, which can sometimes become contentious and stressful. Enter all completed transactions into the accounting system before the auditors arrive. Also, if not already clear, designate a liaison in the accounting department who will answer inquiries and prepare, obtain or assign preparation of documents requested by auditors.
Auditors can work more efficiently when client personnel prepare workpapers and assemble documents to support account balances and transactions in advance of their arrival. They will generally communicate written lists of needed materials well in advance of their scheduled fieldwork. These lists will include original, external source documents to be used verify what’s reported on the financial statements, such as bank statements, new sales contracts, leases and loan agreements and will inquire about changes to agreements from the prior year, regulatory or legal developments, additions to the chart of accounts and major complex transactions that occurred during the audit year. Set reasonable work deadlines that are coordinated with approved staff vacations, if any, and consistent with the audit firm’s scheduled fieldwork.
Reconciliations and other schedules. Prepare the schedules as necessary to reconcile year-end statements received from banks and vendors or internal details, for example, in subsidiary ledgers, to each general ledger account balance shown on the trial balance. Prepare support for and be ready to discuss the basis for any estimates that underlie account balances, such as allowances for uncollectible accounts, product warranty provisions, chip “float” liabilities or percentage of completion accounting.
Look for discrepancies in results from what’s expected based on the company’s budget or prior year’s balances. Review last year’s adjusting journal entries to see if they’ll be needed again this year. An internal review is one of the most effective ways to minimize errors and adjusting journal entries during a financial statement audit.
Internal controls. Evaluate the effectiveness of your company’s internal controls before your auditor arrives as early in the year as is practical. Consider whether effective improvements have been instituted in response to any auditor’s findings from the prior year’s audit. Unless yours is a publicly held company, your evaluation may be informal and undocumented. To the extent you corrected any control deficiencies identified, such as a lack of segregation of duties, managerial review or physical safeguards, your auditor will have fewer findings to report for the current year.
Value-added services. Financial statement audits should be seen as a learning opportunity. Preparing for your auditor’s arrival not only facilitates the process and promotes timeliness and efficiency, but also engenders a sense of cooperation and teamwork between your office staff and the auditors toward achieving a common goal.
For more information on our auditing and accounting services, contact PBTK Principal Howard Levy, CPA.