The word ‘audit’ is often perceived as a negative term. There are many different types of audits, and your financial statement auditor is not your adversary, but rather should be viewed as a trusted advisor. A financial statement audit may cause alarm to management however it can provide great value to your organization and help to strengthen internal controls. The key to a successful audit is planning and preparation. To help our clients, prospects, and others prepare for their next financial statement audit, the following key tips are provided.
Key Preparation Tips
As is the case with most relationships, open and frequent communication is essential to an efficient audit process. When a request is made by your auditor that is unclear or confusing, be sure to ask questions. They should be more than willing to offer clarification and answer your questions. Make sure to communicate with your auditor on your expectations for all deadlines. For example, you may need adequate time to review a draft version of the Audit Report and other deliverables before finalizing. By communicating these deadlines early on, you will minimize the risk of not meeting reporting deadlines, and you will streamline the audit process.
It’s important for the organization to designate a primary contact person that is responsible for managing all communication with the auditor. Ideally this would be the chief financial officer (CFO) or controller—essentially someone who understands the complexities of financial reporting but is also familiar with the operational systems and processes of the organization. By limiting communication to a single, high level individual, it ensures that important requests and other information will be properly facilitated to the appropriate employees.
Have you ever heard the term ‘PBC List’ and wondered what it stood for? It’s short for ‘Prepared By Client List’ and in common terms, is a list of items needed for the audit. It’s commonplace for audit firms to provide their clients with a PBC list prior to the start of audit fieldwork. By making sure everything on the list is provided, you will ensure audit fieldwork begins timely and minimizes interruptions. A thorough PBC list would indicate when copies of documents are needed, if such documentation should be provided in electronic form, and should also indicate when such documentation should be provided. For example, providing a trial balance in advance of audit fieldwork tends to create efficiencies once audit fieldwork begins.
Plan Around the Audit
It’s important for key staff members to be available during the audit to respond to requests for additional information, documentation, or other necessary tasks. It is also key that essential team members have “free time” to address audit issues if and should they arise throughout the audit, particularly during fieldwork. Being available helps to ensure that any unexpected issues which may arise during the audit can be quickly and easily addressed by internal team members without delay.
Establish an Auditor File
Establishing an auditor file is a recommendation that can be started at the organization anytime throughout the year. This file, hard copy or electronic, can be used as a repository for collecting essential communication and other documents with banks, attorneys, and regulatory agencies. Additionally, it’s great for compiling information on topics such as fixed assets, debt agreements, leases, litigation, complex transactions, changes to governing documents, correspondence with regulatory bodies, and essential customers and vendors. In other words, it will be the one stop shop where all important and relevant auditor information can be stored for later review.
If your loan facility contains financial covenants, you should consider compliance with those covenants as of and for the year under audit. First year audits take significantly more time than in subsequent years due to the auditor’s responsibility to document their understanding of internal controls, construction of the permanent file containing governing documents, pertinent financial policies and agreements, and for the preparation of audit workpapers and reports.
For many, the idea of the financial statement audit is more stressful than the actual process. While there is a lot of information that needs to be reviewed, establishing an open line of communication and proper preparation and planning will allow for a more streamlined process with less obstacles to overcome. The above list provides only preliminary insight into the planning and preparation steps yet represents an excellent start to the process.
If you have questions about preparing for your annual audit or need assistance with your audit, Selden Fox can help. We offer consulting services tailored to your needs to analyze internal controls, assist with accounting services to aid in preparing for an audit, as well as perform audit, review and tax preparation services. For additional information please call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.