A financial statement audit is often a feared part of an entity’s annual compliance work. Companies are sometimes unsure about what information needs to be prepared and reviewed, leading to unwelcome surprises and delays in the audit. For example, lacking copies of key documents, incomplete reconciliation of major accounts, and failure to document changes in business processes can all result in headaches during the audit. However, we have found that when an organization is properly prepared for their financial statement audit, the experience can run much more efficiently.
Purpose of an Audit
Remember, the purpose of a financial statement audit is to provide creditors, banks, and other third-parties with independent assurance that the company has presented their financial condition accurately. In other words, an audit verifies that the financial health of the company is properly represented in the financial statements. All the work completed by the auditor is done according to established standards designed to aid in the rendering of an opinion on the financial statements.
Tips for Getting Prepared
Consistent communication with your auditor throughout the year is recommended to ensure they are aware of any significant changes or non-routine transactions. It’s also important to understand what information will be needed to complete the audit. Below is a list of tips that can help the audit stay on track:
- Create a Timeline – Properly preparing for an audit takes time and, depending on the size of the company, often involves multiple individuals. Failing to plan is planning to fail. It’s important to review the list of documents requested by the auditors and assign appropriate individuals their tasks and corresponding due dates. Remember to allow time for review, changes to schedules, and the gathering other documents as needed. We suggest targeting the most time-consuming tasks first and working to the easiest. Periodically check in with assignees to ensure they are on track and will be able to meet the deadlines.
- Ask Questions – Although this may seem obvious, it’s important for you to ask questions about any requests or other items that are unclear prior to the start of audit fieldwork. Don’t be afraid to seek clarification about unfamiliar requests or other unique items. Finally, spend time communicating with your management team to get details about items that may need to be disclosed in footnotes, such as accounting estimates, pending litigation, and related party transactions. The fewer questions you have when the actual audit begins, the easier it will be to complete.
- Complete Account Reconciliations – Be sure to have all balance sheet accounts reconciled. It’s common to uncover adjustments during the audit that arise directly from incomplete or inaccurate reconciliations. In addition, check that any changes in equity accounts are also reconciled and supporting documentation is readily available. This ensures that all variations in these accounts are properly documented and represented in the financial statements.
- Provide Copies of Updated/Amended Agreements – The auditor should have copies of updates or amendments to agreements that have been implemented in prior fiscal years. Items such as operating, lease, and debt agreements are regularly updated and frequently receive considerable attention by your auditor. These agreements will need to be reviewed during the audit and are sometimes included as footnotes to the financial statements. Having copies of this information available will reduce additional requests for information that have a tendency to delay the audit.
- Prepare Related-Party Transaction Details – Before the audit fieldwork begins it’s important to have information that details related-party transactions, such as sales, leases, and purchases. This information is also often needed when preparing footnote disclosures.
Be sure to compile any supporting documentation as requested by your auditor. In addition to what’s listed above, you may also be requested to provide copies of your general ledger, accounting policies and procedures, organizational charts, budgetary information, support for significant commitments or contingencies, and minutes from Board of Director’s meetings.
The annual financial statement audit does not need to be a painful process. In fact, through proper preparation and open communication the audit can go quite smoothly. If you have questions about preparing for your next audit or are looking for a provider to conduct your next audit, Selden Fox can help. For additional information please call us at 630.954.1400, or click here to contact us.