With year-end approaching, few things are more anticipated (okay, dreaded) than the annual audit. As an auditor, I can tell you that your organization’s next audit doesn’t need to be a nerve-wracking ordeal. With some thorough preparation and communication, your audit can be a painless process that does what it’s intended to do: help ensure your financial reporting systems are sound.
#1: Reconcile, reconcile, reconcile.
This is by far the most crucial step you can take. Every significant account that shows up in your financial statements should be reconciled to the respective underlying records as of year-end. Most adjustments we discover during fieldwork relate to one of the following reconciliations either not being completed or being completed inaccurately:
- Cash and Debt: Reconcile to bank statements
- Accounts receivable and payable: Reconcile to underlying detailed aging sub-ledgers
- Investments: Reconcile to brokerage statements
- Fixed assets and depreciation: Reconcile to your fixed asset software’s reports
- Prepaid assets or deferred liabilities: Reconcile to the transactions giving rise to the prepaid/deferral, and double check the math
It is imperative to ensure that reconciliations with significant reconciling items have support for such items. If you have a reconciling item on the bank reconciliation for outstanding checks, do you have a complete list of outstanding checks that agrees with that amount? If you manually accrue invoices for trade accounts payable at year end, do you have a list of invoices that support the balance? Does the reconciliation foot? Does the reconciliation actually agree with the year-end trial balance? These all sound like pretty simple suggestions, but they do trip up some of the best companies each year. Finally, it is a best practice to have a controller/CFO review all reconciliations which are prepared by accounting staff.
#2: Prepare everything on the request list before the auditors arrive.
No matter which audit firm you use, your auditors should be providing you a request list of items to prepare ahead of the audit. This list is fairly comprehensive and will usually include requests for populations of transactions from which your auditor will pick a sample. Generally, if the items on the list are completed and delivered to your auditors prior to or at the beginning of the audit, the audit will be completed faster and with fewer questions. Additionally, it is usually better to provide support electronically, rather than in paper format.
#3 Explain any significant changes in your business to your auditors before they ask.
Auditors use analytical procedures for a portion of the testing in most areas. So, if your headcount is the same as the prior year, but your payroll expense increased by 25%, we’re going to ask why. If you are able to proactively address such items ahead of the audit, rather than needing to research such info during the audit, you will save time for yourself and your auditor. Likewise, if during the year you enter into a major transaction (purchase a business, obtain new debt, sign a new lease, change accounting software, adopt new accounting pronouncements, etc.) communicate such transactions to your auditors upfront; they will likely be able to ensure you are getting the accounting treatment correct the first time.
Audits can be a daunting and stressful process, however, with an adequate amount of preparation and communication during the year between Company and auditor, the process can be relatively painless for all involved.
Contributed by Wayne E. Groff, CPA, a manager in RKL’s Audit Services Group. Wayne specializes in serving the audit and accounting needs of closely-held businesses, manufacturing operations and not-for-profit organizations.