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Governments: How to Prepare for a Successful Audit

CFOs and risk management

Countless hours of work go into annual audits, both on the side of the auditee and the auditor, which can make preparing for one seem like a daunting and overwhelming task. Fortunately, auditors understand that your time is valuable and with open communication and advanced preparation, you can efficiently and successfully move through an audit.

These management tips can help you plan ahead and execute successfully:

Be ready to discuss any changes in the following areas:

  • Governance, management
  • Operations
  • Technology
  • Personnel
  • Economic/Industry developments
  • Accounting systems/Procedures/Policies
  • Actuarial Reports

Prepare to discuss significant estimates used in the financial statements such as:

  • Allowance for uncollectible accounts
  • Compensated absences
  • Accrued wages
  • Landfill closure and post-closure
  • Pensions
  • OPEB

Note: the emphasis is on the methods/processes used in making the estimate.

Know your variances

Be prepared to explain significant actual-to-budget and prior-year variances, as well as discuss the results of the year based on your expectations going into the year.

Staffing issues

Designate contacts for specific areas within your audit team and identify potential scheduling conflicts such as vacations and holidays, medical leave, and work and travel schedules. Put together a schedule with your auditors and staff that all can agree on then clearly communicate that schedule with other key employees and department heads. You don’t want the auditor showing up for a meeting without key personnel due to scheduling conflicts.

Help and prioritizing

Discuss with the auditor the need for assistance and establish a high priority for agreed-upon items.

Scheduling

Ensure the timeframe is fair to you and your staff and then commit to it. If the auditors are showing up on-site too early, don’t be afraid to adjust the schedule and expectation.

Preparation and consistency

Request templates, copies of prior working papers and clarification so that you can prepare information in a format acceptable to the auditor. This will help maintain consistency from year to year and eliminate extra work. But keep in mind, the content is more important than the format.

Know your deadlines

Discuss procedures to be performed with management, timing of the engagement and deadlines. Expect a formal communication document from your auditors related to these matters and ensure that you distribute them to the appropriate parties.

Reconcile, reconcile, reconcile

Reconcile detail to general ledger account totals. For example, reconcile all bank accounts, accounts receivable, accounts payable and equipment lists.

Ask questions

Ask your auditor why a particular schedule is requested if you don’t know. You may have a better source for that information, it may already exist in an alternative format or you may learn a better way to organize your routine tasks as a result. Always take time each year to review the “prepared by client” (PBC) list with your auditor. There may be schedules or reports listed that are no longer needed. If there is new accounting guidance that the government is implementing in the current year, new PBCs may be required that are not on the list.

Keep the auditor in the loop

Alert your auditor to any outside consultants utilized during the year, regulatory agency inquiries or future plans, and provide related reports and correspondence. This will provide quality audit documentation and save time answering questions from your auditors.

Be forthright

Be open and candid. Don’t wait until you are asked about questionable accounting practices or pressures, fraud risk factors and known deficiencies in accounting systems. Bringing it to the attention of the auditor is better than letting them discover the problem or issue.

File management

Establish an “auditor” file for regulatory agency correspondence and copies of new or changed documents about fixed asset additions and disposals, debt agreements, leasing arrangements, lawsuits, complex transactions (such as economic development agreements), and technology modifications. And remember, electronic copies are usually more efficient and convenient for the auditors and your staff.

Be open with your difficulties/concerns

Be open with your auditor about difficult areas you’ve encountered, concerns, questions and recommendations you may have about your job or the government’s operations. Professional Standards require the auditor to be skeptical, so don’t take it personal if your auditor asks for documentation to support your assertions.

Give access when possible and prudent

If possible, talk with your auditors about giving them access to your accounting system. This will cut down on staff interruptions by allowing the auditors to be more self-sufficient when looking for supporting documentation and researching balance details. If this is something you plan to do, take the time before the audit to have a training session with the auditors to ensure they can properly navigate the governments accounting system.

Communicate

We cannot overstress the importance of ongoing communication with the auditor throughout the year. Stay in contact regarding matters such as changes in the entity, personnel, industry, debt, business direction, chart of accounts and, most importantly, any new accounting standards that will impact the government in the current year. Your auditor should be open and willing to discuss these matters with you throughout the year – as mere days before the audit is no time to start implementing a new GASB.

Questions?

To learn more about how to prepare for a successful audit, contact Mike Lowry, senior vice president of assurance services and government team leader, using the information below.

Mike Lowry, CGFM

Senior Vice President,
Assurance Services
Mike Lowry specializes in governmental and not-for-profit clients. Prior to joining AGH, Mike’s experience included nearly 20 years of financial and technology leadership positions in hospitality management and software companies.

He is a certified public accountant who has earned the designation of Certified Government Financial Manager from the Association of Government Accountants, and he is also a member of the American Institute of CPAs, the Kansas Society of Certified Public Accountants, and the Association of Government Accountants. He is a frequent presenter and member of the Kansas, Missouri, and Great Plains Financial Officers Association, and serves as a CAFR reviewer for the GFOA.
Mike Lowry, CGFM
Mike Lowry, CGFM
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