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, our 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 and prepared
Be ready to review any changes in the following areas:
- governance, management
- economic/industry developments
- accounting system/procedures/policies
Prepare to discuss significant estimates used in the financial statement, such as:
- allowance for uncollectible accounts
- compensated absences
- accrued wages
- contract cost estimates
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.
Avoid scheduling conflicts with your staff
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.
Identify areas of need & priority
Discuss with the auditor the need for assistance and establish a high priority for agreed-upon items.
Review and commit to the schedule
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, but do so early.
Request templates, copies of prior working papers and clarification so you can prepare information in a format which is acceptable to the auditor. This will help maintain consistency from year to year and eliminate extra work. Keep in mind that the content is ultimately 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 you distribute it 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 your auditor why a particular schedule is requested if you do not know. You may have a better source for the information, it may already exist in an alternative format or you may learn a better way to organize your routine tasks as a result. Also 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 company 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 auditor.
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.
Establish a file management system
Establish an “auditor” file for regulatory agency correspondence and copies of new or changed documents about fixed asset additions and disposals, debt agreements, leasing agreements, lawsuits, complex transactions (such as entity acquisitions or divestitures) and technology modifications. Electronic copies are usually more efficient and convenient for the auditors and your staff.
Be open with your auditor about difficult areas you’ve encountered, concerns, questions and recommendations you may have about your job or the company’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 & prudent
If possible, talk with your auditor about giving them access to your accounting system. This will reduce staff interruptions and allow the auditor to be more self-sufficient when looking for supporting documentation and researching balance details. If this is something you plan to do, take time to provide a training session before the audit to ensure the auditor can properly navigate the system.
Ongoing communication is key
We cannot overstress the importance of ongoing communication with the auditor throughout the year. Stay in contact regarding matters such as changes in entity, personnel, industry, debt, business direction, chart of accounts and, most importantly, any new accounting standards that will impact the company 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 standard.