Accounting and Tax Planning Sections

Preparing for a Financial Audit

Or, a Primer on How to Make Friends with Your Auditor

Donna Roundy, CPA

Donna Roundy, CPA

Summer has passed, and it’s time to focus on the balance of the year, which includes preparing your fiscal records for your accountant. Generally, the focus at year end is tax-motivated — keeping your money in your pocket rather than Uncle Sam’s. Another focus for many, however, is getting information together for their auditor.
While preparing for an audit can seem arduous, there are many benefits of having an audit. An auditor can help you analyze and better understand your company’s financials and show you where improvements within your company can be made. An audit assesses any risks to your company, as well as the efficiency and quality of your company’s processes. One of the most important benefits of an audit could be the realization of fraud and illegal activities taking place within your company.
Recognizing and optimizing the benefits of an audit can help your company become more efficient and more profitable. This article will describe the steps involved in preparing for an audit, and how to optimize the value of an audit for your company.
Many organizations must prepare for a year-end audit at the end of each fiscal year. Whether your business is public, private, or nonprofit, you may be required to have an audit performed on your company. This requirement can be government-required (such as for nonprofit organizations). It can also come from a variety of other groups, such as investors, financial institutions, or a board of directors.
‘Audit’ is not a word many business owners want to hear, but with preparation and focus, an audit can go smoothly and prove to be a valuable exercise.
The best time to start preparing for the audit is right after the auditors leave at the beginning of the year. A significant focus of an audit is on internal controls and the organization’s policies and procedures. Sometimes your auditor may, either verbally or in writing, make suggestions to better segregate duties or create a step of review. Discuss with your fiscal director how best to implement those suggestions.
Due to these changes and possibly due to changing staff levels, the flow of information in your company may change subtly in ways that will require your policies and procedures manual to be updated. Providing your auditor with updated procedures is important because he or she needs to assess risk and ascertain that things are actually happening as intended.
Soon after Jan. 1, begin to close your books for the current fiscal year. Transactions should be posted to the year in which it occurred, including receivables and sales, inventory purchases, cost of goods sold, and operating costs. You also must reconcile all sub-ledgers to make sure they are accurate with your trial balance. Performing reconciliations for all balance-sheet accounts to accurately prepared schedules and third-party statements (bank statements, loan and vendor statements) is a large part of preparing your books for year end.
If you are finding that significant adjustments are necessary at this time, look back to the monthly closing process and see where procedures need to change. A monthly close is a mini-year end, and reconciliations should be performed in a timely manner. If this isn’t happening, the reports being used are inaccurate, and decisions are being made based on wrong information.
Normally your auditors will provide you with a list of the items they need for the audit. Gathering together the entirety of this list and having it in one place for the auditors the first day they walk in has a few benefits. Saving your auditor time from having to ask for things they’ve already asked for makes him or her more efficient, which can mean a lower fee. The auditor will need your time and attention during the audit, so it’s less stressful for you if you don’t also have on your agenda to pull together items they need throughout the day. More preparation can make the audit process easier for you and your company.
Auditors will be looking for a variety of information before they begin the audit. This information will include company bylaws, corporate charters, state registrations, formal policies, a procedure manual, and loan and lease agreements. Annually you must provide to your auditors any new loan or lease agreements and minutes from shareholders or board of directors meetings through the date of your audit. Any information explaining events during the fiscal year that could potentially have an impact on the financial statements must also be provided to your auditor.
Inform your employees when the audit will begin and how long the audit will last. Indentify which employees will be working with the auditors side-by-side on a day-to-day basis. You must make sure that these employees have an open schedule during the audit period. There also must be a workspace prepared for the auditors based on their needs.
Your responsibilities during the audit process are just as important as the steps taken leading up to the audit. Be prepared to explain your procedures for any of the following processes: payroll, cash receipts, accounts receivables/sales, computer systems and software, and how you identify and implement controls to minimize fraud risks. Set aside time during the audit to ask questions of the auditor or to answer any questions the auditor may have.
An audit of cash can provide a business with validity and accuracy of the cash flow within the company, as well as provide a better understanding of where errors may occur and tests to make sure they are not occurring.
Accounts receivables is frequently the largest asset a company can have. An auditor looks at all levels of accounts receivable to help you better understand the risks that could occur and the red flags to look for to prevent these risks.
Inventory audits are designed to keep track of a company’s products and merchandise. This procedure often leads to the influencing of future policies and decision-making within companies.
For your income and expenses, the auditor will typically prepare an expectation of what your income and expense balances should be. This will be based on your organization and your discussions with the auditor. Be prepared to explain fluctuations for accounts that may fall outside of these expectations. Audits performed on income and expenses are some of the most necessary of all.
Income or revenue is required to be recorded for tax purposes. If not properly kept track of, your tax return could be misleading causing larger problems in the long run. An audit of expenses ensures that internal controls are being followed, the reasonableness of your expense costs, and timeliness of the invoice to ensure reliability of the expense. Expense audits also ensure that vendors are real businesses and exist, as well as the accuracy of all contracts, invoices, and signatures.
An audit should be a positive and productive experience. When your staff and the auditors work together, you will save money, the audit will be completed efficiently, and the transaction or requirement that created the need for the audit can be fulfilled. You and your staff will also be in a greater position to understand the financial, data-system, and workflow-process needs of your firm, which will enable you to better plan for future challenges and capitalize on future opportunities.

Donna Roundy is a senior audit manager with the Holyoke-based certified public accounting firm Meyers Brothers Kalicka, P.C.; (413) 536-8510.

Related Posts

buy ivermectin for humans buy ivermectin online
buy generic cialis buy cialis
payday loans online same day deposit 1 hour payday loans no credit check