What is an audit?
An audit is an examination of the company’s accounting records by an accounting specialist to ensure that transactions are being accounted for correctly in accordance with the applicable financial reporting framework or regulations.
Why do companies get audited?
In most instances, companies get audited when there’s an interested external party that wants to ensure that their accounting records are properly kept or that the financial statements are a true reflection of the company’s performance.
These external parties are mostly lenders (if you have a loan, most lenders—especially banks—require audited financial statements) and, in some instances, investors. Other instances in which audited financial statements are required are purely regulatory. For example, some industries—mainly financial services: broker-dealers, banks and other lending companies—require audited financial statements. All public companies are required to be audited.
What types of information does your company need to provide when going through an audit?
Because an audit comprises the review of a company’s accounting records, most of the information required for the audit process would include:
- An unadjusted trial balance
- All supporting schedules for the various accounts
- Bank reconciliations
- AR aging report
- AP aging report
- Debt schedule
- Fixed asset register, including the depreciation calculation schedule
- Monthly revenue report (the audit team could later request a revenue transaction detailed report)
- Deferred revenue schedules
- Lease rent schedule (including any deferred rent workings)
- Equity roll forward
- A dump of all manual and automated adjusting entries recorded through the year
- A report of all closing journal entries, client prepared financial statements including footnotes and all supporting schedules for the footnotes and eliminating entry schedules (if the client has consolidated financial statements).
The good news is that most of this information resides in your accounting department and is typically provided by the CFO, Controller, Assistant Controller or the assigned accounting personnel on the engagement, depending on the size of the company.
In some instances, IT personnel might need to be involved in providing some of the detailed reports such as the journal entry data and the revenue transaction data. However, the assigned accounting personnel overseeing the audit process should facilitate this for the auditors.
What can happen when a company isn’t prepared for the audit?
I once worked on a real estate client that was fully prepared when we arrived for the audit and it was a breath of fresh air. The “Prepared by Client” (PBC) list was provided to the client a month before the engagement and all reports required to start the audit process were provided a week prior to the engagement. This was all due to effective communication and solid planning between the client and auditors prior to the engagement and good on-site collaboration.
In contrast, I worked on a restaurant client that was not prepared for us at all. PBCs were not provided on time and eventually the audit team had to pull out of the fieldwork to reset and allow the client to prepare, wasting time, resources, and money on both sides.
6 strategies to help you prepare for an audit
- Set a pre-planning meeting with the auditors early in the year before the audit date to discuss client deliverables, timeline, and expectations. Some companies schedule these meetings as far back as six to three months before the audit.
- Ensure the month-end close process is performed on a regular basis. Ideally, books would be closed within two weeks of month-end. This helps to ensure that your accounting records are well kept on a month-to-month basis and to reduce the workload at year-end when the audit process is about to begin.
- Prepare the trial balance so it’s readily available when the audit starts. The trial balance is the main accounting information that drives the audit, so having the final version at the start of the audit will reduce costs incurred from having to update it to the latest version and prevent version control issues.
- Prepare your personnel. It’s critical that the accounting personnel overseeing the audit process has a good understanding of the accounting information that is being requested by the auditors and the accounting system, as well as access to resources that will facilitate a smooth audit process.
- Have IT specialists on standby. In some instances, auditors may request complex reports that need to be generated by an IT person, preferably one who has an accounting background. Because IT professionals are typically in high demand around an organization, it’s crucial they understand the criticality of making themselves available during audit time. Nine out of ten times the audit process is held back because IT professionals have not been given the heads up that their expertise may be needed in a pinch.
- Plan for employees to be available. Defer vacation and travel plans whenever possible and ensure you have a fully ramped staff during the audit. The ability to turn around audit requests on a timely basis is the key to getting the audit process completed on time.
Tinashe is a professional accountant with eight years of experience working in public accounting and industry. She has worked in various industries to help companies improve their accounting processes and ensure compliance of their financial reporting with applicable reporting frameworks and regulations. Tinashe now spends her time consulting and helping small and midsize businesses to meet their financial reporting needs with Paro.