A company audit is a complex regulatory process that provides stakeholders with visibility into its financial operations and its future. For lean finance teams, an audit can be a stressful experience, but it doesn’t have to be. Proper audit preparation is crucial for ensuring a smooth process. Read on to get actionable guidance that will help your business and employees understand how to prepare for an audit effectively.
What Is a Company Audit?
An audit is a comprehensive review of a company’s accounts by an independent party to confirm that the business’s financial records are accurate and GAAP compliant. Effective audit preparation ensures your company audit proceeds smoothly, and enables it to highlight the fiscal trustworthiness and value of your business to stakeholders. In addition to ensuring a company’s financial health, audits can also unearth new efficiencies to improve operations.
Why Do Businesses Get Audited?
An audit’s purpose is to ensure a business is accurately and honestly reporting its financial performance. Business audits happen for several different reasons, including:
- Regulatory requirements: The SEC requires routine audits of public company filings to ensure investors have access to accurate information. SOX compliance was enacted to bolster public trust in capital markets after companies like Enron eroded that trust with fraudulent reports.
- Tax purposes: The IRS occasionally audits a company’s tax return. Being selected for an IRS audit does not automatically indicate a tax issue; the IRS randomly selects companies to audit. In addition, a business may be audited if a partner or investor is also being audited.
- Lender/investor requirements: External lenders, like banks, usually require audited financial statements to approve a loan or credit. Some investors also ask for an audit.
Key Information Required During an Audit
During a company audit, an independent third party performs a thorough review and analysis of the company’s accounting records. Employees, particularly those in the finance and accounting departments, along with information technology (IT), will collect and present the necessary accounting records. Proper audit preparation involves gathering essential documents like an unadjusted trial balance, as well as supporting documentation for all the company’s accounts.
- All manual and automated entry adjustments for the year
- AR and AP aging reports
- Client prepared financial statements
- Closing journal entries report
- Bank reconciliations
- Debt schedule
- Deferred revenue schedule
- Equity roll forward
- Fixed asset register, accompanied by the depreciation calculation schedule
- General ledger
- Lease rent schedule (including deferred rent)
- Monthly revenue report
What Happens When a Company Isn’t Prepared?
Devoting time and attention to preparing for an audit is absolutely necessary, given the volume of statements and schedules to present. Depending on the size and scale of your company, preparation can take weeks, or even months, but it is necessary. When a company isn’t adequately prepared for a business audit, the consequences can be significant for both the company and its employees.
For example, AVIA faced the challenge of preparing for an annual audit with a lean finance team of just 2-3 members. With increasing projects, priorities, and unexpected employee turnover, the workload became overwhelming.
Lack of proper audit preparation can leave employees scrambling to gather files, schedules and statements, which will likely interrupt their regular workflow and impede their ability to deal with new work as it arises. In turn, the business ends up spending extra time and resources, potentially missing the chance to take advantage of opportunities on the horizon.
By partnering with Paro, AVIA was able to seamlessly integrate a fractional CPA into their team, ensuring that audit preparation got back on track despite the earlier challenges. The added support also allowed AVIA to maintain business as usual while effectively preparing for their audit, reducing stress and avoiding costly delays.
Tips to Help Your Business and Employees Prepare for an Audit
An audit is a business activity in and of itself, and as such needs to be allocated a plan, resources and time. Although the finance department is most involved, all employees need to be informed and understand the audit process, as their own workload might need to stretch as their colleagues prepare.
To ensure your audit runs smoothly, consider these six audit tips to prepare your business and employees. These strategies are tailored to address the specific needs of different roles within your organization, ensuring employee audit readiness.
For accounting personnel
- Ensure documentation is ready: Accounting team members should focus on organizing and updating all financial records as listed above. This will make it easier to provide accurate information during the audit. Proper audit preparation is key to avoiding last-minute scrambles that can lead to errors or omissions.
- Prepare for auditor questions: Be ready to answer questions regarding specific entries or discrepancies in the financial records. Ask the auditor for the list of required Prepared by Client documents (PBCs) a month before the audit, at minimum. This gives you time to ask for any clarification and provides your team with more time to prepare.
For IT specialists
- Ensure data accessibility and security: IT specialists should ensure all relevant financial data is accessible and securely stored. This includes setting up secure data-sharing platforms and confirming that all digital records are backed up. IT’s role is crucial in supporting the audit process by making sure that auditors have timely access to the information they need.
- Support the finance team: Be prepared to generate any necessary reports or data extractions that the finance team may require during the audit. IT should collaborate closely with accounting to ensure all data is accurate and readily available.
For leadership
- Divide up responsibilities. Assign documents and tasks to the employees best suited to each file. Ensure everyone involved is aware of and understands their responsibilities.
- Established a shared digital space. This should include a shared calendar and data storage. Populate the calendar with task timelines and ensure each employee understands and uses the same file naming conventions.
- Communicate regularly and thoroughly. Keep all employees updated with the progress of tasks, timing and accomplishments. Communicate with the auditor, too. After all, the auditor is a collaborative colleague, not an adversary.
- Conduct a post-audit debrief: Have employees share what worked or didn’t, so the business can develop a suite of best practices. This will make the next company audit a smoother process.
Partner with Expert Support to Streamline Audit Preparation
For companies with lean teams, partnering with expert support can be crucial to successfully prepare for an audit. Nanophase Technologies Corporation (NTC) had a small finance team and faced significant challenges in maintaining compliance and preparing for their annual audit. By engaging Paro’s fractional expert, NTC was able to streamline their financial reporting and ensure GAAP/SEC compliance. This engagement helped NTC meet their business audit requirements efficiently while also freeing up their internal team to focus on other critical business functions.
External expertise can dramatically help companies looking to enhance their audit readiness without overburdening their existing staff. If your business lacks a finance leader or the employee bandwidth to adequately prepare for an audit, Paro has a solution. Our highly qualified, experienced fractional audit experts can help you and your team prepare so you can meet compliance requirements and drive investor assurance.
