9 Steps to Flawless Audit Preparation

{authorName}

Finance Insights for ProfessionalsThe latest thought leadership for Finance pros

Thursday, November 3, 2022

Preparing for an audit can be a stressful time but there are ways you can make the process less stressful for you and your finance team.

Article 8 Minutes
9 Steps to Flawless Audit Preparation

The year-end audit is something that often brings shivers to the spine of any finance professional. It's understandable that many approach the task with a good helping of caution and just a little bit of dread, as there's a lot riding on the annual audit.

C-level executives, decision-makers and directors all look to the year-end audit to provide guidance on the business objectives for the next 12 months and beyond. This means, more than ever, finance specialists are under pressure to make informed recommendations and ensure figures are presented in an accessible manner.

So how can finance professionals take some of the stress away from the process of preparing for an audit, without jeopardizing the quality of information delivered in the review?

An important early step is to educate yourself on different types of audits and their relevance to your business.

What are the main types of audits? 

For companies operating in the US, financial audits can be broadly divided into three distinct categories: internal audits, external audits and Internal Revenue Service (IRS) audits. These processes can lead to a range of possible outcomes for your business, so it's important to understand all of them and how they work.

Internal audits

Internal auditing is the process of an independent expert being brought into your company to conduct an objective examination of your statements and transactions, to ensure they provide an accurate representation of your financial situation.

This will lead to the generation of a report that can be shared with managers and directors. The results of this process can have various applications and benefits for the company, including the implementation of managerial changes and reforms to your internal controls that improve compliance.

External audits

An external audit differs from an internal audit in that external auditors have a higher degree of independence from the company they're examining. This is particularly important if you want to remove any potential bias from the process, and also allow rigorous checks to take place without any risk of the outcomes affecting relationships within the business.

Unlike internal auditors, third parties will follow their own set of standards, rather than those used by the organization that has hired them to complete the task. This provides additional assurance that the conclusions drawn from the audit are impartial and free of any internal influence.

IRS audits

Being audited by the IRS is not a welcome prospect for any business, but despite the negative implications, it doesn't necessarily mean you're guilty of any wrongdoing. The tax collection agency uses various methods to select returns for inspection, including statistical formulae that compare your figures to 'norms' identified from similar returns.

IRS audits are conducted by mail or through in-person interviews and could require you to provide records such as:

  • Receipts
  • Bills
  • Canceled checks
  • Legal papers
  • Loan agreements

There are three possible conclusions to the process: no change to your tax return, changes that you accept or proposed changes that you disagree with. If you don't accept the findings of the audit, you can go through the mediation process or file an appeal.

Unlock the power of your ERP system

Transform your processes, improve operational efficiency, and gain deeper insights into your firm.

VISIT THE HUB

Why internal audits are crucial to your business 

Conducting regular internal audits is important if you want to gain reassurance from an independent party that your organizational controls, compliance functions and risk management methods are operating efficiently.

While external auditors will focus on your financial records and potential risks, internal auditors may be able to take a broader view and consider how your financial reporting and compliance relate to topics such as your reputation and prospects for growth.

The process can also examine whether you're handling sensitive data in the right way and identify issues that may be affecting productivity.

You can maximize these benefits and increase the likelihood of your company getting the best results from your audits by following a clear workflow to prepare for them.

1. Plan ahead

It should come as no surprise that the most important step you need to make in preparing for your audit is to plan ahead. You'll need additional time in the lead up to the audit, as well as the extra resources required to do final preparations before you start official work on it. The entire finance team will have to ensure they have the necessary resources and time needed to plan and set expectations for the audit.

This is a crucial element of ensuring the process is as stress-free as possible for all involved. Although year-end audits only need completing annually, you should be thinking about it throughout the year. Keep records and schedules as up to date as possible as this will reduce the lead-in time you need for each yearly audit.

2. Brush up on accounting standards

Accounting standards are almost constantly changing and this may affect your organization and its year-end audit. Familiarize yourself with any accounting development as it could affect how you're able to track data or operate. Ensuring you keep on top of any new industry standards will make the auditing process easier in the long run, as well as help to identify where you may need more support to comply with regulations.

Standards often require certain training to be delivered to professionals, so it's essential that you maintain a good understanding throughout the year to safeguard your company and its internal figures. This can also hammer home the value of attending industry conferences, as they can be an effective way of keeping your finger on the pulse of accounting.

3. Reconcile all accounts

Ahead of the audit, you need to ensure all of your accounts are as straight as possible. This involves paying any bills and employee expenses that may have been left until now, as well as collecting invoices. This will help you give the most accurate projections and analysis during the audit. It may also involve resolving any admin issues, such as ensuring contractual amendments are with the original contract so that there's no confusion over revenue.

Learn more: How Finance Teams Can Perfect the Art of the Reconciliation Audit

4. Learn from previous errors

Audits rarely go completely smoothly, especially the first time you complete it or in a year when the organization has undergone a number of significant changes. Most year-end audits will have adjustments made and these can be a fantastic starting point to help you draw more accurate conclusions this year. Schedule a planning meeting with those performing the audit and decision-makers to see how you can navigate the previous errors made and improve the accuracy of this year's audit.

5. Identify significant changes

How has the company's financial situation changed from last year? Are there new projects that are being invested in? Is there more revenue coming in? These are key questions that you need to answer ahead of the year-end audit to be fully prepared for the review. You should also consider any grants or government support your organization has been given over the past 12 months.

It's also important to note any non-financial changes that have occurred in the company. Have internal control systems been altered or were new processes introduced? You need to be aware of these things as they could indirectly affect the fiscal findings for the year.

6. Draw up a timeline

Auditors will normally ask for certain evidence of your year-end audit at certain deadlines. You need to be clear on when these are and what you need to have achieved as an organization to ensure you can supply the right documents at the necessary time. Make sure you’re allowing enough time for things to not go to plan.

In addition, it's always a good idea to have a regular team meeting so that everyone understands where individuals are at with their tasks. This helps to reduce the amount of time wasted if any member of staff has an unplanned absence in the lead up to the audit.

7. Divide responsibilities

Each element outlined on the timeline should be assigned to a person, and they should then break down the smaller tasks that need to be achieved. This makes the whole process much more manageable and quantifiable for both the team and decision-makers. You should designate clear internal deadlines for work to be finished, which should be an appropriate time before the hard deadline given by the auditor.

This should give you time to fight fires and resolve any last-minute problems that arise. With this in mind, your timeline should tackle the most difficult or time-consuming areas wherever possible first.

8. Be proactive

If there are certain items requested by the auditor that you're unsure about, you should be proactive about it. Asking them questions will avoid any unnecessary delays once the audit has begun. You should also talk to decision-makers or those you’ll be relying on for certain details to complete the audit preparation. It's important that there is total transparency between you and them and that they’re clear on what you need from them.

9. Prepare your paperwork

You should make sure you have all the items on your auditor’s preparation checklist ahead of the start date. This information should be submitted electronically and usually includes:

  • General ledger
  • Employee handbooks
  • Fiscal year budgets
  • Paid bills and checks
  • List of transactions
  • Internal financial statements
  • Accounting policies.

They may also ask for minutes from relevant meetings with directors and other organizational documents, so it's important you check what is necessary even if you've successfully completed an audit before.

Further reading:

Finance Insights for Professionals

The latest thought leadership for Finance pros

Insights for Professionals provide free access to the latest thought leadership from global brands. We deliver subscriber value by creating and gathering specialist content for senior professionals.

Comments

Join the conversation...