CPAs are hard at work each fall preparing for audit season, which typically spans from January to April and includes meeting with clients, assigning staff, and scheduling fieldwork.
Likewise, organizations with calendar year ends should prepare for audit fieldwork. A little prep work this fall can help facilitate the process, reduce adjustments and surprises, and add more value to the audit process. Here are four ways to gear up for your audit.
Four Ways to Prepare For Your Audit
1. Disclose Operational Changes
Internal and external changes may bring opportunities and risks that could affect your auditor’s procedures. So, it’s important to identify all recent developments of importance and discuss them with your auditor before fieldwork begins.
Examples of noteworthy internal events or transactions include:
- Major asset acquisitions or divestitures
- New or expanded product lines
- Relocation or a new lease for commercial space
- Application for new debt (or refinanced debt)
- Addition (or retirement) of owners and other key employees
- Losses and business interruptions from natural disasters, fraud, or cyberattacks
- Acquisition (or loss) of a key customer or supplier
- A change in accounting software
Your auditor also will want to hear about external changes, such as pending lawsuits and tax audits, new sources of competition, and new regulations. When in doubt, tell your auditor.
2. Ask Questions About Gray Areas
All transactions for the year should be entered into your accounting system before the start of fieldwork. But your accounting personnel might not know exactly how to report certain items. There have been several major changes to the federal tax code and U.S. Generally Accepted Accounting Principles in recent years.
If your staff is uncertain how to account for a particular transaction or when a new rule goes into effect, it’s a good idea to ask for help before closing the books at year end. Doing so will help reduce inquiries and the need to make adjusting journal entries during fieldwork.
3. Review Last Year’s Audit
Start by looking at last year’s adjusting journal entries and management points. You should have taken steps to correct whatever problems were found last year. For example, if your controller forgot to record accrued payroll and vacation last year, double-check that accruals have been done for 2023. Likewise, if your auditor suggested that you needed stronger internal controls over purchasing, you could make last-minute changes before year end, such as segregating ordering and vendor payment duties between two employees or cross-checking vendor vs. employee addresses.
You also should anticipate requests for documentation and inquiries from auditors. Chances are you’ll create many of these schedules — such as accounts receivable aging reports and fixed asset listings — when you reconcile your general ledger. Consider compiling an audit binder before the start of fieldwork to expedite the process. It also helps to designate an internal liaison to field the audit team’s inquiries. Often, this is the company’s CFO or controller, but it can be anyone who’s knowledgeable about the company’s operations and accounting systems.
In addition, each account balance should have a schedule that supports its year-end balance. Amounts reported on these schedules should match the financial statements. Be ready to explain and defend any estimates that underlie account balances, such as allowances for uncollectible accounts, warranty reserves, or percentage of completion.
4. Adopt A Positive Frame Of Mind
Some in-house accounting personnel see audit fieldwork as a painstaking disruption to their daily operations. They may begrudge having to explain their business operations and accounting procedures to outsiders who will highlight mistakes and weaknesses in financial reporting.
Although no one likes to be questioned or critiqued, audits shouldn’t be adversarial. Your external auditor is a resource that can provide assurance about your financial reporting to lenders and investors, offer fresh insights and accounting expertise, and recommend ways to strengthen internal controls and reduce risks. Financial statement audits should be seen as a learning opportunity and an investment in your organization’s future. Contact us to learn more.