Do you feel unprepared for your external audit each year? Does your staff start showing signs of anxiety in anticipation of the auditors walking in the door? If this sounds like your situation, take a deep breath. Here are five tips for making the audit experience run more smoothly for you and your auditors.
1. Be ready
Ask your auditor for a list of items they’ll need during the audit, with deadlines for each item, if such a list isn’t provided automatically. Talk to your auditor before the fieldwork if you have questions about any of the items, and let your auditor know right away if you won’t be ready by the agreed upon dates.
Because surprise is a required element in the audit, you’ll also need to produce some information on the spot, such as specific expense reports, journal entry support, etc. But you can still prepare by establishing files during the year to collect the information you may need.
2. Have realistic expectations
Your expectations of the audit should mirror your contract with the auditing firm. It will spell out what the audit will accomplish and your responsibilities.
Auditors once did accounting “cleanup” work for their clients during the audit, such as preparing year-end journal entries, fixed asset schedules, and various prepaid expense and accrued liability analyses. But today’s professional standards draw a clear line between accounting and auditing services, and your auditor must stay independent of your accounting processes.
If there are accounting tasks you can’t do internally due to a lack of expertise, consider hiring a different firm to handle them. But if you’re fully capable and “own” the process, you can engage your audit firm to assist with certain analysis and adjustment information outside of the audit.
3. Minimize your risks year-round
Draft and review your accounting and procedures manual. Self-assess inherent internal control weaknesses and determine the necessary internal controls to mitigate such weaknesses. Periodically ascertain whether your organization’s policies and procedures are being followed.
If your operations have changed or evolved, discuss these developments with your auditor during the year and update your policies and procedures accordingly. Waiting until fieldwork begins can delay the audit process.
4. Be prepared to deal with any control deficiencies
Your auditor will apply risk standards during the audit. AICPA Statement on Auditing Standards No. 115, Communicating Internal Control Related Matters Identified in an Audit (SAS 115), defines deficiencies in internal control and other “material weaknesses” and “significant deficiencies.”
For example, the auditor will look to see if there’s:
- More than one person handling cash receipts and reviewing and approving cash disbursements and payroll,
- A second person authorizing contracts and their payment, and
- Adequate oversight of your checks and balances system.
After reviewing the risk and internal control information you’ve assembled, your auditor could determine there is a “significant deficiency” or the more serious “material weakness.”
For any matter identified in the auditor’s SAS 115 letter, prepare a written response including whether you have taken or intend to take any action in response to the finding. This is important to the audit committee and board as they oversee the audit and the overall system of checks and balances.
5. Stay in touch
Don’t let the annual audit be the only time you talk to your auditor. If you save up all your questions, it’s likely to extend the length of the audit.
One of the best ways to stay in touch with your auditor is to schedule quarterly or semi-annual lunch meetings. Having touch points throughout the year provides both you and your auditor an opportunity to discuss new accounting pronouncements and significant transactions. This will enable you and the users of your financial statements to avoid surprises.
It’s all good
Although the audit — and the preparation that precedes it — requires some work, the benefits are plentiful. The audit not only assesses your overall financial condition but also can pinpoint problems with financial management and financial reporting, identify ways to reduce risk and strengthen internal controls. For more information about our assurance services, contact Adam Collyer at email@example.com or your MarksNelson Professional.
Adam Collyer specializes in working with clients in the insurance industry. In this role Adam provides attestation services to the life, property & casualty, and warranty sectors. Additionally, Adam provides consulting services to assist organizations with the optimization of financial reporting and other compliance functions.