10 Tips for Preparing for a Successful Annual Audit
If you are anything like most people, the idea of having an audit typically sends shivers down your spine. Auditors need to dive deep into the business's operations, and as a result, it may often feel like you are receiving a long list of demands in the dreaded client assistance list. As a recovering Audit Director myself, I have seen the gamut of how companies prepare for their audits. Now that I am on the other side helping companies prepare for their annual audits, I wanted to put together some of the top tips and tricks for making it as painless as possible for you and your accounting team.
1. Plan Ahead.
Devote additional time before and in connection with year-end close to adequately prepare for the audit, be available during audit fieldwork, and communicate with those involved in the audit process. Meeting with the auditors and your team ahead of time to set clear expectations can minimize anxiety and frustration. Additionally, it would help if you assigned someone within your accounting & finance team to be the auditor's point of contact. Assigning a point of contact will allow for less confusion and ease of communication. There should always be a backup point of contact for the auditors in case your main point of contact is unavailable and if the auditors are not getting the necessary information needed.
2. Stay Up-to-Date on Accounting Standards.
As we all know, there are lots of new accounting pronouncements, as well as legislative and regulatory requirements that regularly get updated and may affect your organization's audit. You will want to stay up-to-date because you may need to manage or track data in a different way. It is best practice for the accounting and finance team management to understand the new accounting pronouncements and understand if you need additional training for team members to perform their jobs properly.
3. Ask Questions Before the Audit.
Build a strong relationship with your auditors and ask questions during the year before fieldwork. If an unusual transaction occurs or you are thinking about entering into a new transaction, give your auditor a call. Believe it or not, they want you to call them to discuss the appropriate accounting treatment ahead of time instead of correcting it on the back end.
4. Maintain Reconciliations Throughout the Year.
Please do not wait to perform reconciliations until the year-end; perform them monthly or quarterly throughout the year. Completing reconciliations monthly or quarterly allows you to identify, investigate and resolve reconciliation items promptly. If you wait until year-end, you may not have enough time to resolve the issue before the audit and may make it more time-consuming to solve.
5. Learn From the Past.
Take stock of any prior year audit adjustments, internal control recommendations, or struggles encountered during previous audits. Look at the documentation for such prior issues, including the plans for addressing them. These can be a starting point for self-review and a memory-jogger to ensure these issues were managed and will not continue to be an issue. During the planning meeting with the auditors, discuss what went well during last year's audit and where there may be opportunities for improvement or more effective communication between the organization and the auditors.
6. Develop a Timeline and Assign Responsibility.
Review the list of work papers and schedules requested by the auditors, making sure to obtain clarification of requested information when necessary. Assign each item from the list to a responsible person and include a due date. Make sure to allow adequate time for review and correction of schedules if necessary. Tackle the most difficult, complex, or time-consuming areas first when possible. The drafts of the financial statements, schedules, work papers, or other items requested by the auditor should be available on or before the first day of audit fieldwork.
7. Organize Data.
Create a repository of audit schedules that can be accessed in future years by the appropriate personnel. Consider creating subfolders for significant transaction cycles or categories, such as cash, revenue and receivables, expenses and payables, investments, fixed assets, debt, etc., to make managing and retrieving schedules easier. Schedules and workpapers containing sensitive information, such as payroll, may need to be password-protected or maintained in an appropriately restricted network location. Explore whether you can write new reports within your accounting software that could automate the preparation of certain schedules and workpapers.
8. Schedule a Kickoff Meeting.
A kickoff meeting (whether in person or over the phone) is essential. It provides an opportunity to talk through your needs, iron out the logistical details, debrief from the previous year and establish your expectations for this year. Kickoff meetings also get everyone on the same page, which leads to greater overall satisfaction.
Before the kickoff, work with the auditor to create an agenda that gives the discussion structure and ensures that both sides get what they need out of it. Prepare by bringing any questions you have so you can leave the meeting confident you understand the scope and strategy for the audit. Include the following topics for discussion:
Current year activity and transactions and their associated impact on the audit
Outstanding questions about the prior year's audit
A discussion around how you implemented the suggestions from the previous year
Discussion on your companies response to any prior year management letter or internal control comments
Status of preliminary work and initial information requests
Discuss sending your population listings to the auditors at least four weeks in advance to ensure you receive their selections at least two weeks in advance of fieldwork. This will allow your employees sufficient time to pull the supporting documentation for the auditors' selections and give time for follow-ups as they typically arise after documented are provided.
9. Perform a Self-Review
Once all year-end closing entries are made, review schedules and workpapers to ensure amounts agree or reconcile to the trial balance. Take a step back and assess the overall financial statements for reasonableness. Also, read and update the notes to your financial statements, and download the most up-to-date disclosure checklist from your auditor or one of the Big 4 websites to ensure you have included all the required information. Be prepared to explain financial statement line item variances from year to year or from budget to actual.
10. Evaluate results
Maintain communication with the auditors during the time between fieldwork and the issuance of the audit report. If there are any open items at the end of fieldwork, establish agreed upon dates for the information to be provided to the auditors whenever possible. If the auditor has agreed to attend meetings with the audit or finance committee and/or board of directors, confirm that the auditor has the date, time, meeting location, and other pertinent details of the meeting. Hold a post-audit closing meeting with employees involved in the audit to communicate results and solicit feedback. Document the conclusions of the post-audit meeting to help guide the subsequent year's audit.
KCG has extensive experience in audit readiness and is here to help you prepare for your annual audit.