In our previous “Audit Preparation Series: Reasonable Assurance” article, we discussed the level of assurance you receive in an audit and the processes in which an audit is required to go through in order to obtain reasonable assurance. One of those items is obtaining appropriate and sufficient audit evidence. Certain steps need to be taken on your end in order to ensure the auditor can do their job efficiently and effectively. How do you prepare? What should you have ready? What do you need to do during fieldwork? This article will focus on explaining certain steps to ensure your audit goes smoothly.
One of the comments I hear from my clients is how much work it is getting ready for an audit. Yes, an audit is an interruption to your normal business process. We come in to your office, take up your time asking questions and requesting certain items to be provided; however, the majority of the items should already be done in the normal course of your month-end closing process. If items such as bank reconciliations, reconciliations of receivable ledgers to the general ledger, or recording of fixed assets is only being done before an auditor comes, your organization is already behind in terms of ensuring the accuracy of your financial statements and the timely detection of material misstatements due to fraud or error.
To begin preparing for an audit, I would highly recommend for any of my clients to schedule a meeting with the auditor. A proper understanding is needed by both parties as to when the final reports are due to end users. Once this is established, both parties can work backwards in terms of determining when fieldwork needs to occur. It is very important to understand an audit is not necessarily finished when an auditor leaves your office. Often times, the time in your office just gets us through the testing processes necessary to obtain reasonable assurance the financial statements are fairly stated. Extra time will be needed in the days or week following the audit to prepare the financial statements. Additionally, auditors are required to have our work internally reviewed by members of the team in order to ensure standards of quality in our work. This may lead to additional follow up questions to you. We are also required to finish any necessary procedures prior to issuance of the audit report. If an item is requested by an auditor and not received prior to the finish of the week of your audit, those items simply do not go away. The auditor will still need them. Even once all items are received by the auditor, testing procedures are performed, internal review process is complete, and a draft of the audit report and financial statements is issued, you will need time in order to review and approve the financial statements. While every organization is different, it would be wise to schedule a healthy cushion of time between when the audit fieldwork ends and when the final reports need to be issued.
During your meeting with the auditor, you should also bring up any difficulties the auditor might encounter. If you have awareness of significant items still needing to be performed, such as a bank reconciliation, it is absolutely essential to inform the auditor of such items. It may be critical, or at a minimum far more efficient, to wait until these items are finished prior to the audit being performed. During the meeting, you should discuss the list of items you need to prepare. You frequently will hear us refer to the “PBC List” (short for Prepared by Client List). Discussions can be held as to when you can expect the list and what new items may be required. Deadlines should also be established as to when the auditor needs these items. Some items may not be necessary for the auditor to have until the week of fieldwork, while other items may be required well in advance of the audit. As I stated earlier, the majority of the items necessary to have ready for an audit should not be that much different for what you would normally be required to have done as a part of your month-end processes. If you glance at your PBC list, you will see a wide variety of subsidiary and supporting information needing to be provided at year-end, such as bank reconciliations, accounts receivable and accounts payable subsidiary ledgers, inventory listings, etc. One last important note regarding the PBC list: the vast majority of items will need to be kept by the auditor in their workpapers (i.e. not your copy or the original copy). If you have any questions, please ask your auditor.
Once a timeline is established for the audit and a PBC list is provided, the preparation process should begin. Before providing any information to your auditor, take a look at what you are providing. Do items such as your bank reconciliations, accounts receivable and accounts payable ledgers, and inventory listings agree to the balance on the general ledger? Are there obvious errors in what you are providing? Do account balances look unreasonable and unusual to you (i.e. an accounts receivable balance having a credit balance). If there are errors and issues, time and effort needs to be spent determining the cause of such issues and making the necessary corrections. Remember, an audit is not a bookkeeping service. If an auditor is expected to discover the cause of such issues, timelines for issuance of final reports can not be guaranteed and significant extra costs could potentially be incurred.
After all requested items are prepared, now comes the week of your audit. This is the part where you will inevitably have an interruption of your normal day-to-day processes. The auditors are going to need your time. An auditor would simply not be performing his or her job if they did not ask questions about the information provided. Certain accounts are going to appear unusual to us. We might not recognize what the schedule provided to us is for, or at first glance understand how it works. Additional items may need to be requested. Adjustments may be encountered. The best piece of advice I can give to you is to plan accordingly for this time and discuss with your auditors what method of communication works best for you and what time you will be available. Schedule a few hours each day to devote to the audit or it is not reasonable to expect that audit deadlines will be met.
One last and final point to keep in mind: while your auditor may be a familiar face, and while your processes may be the same as the prior year, your auditor typically only visits your organization once per year. Since last year, the auditor has worked with many other clients. As such, we may need some assistance getting familiar with certain items. Just because you explained something last year does not mean we will remember it this year.
Proper planning and preparation for an audit is absolutely crucial to ensure an audit will go smoothly. Communication is key. Work with the auditor well in advance of the audit to plan. If certain unusual items come up during the year and might impact the audit, inform your auditor in advance. If you feel like you are not going to be ready for your audit or have crucial items prepared, tell your auditor. The process of preparing for an audit does not need to be as daunting as it seems to be. Before you know it, it will be time for issuance of your final report. This leads us into final topic of discussion in the Audit Preparation Series- The End Stages of Your Audit and Issuing Final Reports.