Preparing for an Audit

The word ‘audit’ can invoke images of piles of paperwork, discovery of horrible mistakes, and endless email chains in our mind’s eye. For auditees, exhaustion can creep in before the audit even begins. Prior experience with external audit can provide some relief in terms of familiarity, but for a first-time auditee, the process can be especially intimidating. The right preparation and mindset can help dissipate that overwhelming feeling.

I have come across several scenarios where incomplete understanding of the audit process and lack of proper preparation on the auditee’s end caused unnecessary complexity to the engagement. This article explores practical and insightful tips to help auditees meet auditor expectations and prepare confidently for an audit.

The foundation of an auditor’s work is the responsibility to provide an opinion with reasonable assurance that the financial statements of the organization present a true and fair view of the finances of that organization, and that these financial statements are free from material misstatement. An auditor’s opinion, generally expressed in an audit report, must be independent of the entity. The opinion has a strict evidentiary standard (warrants high significance) and can be relied upon by authorities seeking compliance like the government or the SEC.

It is important to note that the responsibility of preparing financial statements lies with the management of the organization. The management must provide the financial statements as well as additional documentation requested by the auditors.

To ease the audit process, here are some steps auditees can take to prepare for an audit. Some of these steps can be taken well in advance of the actual audit.

1. ENSURE REPORTS SHARED PERTAIN TO THE CORRECT PERIOD AND CUTOFF

Audits look at financial activity during a specific period of time, with strict beginning and ending dates. One of the most frequent issues we encounter during audits is reports that do not correspond to the correct reporting period or fall out of the cutoff period (ending date). This detail is often overlooked but is critically important to get it right. Reports serve as the foundation of any engagement, and ensuring their dates are accurate is essential for smooth and timely completion.

Auditees can go the extra mile by proactively sharing documentation for all expenses up to the cutoff date, including verifying the dates of any expenses incurred shortly thereafter. Misreporting the period of an expense, even unintentionally, can result in duplicated audit procedures, increased costs, and unnecessary stress for both the audit team and the client. In fact, a single material expense recorded in the wrong period may trigger a complete retesting of the affected area. Timely and accurate documentation helps ensure a smoother, more efficient audit process.

2. PROACTIVELY PREPARE FOR AUDITS BASED OFF PREVIOUS YEAR REQUESTS

Our audit team takes a proactive approach in preparing clients for anticipated audit requests. For more complex engagements, we conduct interim checks throughout the year to help clients gather necessary information gradually, rather than waiting until year-end. This not only streamlines the audit process but also reduces last-minute pressure. Maintaining an ongoing relationship with the auditors is essential as it ensures they stay informed about current developments within your organization and can provide timely, relevant support.

3. MAJOR TRANSACTIONS AND EVENTS

Businesses typically experience one or more significant events throughout the year such as acquiring fixed assets, securing new debt, or entering into lease agreements. These transactions are closely scrutinized by auditors, as they can materially impact the scope and direction of the audit. To ensure accurate financial reporting, it is essential that both the initial recognition and the subsequent effects of such events are properly recorded. Maintaining clear, comprehensive documentation at the time each event occurs is not only critical for transparency but also helps prevent confusion during year-end closing procedures. Proactive recordkeeping is widely regarded as best practice in financial management.

4. NON-MONETARY CHANGES

Non-financial events can also impact an organization. For example, a change in leadership, such as the replacement of the Chief Financial Officer, is just as significant as major financial transactions like acquiring new property. Such events can have far-reaching implications for the organization’s strategy, operations, and financial reporting. Therefore, it is crucial not to underestimate their impact. Timely and transparent disclosure of these changes to your auditors is essential to ensure compliance with reporting standards.

5. ROLL FORWARD BALANCES FOR BALANCE SHEET ACCOUNTS

A roll forward schedule is a report that tracks and reconciles changes in an account’s balance from the beginning to the end of a period, showing all transactions that occurred during the period. Auditors always request roll forward schedules for big balance sheet items like fixed assets and long-term debt. The schedules, if maintained annually, should reflect both beginning and ending balances. It is important to ensure that the beginning balance in current year matches ending balance in prior year. For a large-scale entity, it is advisable to match and maintain roll forward schedules every month as part of their monthly close process. This way, the organization will be better prepared with minimal catch-up required for year – end.

6. COMMUNICATE WITH YOUR AUDITORS

As auditors, we understand that anticipation of audit results can cause stress and anxiety for the auditee. It is always a good idea to maintain ongoing communication with your auditor. Ask questions and express concerns. Discuss expected timelines to get a better understanding of the audit flow. Check-in meetings at regular intervals during the audit can help alleviate confusion and undue stress, all while ensuring both parties are on the same page.

Preparing for an audit can seem like a monumental task for auditees new to the process. As auditors, we do our best to help you prepare in advance so that the burden at the end of year is not so overwhelming. We are committed to helping you during the audit itself, so you understand what information we need and the most efficient way to provide it. Ultimately, a well-prepared audit not only reduces stress but also strengthens the organization’s financial integrity.

If your business needs an audit—or a review or compilation—contact us. At R&A, we have a wealth of experience in conducting audits, but we also pride ourselves on being helpful and approachable. We would be happy to help you with any of your assurance needs.