Whether you are new to the process or have been through it before, there are ways to help make the typically stressful, complicated, time-sensitive corporate audit better for both your team and the auditor.
The better you understand what your auditor wants to review, the information, data and documents they need to see, the more successful – and shorter – the audit will be. Faster is almost always better when providing the data. Make sure the data is in a format that allows them to analyze it; don’t just send .pdfs, provide a spreadsheet with it.
Why is faster better? The auditor’s job is to answer certain questions about the financial condition and GAAP compliance of your company. The sooner the auditor can answer one question, the sooner they can move on to the next question. The longer you take to provide the data, the greater the likelihood that doubts could be raised. Auditors are human, they will question the data.
Since the auditors are reviewing your financial results and controls, they want to see good quality schedules from your finance department. There are six main areas they will be reviewing:
Prepaids and accrued expenses are other areas that are critical since they can be dumping grounds for hidden expenses. Make sure you have documentation on these to share with the auditor.
Every auditor will provide a prepared-by-client (aka PBC) checklist of data, schedules, and reports that they want to review and the proposed timing. Have as much of the information available when the auditor starts. Handing them a book, flash drive or uploaded to a cloud site with all items that are due goes a long way toward a successful audit.
After the review of that data, they may ask for more detailed information. For example, if the auditor first asked for a list of invoices, they may then want to see 25 invoices from that list.
The auditor will want explanations of any variances you experienced on a year over year and quarter over quarter basis. Clarifying variances in your profit/loss and gross profit will be important.
Even if it’s your first audit, they are never a surprise. It’s likely your investors, board audit committee, or long-term strategic plan will dictate the timing of the first audit. Once the firm as gone through an audit, it won’t be the last, annual audits will be part of the finance department’s life.
With that being the case, plan for success. You’ll have 30-45 days post the annual close to make sure all the data needed for audit is ready and available. If you’ve done it before, you should have detailed records on what the auditor asked for last year.
The audit plan ideally should start at the end of prior year’s audit, with a post-mortem both internally and externally with the auditor. With your team identify process improvements to ensure they deliver the right data faster next year. With the auditor, the post-mortem helps strengthen the relationship and gives them an opportunity to let you know what you can do better next year.
In your plan, you need to outline all the reports, schedules and datasets that will be needed for the audit and then understand the timing of those deliverables. Your team should know where they are on data collection as your audit date gets closer. Don’t wait until after close to prepare for the audit.
Good personal relationships are important; so is making sure the auditor knows the industry you operate in and any quirks they might encounter due to the nature of your business. You don’t get to choose your auditor, so there is always the chance that they don’t have specific experience with your type of business.
It is your responsibility to educate them. Take them on tour of your factory floor, show them what you do and how you do it. They are going to be looking deeply at the numbers – so help them understand your business as best as possible.
If there have been changes to your business in the past year, make sure you give an update. Have you experienced M&A? If so, goodwill and intangibles will have to be addressed. Has your reporting structure or business model changed? Any differences from the last audit will want to be communicated.
The post-mortem with the auditor is a great time to improve your relationship with the auditor for the next year. When you’re not in the weeds you can find out areas for improvement around the data you provided, and its format.
Go digital. One of the major pitfalls in an audit is lack of ready access to information. Paper invoices or bills of lading can be a challenge to find. Digitize them and keep them in a searchable document filing system. Knowing the auditor will ask for items like the first five and last five invoices of the year – to confirm proper revenue recognition. Have your customer payments available, as they will want to tie payments to invoices on an account-by-account basis. Having your vendor invoices digital is equally important as the auditor will want to review incoming invoices to ensure proper recording of expenses.
Ensure that the team is resourced appropriately – don’t have vacations during the audit. Your staff needs will vary based on the size of your business but start with a controller. The controller will be the one managing the auditor relationship. Below them director-level support can collect and manage the information needed by the auditor.
There are two reasons to have the best audit possible. The first one is cost. Audit fees will be based on the amount of time the audit is expected to take. The more hours the auditor must spend making sense of the data you provide, the more expensive it is going to be. On a year-to-year basis, if you can speed the process up, it will be cheaper.
The other benefit of course is getting a satisfactory rating on the audit. The audit demonstrates to your board and investors that you have proper financial controls, particularly if you make public filings; that the financial results you report are valid; and provides confidence in your company and its management.
An unsatisfactory rating does just the opposite. The auditor will be back to check that your controls have been improved and check the numbers again often leading to a restatement of preliminary financials, which is never a good thing.
Eventus provides timely audit support for many clients who need either extra help or whose businesses may not require a full-complement of finance and accounting staff throughout the year. On-demand solutions can be highly effective for small and mid-sized companies for audit support.
For more information on our audit preparation support click here.
