Companies often need financial audits when they seek additional funds or have to satisfy the requirements of owners, creditors, investors and other outside parties who want a higher level of comfort on the accuracy of financial statements.
My experience auditing privately held companies has taught me that a few proactive measures can go a long way in avoiding audit delays, keeping you and your auditor on track, and ensuring a smoother audit process for all. So, let’s jump right into those tips, shall we?
- Document your accounting and business processes:
Your auditor needs to review your company’s accounting policies and assess whether you have sound accounting processes that are in accordance with Generally Accepted Accounting Principles (GAAP). To prepare for this,
- Create written accounting policies and processes for material account balances, e.g., understand all the ways your company generates different types of revenue (hardware, software, support, training, consulting, etc.);
- Research and document the accounting for it.
- Plan ahead – maintain documentation throughout the year, and not just at the end.
- Maintain auditable evidence of key internal controls at the Company:
An audit requires extensive review of overall company level controls (e.g., “Tone at the Top”, monitoring of controls, risk assessment by management, etc.) in addition to day-to-day accounting processing controls. Identify your company’s key controls and maintain documentary evidence to support that the key control is performed on a consistent and routine basis.
- Ensure that accounting records and legal documents are organized and easily accessible:
An independent audit requires the review of original signed documents and records (e.g., invoices, purchase orders, packing slips, bank statements, payroll records, articles of incorporation, stock certificates, loan agreements, etc.). Organize your files, track down documents with original signatures by all parties and have it ready for your auditor. Clean, accurate and auditable data will stand you in good stead during an audit.
- If applicable, review the internal controls over foreign subsidiaries or other related entities that need to be consolidated with the Company’s financials:
For instance, if you have a subsidiary in Asia being rolled up into your consolidated financial statements, establish internal controls to minimize the likelihood of both error and fraud. To prepare for this,
- Communicate with your foreign entities regularly,
- Provide knowledgeable local and corporate resources to oversee accuracy of the foreign financial accounting processes,
- Ensure that the accounting data from foreign subsidiary has been prepared in accordance with GAAP or other acceptable framework (e.g., prepare the consolidation and eliminating journal entries; understand the foreign currency issues with foreign subs – translation versus remeasurement, ensure consistency in accounting policies between the parent and subsidiary, etc.)
- If applicable, make arrangements to ensure that year-end inventory is observed and the auditor can rely on it:
It will be a challenge for your auditor to issue a clean/unqualified audit opinion unless an independent third party has observed both the beginning and end of year inventory. Arrange to have your inventory observed at year-end by your CPA. Note: the Company might have perpetual inventory in which case the CPA could gain comfort from cycle counts and test counting.
At ASL, we understand the Company staff need to have the capacity to assist with the audit as well as keep their current work completed and we are happy to assist your team in every possible way as you navigate the audit. We hope these tips prove useful for your next audit adventure.