Every audit requires dedicated time, precise coordination and extensive resources. Audit firms work with many clients and schedule their people and resources months in advance of the actual audit. If the company being audited isn’t ready at the designated time, an audit firm’s resources may not be available. This can lead to significant delays and potentially missing important debt covenant or regulator deadlines, resulting in unhappy shareholders.
There are several steps your organization can take to support a smooth and efficient audit. Below are four key audit preparation best practices:
1. Review The Previous Audit To Identify Risks
The first step to prepare for an audit is to review your organization’s last audit with an eye for issues cited and correct those in advance. Next, identify areas of risk. These can include accounting for complex areas such as equity and debt arrangements, revenue recognition, and IT systems and controls.
2. Assemble Your Internal Team And Evaluate Needs
Companies must also take a realistic look at internal teams and determine if external help is needed. Review your staff before an audit begins to make sure the right skills and experience are in place. A key internal position needed to support an audit is that of the controller. The person in this role coordinates and manages all audit activity. If the controller doesn’t have a strong skill set, then the likelihood of having issues with your audit increases significantly. In a larger organization, there may be someone who the controller designates to help offload some responsibilities.
It is also helpful to consult with your external audit partner to determine if they expect any complexities with the audit that may require seasoned external help. They may recommend using resources to deal with the complexity of highly technical accounting areas or implementing newly adopted accounting pronouncements.
The accounting department’s workload is higher at the end of the year than at any other point in time. Not only are they closing the books for the year, but they’re also preparing for an audit. Companies may need to bring in resources to help manage the additional workload. These additional people can take on some of the most time-consuming activities, freeing up employees to focus on audit preparation.
3. Set Expectations
Communication should be clear and frequent with all participants as audit preparation is underway. Communicate with the engagement team, your company team and external resources (e.g., banks and attorneys) on a regular basis. Schedule frequent status meetings between the audit firm and company personnel to determine progress and address any issues. Regularly confirm that the deliverable of a signed audit opinion on the required date is still realistic.
Request a timeline from the auditors that includes deliverables and milestones. Start with the previous listing of schedules “prepared by client.” The auditors need access to information that they will test or evaluate in accordance with their audit program. To facilitate this, they will request a number of items from the company in the form of a “prepared by client” schedule. For example, they might request accounting records, trial balances, account reconciliations, various accounting reports, significant agreements and board minutes to carry out these procedures. Schedules should be prepared in the form requested to improve the efficiency of the audit and potentially reduce audit fees.
The goal is to minimize surprises for your company’s leaders. Because regular communication is required for an effective and efficient audit process, status meetings should be scheduled in advance. This is the only way to monitor that expectations and schedules are being met and to quickly identify and resolve accounting issues. Scheduling regular communications allows your company to control the audit process, which will help control costs. Just as critical is that there is an expectation that both your company and the auditing firm will come to the meeting prepared for a productive discussion.
By having a frank conversation at the start of the audit process about expectations and issues, the audit will start off on the right track, and issues will be minimized.
4. Reacquaint With And Commit To The Auditing Firm
Hopefully, you conducted an evaluation of the firm and its work after your company’s last audit (if not, schedule an annual evaluation). Review the evaluation to get reacquainted with the team, including overall quality, responsiveness, consultation process, communication habits, quality of recommendations, understanding of the company’s business and, importantly, results versus expectations. An evaluation review provides an opportunity for both sides to discuss process changes or restate respective needs, priorities or expectations.
Commit to the long term with the external auditors. It’s generally cost-prohibitive to switch audit firms, even when, ostensibly, it’s being done to save fees. Companies will find they end up spending more, considering the time it will take a new firm to ramp up or if the new firm brings different processes or evaluations and assessments that internal staff did not prepare for. That is not counting the additional expense of time and resources to find, research, interview and select a new firm.
Effective planning in advance and consistent communication throughout the audit process can ensure that your company’s audit runs smoothly and efficiently.