Preparing for an Audit: Tips for a Smooth process and Best Practices

Preparing for an audit can feel burdensome, regardless of previous experience. There are various types of audits, each having different purposes and standards, making it difficult to navigate the process. This article will provide you, the audit client, with key information and some best practices that can help make your next audit the smoothest one yet.

Step One: Understanding

The first step in properly preparing for your audit is understanding. You should know the type of audit and its purpose to fully understand the end goal. External and internal audits are the two primary audit types (excluding tax-related audits). External audits are performed by an independent third-party with the goal of providing assurance regarding the accuracy and compliance of financial reporting to the users of the financial statements. Internal audits are typically performed by the client’s company, with the goal to evaluate internal controls, identify areas that pose risks to the company, and identify operational inefficiencies to implement corrections. We will focus on best practices pertaining to the external audit process, as this is the typical audit type that may be required by regulators, lenders, or owners.

You should also understand the three phases of an audit: planning, fieldwork, and wrap-up. Planning involves setting the audit schedule, auditors providing an initial list of requested items to the client, and the client providing the requested items to the auditor so the behind-the-scenes audit process can begin. Fieldwork refers to the days both parties set aside for the auditors to conduct substantial detail testing. This typically takes place at the client’s business, or virtually, and the duration depends on the client’s specific circumstances. Lastly, the wrap-up phase is the time period after the scheduled fieldwork ends and before the final audit report is issued.

During the planning phase, the auditor will send an initial request for basic information needed to accomplish proper planning procedures. They assess various risks, plan the testing procedures, and select the testing samples. Auditors do not look at every transaction your company conducts; rather, they establish a set of criteria used to determine which, or how many, transactions need detailed testing to obtain reasonable assurance that various accounts and categories are properly reported. The auditor then sends a listing of the various transactions selected for detailed testing, often called “sample selections,” along with a description of the supporting documents needed. Once the requested documents are provided, the auditors use them for testing. After testing is complete, the auditors review the financial statements created by the company to ensure proper compliance, or if engaged to do so, they can prepare the financial statements as a non-attest service. Once the financial statements are reviewed or prepared, the auditors prepare the audit report, which states whether the financial statements can be relied upon as accurate within reason. Finally, the audit file goes through the auditing firm’s quality assurance processes, and a draft is delivered to the client for review and approval prior to final issuance.

Now that you understand the audit process, we will analyze some best practices to help the process go smoothly.

Best Practice One: Communicating Clear Expectations

Communicating expectations to the auditor is key. Most external audits are required by law to ensure proper compliance; required by a lender to obtain financing; or are requested by company owners to obtain both confidence in, and an understanding of, the company’s true financial position. In each of these cases, there is typically a deadline by which time the audit report must be issued and delivered. This deadline needs to be conveyed to the auditors clearly and early. If key personnel from your business who are going to assist with the audit will be unavailable for an extended period of time, this should be communicated as well. The more information you can provide your auditors with while setting realistic expectations, the greater the chances are of having your expectations met.

Best Practice Two: Self-Reviewing

Self-review throughout the year is important to assist with accuracy. Additionally, a self-review prior to sending your initial financial documents to the auditors decreases the risk of schedules not matching. Beginning an audit with schedules that do not match means the audit is a step behind from the very beginning. The first item on the initial request list is typically the trial balance, which serves as the measuring stick that all reconciliations and subledgers tie back to. As you gather requested items, review them to make sure that the balances agree to the trial balance. If you have variances, try to reconcile them before the audit begins. Typically, requested items that should be self-reviewed include the balance sheet, income statement, bank reconciliations, loan statements, accounts receivable schedule, accounts payable schedule, and a detail of additions and disposals of fixed assets. If you identify any variances or post any adjustments to the trial balance after it was delivered to the auditor, make sure to provide them with all adjustments you made. This ensures that you both have the most updated data from which to work.

Best Practice Three: Prioritizing the Audit

Provide all requested information as quickly as possible. Auditors want to avoid an audit that drags on for months just like you do. The more you can prioritize the audit by responding in a timely manner to requests, the quicker the auditors can complete their items, and the quicker the audit progresses. Another way to prioritize the audit is through proper staffing during fieldwork. Your regular business operations do not stop when the audit begins, and time management becomes a balancing act of addressing the needs of the business and the needs of the auditors. The best way to combat feeling overloaded on both fronts is to have additional employees available to assist. If you can staff the fieldwork days in a manner that allows even one person to be able to assist the auditors with provision of documents or answering questions throughout the day, this will help decrease the total audit duration.

During fieldwork, you are not at the auditors’ beck and call. Rather, the auditor is solely focused on progressing your audit. They avoid interruptions they face when working in their own office and have dedicated this fieldwork time to you. The more work completed while auditors are in the fieldwork phase, the quicker the audit is finished, which is why it is so important to prioritize audit responsiveness during this phase. There will be times when the auditors work through the information you provide, and do not have additional requests. Ensure that you have provided all requested information, then utilize this time to continue with your ordinary business assignment.

Best Practice Four: Passing the Audit Burden

After fieldwork ends and the auditors return to their office, the wrap-up phase begins. This is when you and the auditor address any remaining items, virtually. This phase is when many clients lose responsiveness and the drive to complete the audit. Potential frustrations for both parties include delayed responses, low urgency, “out-of-sight-out-of-mind” mentality, and the feeling of a never-ending audit. The key to overcoming this is to pass the “audit burden.” Ultimately, an audit is two parties passing information back and forth until satisfactory evidence is obtained. Whichever party owes information to the other is the holder of the “audit burden,” meaning the audit progress stays static until they pass the necessary information on to the other party. Strive to keep the audit burden on the auditors as much as possible. Position yourself so that it is continually the auditors’ responsibility to complete the testing or send you any additional requests. Avoid holding the audit burden yourself, and making the auditors wait on you for additional information. If you believe you have provided all requested information, confirm this with the auditor, then relax until they provide new requests or send you the draft audit report for approval.

Conclusion:

Lastly, be open and honest with your auditors about your experience. If you prefer requests in one consolidated list, or if you prefer multiple lists with fewer items, express that preference. If you become frustrated or overwhelmed, communicate that to the auditors along with any specific issues you are having, and let the auditors help as they can. Remember that you are the client, and the auditors are here to help you.