Oh no. It is that time of year again. The auditors are coming to nose through your financials, dig through invoices from 12 months ago and ask you question after question after question. What is worse? They will do all this right in your office while you are also still expected to do all your normal, day-to-day, actually-running-a-business activities.
But wait…you are good at your job! You have the internal controls that the auditor is looking at and you would certainly never book a journal entry without a good reason. You hang onto your documentation, including the calculations for estimates and discussions on the application of US GAAP. What are you worried about?
Maybe, just maybe, it is the preparation for the audit that makes you nervous. Take a deep breath and let us walk through what you can do to make the audit process go as smoothly as possible
1. Document Everything!
One of the most common control deficiencies that auditors report on relates to the lack of documentation, or support, for entries booked in the general ledger. When you make it a habit to hang onto the documentation associated with your accounting transactions, it makes it very easy to locate when you need to discuss a particular matter.
Many accounting systems will allow you to attach files to the entry, which is especially helpful for manual entries or unusual transactions. If you cannot save attachments to your journal entries, use a file on your server (sorted by month and year) and a naming convention that makes sense to your team to archive that documentation. This will help you find the documentation you need quickly, both for the auditors and for internal conversations amongst management.
If you already have the support electronically saved, you can upload it directly to the auditor’s portal to fulfill requests, saving you time in scanning files! Remember, the longer it takes to get the auditors the supporting documents that they have requested, the more likely it is that your audit will exceed the timeline set, and you will incur additional costs.
2. Perform Monthly or Quarterly Reconciliations
Rock star accountants already do this, so pat yourself on the back. If you are an aspiring rock star, here is where to begin.
The first is to set aside time during your month end close to check the accounts with the most activity, like cash, accounts receivable, accounts payable and your revenue accounts. You will do a quick skim of the details for those accounts to see if anything unusual or unexpected jumps out. Unusual is a fun word and is open to interpretation. It might be that you expected that two-billion-dollar sale to hit this month but are perplexed by a new customer that you had not heard of before suddenly showing up in your sales journal. Those are the things to investigate and dig into.
Then, you want to make sure that your subledger (the detail you just looked at) agrees to the trial balance at month end. This can be tricky, depending on your accounting system! Some systems will automatically post any adjustments when, for instance, a receivable gets paid on the first of the month, so your end of the month statement does not agree to the trial balance when you look at it. Your goal is to make sure that all transactions are captured in both locations.
Some of your reconciliations can be pushed off and looked at quarterly, depending on their activity. These will take more time to get through (because you are looking at a longer time frame), or maybe more complex. That said, once you have reviewed the details and reconciled everything to the trial balance (and saved your documentation as to point one, right?), you can rest assured that you will not have to look back past the three months until the auditors come out.
By setting aside a little time during the year to review and reconcile those accounts, you have your notes and documentation ready and waiting whenever the auditor or management comes knocking with their endless questions.
3. Plan and Prepare
The good news is that your auditor will not show up randomly out of the blue. Make yourself a part of the planning process with your auditor. When they reach out to see how the year has gone and get your engagement letter ready, talk to them about what works for your team, or what you would like to change going forward. This can be anything from discussing the timing of the audit procedures to asking to see templates of what works best for the auditors as support. You can even ask to have the audit request list made live as soon as possible after signing the engagement letter, so you can start providing documents as soon as possible.
Rather than be overwhelmed and throw everything and anything at the auditors, dedicate some time (maybe 30 minutes a day, or two hours once a week) to upload documents in fulfilment of their requests. Your auditor can likely help by getting a priority list together for you and work out a timeline with you for receiving those items, picking samples and coming out to your offices.
While the majority of auditors prefer to have most of the requested information at least two weeks before the audit is scheduled to start, anything you provide earlier can help them get a jump start on the work. Bear in mind, getting that information to your auditors early does them no good if the information is incomplete, or inaccurate. If something is missing, it becomes the focus of the audit and delays all other progress.
4. Assign Responsibilities
You are not facing the audit alone. Lean on your internal team and their expertise to help fulfill audit requests. Have your collections specialist pull together the estimate for the allowance on doubtful accounts receivable. Your inventory manager probably knows what products are not selling and whether they are worth keeping around or should be scrapped. Your payroll specialist can be your best friend in getting together the information needed for those requests. And your boss? Oh no, they are not excluded either! They can pull board minutes or update the high-level discussions with the auditors about the year. Operations managers can speak to the peaks and troughs in your revenue for the year and any major transactions that were big wins for your sales team.
Empower them to ask the auditor what it is they need to see in support of the requests. Just keep an eye on them, to make sure they are not the ones throwing a wrench in the timeline to complete the audit.
5. Communicate Throughout The Year
Remember how we said that unexpected things can come up? That does not just mean during the audit itself. You can come across an unusual transaction at any time during the year. Whether you are absolutely stumped or just need a sounding board, reach out to your auditor and see if they have any insight or experience with this new challenge.
The same holds true for new accounting guidance! Your auditor would rather hear from you as you are weighing your options and looking for solutions rather than finding out what you did after the fact. They might also have good resources for you to lean on and take into consideration.
6. Be Available and Responsive
The schedules align, you pulled all the support that could ever be asked for and there is still one component missing…the auditor wants to speak with you. Most of the time, if the auditor comes to you with questions, they want to understand the story behind the numbers. After all, your auditors are human, too! They want to meet with you and get insight into your business and into the how and why of your decision making. Those qualitative factors mean just as much as the numbers themselves. The auditor’s efficiency depends in large part on your availability and that of your team. This is not the time for a cruise or an extended backpacking tour in Europe (though that will definitely make your audit team envious).
Your audit team may have additional questions once the work moves up through their review process, too. Sometimes, this means retreading ground you have already covered, just to make sure that the facts are squared and properly documented in the auditor’s work papers.
Of course, there is always the chance that something unexpected rears its ugly head during your audit. That is why you stay connected with your auditor and let them know about the pushes and pulls on your time, your attention and the timeline for the audit. A little collaboration will go a long way to smoothing those issues in real time.
Just as you should be available to your auditor, your auditor should be available to you. Give yourself (and your auditors!) the grace to pivot to a more pressing issue, but also the respect to keep in touch by returning phone calls or emails. Even a short email saying, “Hey, sorry I missed your call, I have been out with a family emergency. Can we reschedule? Or can I connect you to a team member who can help you?” goes a long way!
7. Discuss Audit Results
You have done it! Another year’s audit is in the books. Before you sign that representation letter, schedule some time with your auditor to talk through the journal entries that they have proposed and any issues they noticed along the way. Take time to ask any questions on your audit report that you may have. This is the best time to talk about what worked for your team and auditor during the year or set up a strategy for how to improve in the coming year.
Thoughtful preparation sets the foundation for a successful audit. The team at Weinstein Spira is committed to guiding clients through a smooth, efficient process while maintaining the highest standards of quality. A little planning now can make all the difference later!
