Tax season is among us, and annual audits are right around the corner. To most accounting staff, the annual audit is the bane of their very existence. To help make this process easier, here is a list of best practices when preparing for a year-end financial audit.
First off, let’s walk through the general steps of a traditional audit:
- Plan and Schedule – Before the audit is performed, the client will be notified of the upcoming audit. During this time, a schedule should be provided by the auditor to determine the scope and objectives of the examination process. This schedule should include information such as audit dates, indication of the person responsible for which information, and the types of resources and documents that will be needed.
- Initial Meeting – During the initial meeting, the client should take this time to explain their organization, facilities, processes, and staff. It is then the auditor’s job to meet with all personnel involved in the examination process, and discuss any issues that may need addressed.
- Management – The auditor will manage the entire process. He or she is responsible for communication of any changes, delays, and progress to stakeholders. At this time, the auditor will begin examining each area to assess the risk of financial misstatement by performing transaction testing.
- Audit Summary – After all fieldwork has been completed, the auditor will summarize the examination findings, and provide recommendations. The auditor will allow a discussion draft and exit conference before issuing the final report. This will give the client the chance to make final provisions, and bring forth any additional requested data.
- Final Report – The final report is issued following the drafting periods. The stakeholders will receive a written copy of all findings and nonconformities. In this report, the auditor will provide an agreed-upon date to complete corrective action.
In order to ensure an efficient and productive audit process, follow this list of annual audit best practices in part-one of this two-part blog series.
Of course this seems obvious, however, many organizations fail to properly prepare before presenting financials to the auditors. The key to an effective and efficient annual audit is to have quality, well-documented, and organized data. After you’ve received the audit plan and schedule, take a look at the data requested. Does your data make sense to you? Are there any odd transactions that may stand out? Is the audit trail clearly traceable?
There’s a good chance that if the data seems incomplete to you, it will seem incomplete to the auditors, too. Take action to determine the cause, before the auditor does. Also, it’s important to track any changes within your organization during the year including ownership, personnel changes, new facilities, and changes in technology to be presented to the auditor.
Anticipate your Duties
Have a good understanding of what role you’ll play during this process, and what information you’ll be required to supply. The more informed you are about the information you’ll need to provide, the more efficient the process will be. As for any audit, meeting deadlines are critical.
Evaluate High-Risk Areas
Common high-risk areas include revenue recognition, accounts receivables, and goodwill. Changes to the ever-evolving GAAP (Generally Accepted Accounting Principles) makes compliance in these areas more difficult than others. A preliminary function analysis is a great way to double-check data quality, and identify any unusual trends. Be sure that all reconciliations are tied to the general ledger, and that all large reconciling transactions are documented and can be explained.
Contrary to popular belief, the auditor should be viewed as a helpful tool to the accounting department. Most auditors house years of excellent experience, and harbor a wealth of knowledge. Try to view your auditor as an ally, not an enemy. Keep the lines of communication open between drafting sessions, and be proactive. Both the auditor and the accounting staff are responsible for ensuring that all financial statements provided are accurate and timely.
Consider Past Audit Recommendations
Above all, refer back to recommendations and findings in previous years. If there’s one thing the auditor will keep a close eye on, it’s the items listed there. To avoid further noncompliance, develop a plan to remediate all previous noncompliant areas in advance.
To learn more on how to effectively maintain high-quality accounting data, watch for Part Two of this two-part blog series as we discuss choosing the proper ERP (enterprise resource planning) solution for your organizational needs.
Hillary Horning is an ERP Account Executive for Pinnacle, An Advanced Imaging Solutions Company. Pinnacle is a certified Microsoft partner that provides businesses with progressive technology solutions to facilitate their business goals and development. For more information about Pinnacle or ERP solutions for your business, contact us today.