KPM

Non-GAAP Metrics Reduce Billing Bottlenecks Auditor Independence Accounting Methods Year-End Financials Auditing Revenue Recognition Inventory Management System Access To Capital M&A Due Diligence What Is Materiality Job-Costing Systems Technology Bank Reconciliation Cybersecurity New Segment Expense Disclosure Rules QuickBooks To Prepare 2024 Budgets Safeguard Organization Assets Offsetting Rules Inventory Count negotiation M&A Accounting Monthly Financial Close Shareholder advance Payroll challenges Prepare for audit QuickBooks income tax Crypto Accounting Percentage-Of-Completion Financial Statement PCAOB Overhead Mileage in QuickBooks UTPs Cross-Train Employee Benefit Plan Audits Accounts Receivable

Are You Ready For The Upcoming Audit Season?

An external audit is less stressful and less intrusive if you anticipate your auditor’s document requests. Auditors typically ask clients to provide similar documents year after year. They’ll accept copies or client-prepared schedules for certain items, such as bank reconciliations and fixed asset ledgers. To verify other items, such as leases, invoices, and bank statements, they’ll want to see original source documents.

What does change annually is the sample of transactions that auditors randomly select to test your account balances. The element of surprise is important because it keeps bookkeepers honest.

Anticipate Questions
Accounting personnel also can prepare for audit inquiries by comparing last year’s financial statements to the current ones. Auditors generally ask about any line items that have changed materially. A ‘materiality’ rule of thumb for small businesses might be an inquiry about items that change by more than, say, 10% or $10,000.

For example, if advertising fees (or sales commissions) increased by 20% in 2021, it may raise a red flag, especially if it didn’t correlate with an increase in revenue. Be ready to explain why the cost went up and provide invoices (or payroll records) for auditors to review.

In addition, auditors may start asking unexpected questions when a new accounting rule is scheduled to go into effect. For example, private companies and non-profits must implement new rules for reporting long-term lease contracts starting in 2022. So, companies that provide comparative financial statements should start gathering additional information about their leases in 2021 to meet the disclosure requirements for next year.

Reduce Audit Adjustments
Ideally, management should learn from the adjusting journal entries auditors make at the end of audit fieldwork each year. These adjustments correct for accounting errors, unrealistic estimates, and omissions. Often internally prepared financial statements need similar adjustments, year after year, to comply with U.S. Generally Accepted Accounting Principles.

For example, auditors may need to prompt clients to write off bad debts, evaluate repair and supply accounts for capitalizable items, and record depreciation expense and accruals. Making routine adjustments before the auditor arrives may save time and reduce discrepancies between the preliminary and final financial statements.

You also can reduce audit adjustments by asking your auditor about any major transactions or complicated accounting rules before the start of fieldwork. For instance, you might be uncertain how to account for a recent acquisition or classify a shareholder advance.

Plan Ahead
An external audit doesn’t have to be time-consuming or disruptive. The key is to prepare, so that audit fieldwork will run smoothly. Contact us to discuss any concerns as you prepare your preliminary year-end statements.

Related Articles

Talk with the pros

Our CPAs and advisors are a great resource if you’re ready to learn even more.