27 Jan Ready, Set, Audit
If your business issues audited financial statements and follows a calendar year end, your external audit procedures have already begun. At a minimum, you have signed an engagement letter, sent over preliminary financial statements, and allowed your CPA to observe any year end physical inventory counts. However, there are steps you can still take to streamline audit fieldwork.
Think like an auditor
An external audit is less intrusive if you anticipate your auditor’s document requests and inquiries. Auditors typically ask clients to provide similar documents year after year. They will 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 will 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.
Prepare for audit inquiries by comparing last year’s financial statements to the current ones. Your auditor is likely to ask questions about any line items that have changed materially. A ‘materiality’ rule of thumb for small businesses might be to inquire about items that change by more than, say, 10 percent or $10,000.
Review 2015 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 (GAAP).
For example, auditors may need to prompt clients to write off bad debts, evaluate repairs, and supplies 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.
An external audit does not have to be a time-consuming or disruptive event. The key is to prepare so audit fieldwork will run smoothly.