Once upon a time … there was good audit prep

“This year will be better,” you swear to it. If only doing were as simple as thinking. Oh, but it can be that way. Let me tell you a little story.

Once upon a time there was a client who had a messy office and a messier string of bookkeepers. After several years of prolonged and painful year-end closings, the business leader threw his hands in the air and cried. “Enough!” After interviewing many a potential replacement, he sighed and said, “This one has experience that is too small”; “This one has experience that is too big”; “We need one that is just right.” After a diligent search, the business was rewarded with the right person with the right skills, and they all lived happily through year-end. The end.

Sounds great, right? The happily-ever-after part, that is. We have all lived the too big/too small journey as well as the year-end hike that seemed never ending. You too can have a happy ending with a bit of effort and planning. The first step, of course, is having the right personnel on your team, but that’s a story for another day. For this moment, let’s assume you have that one checked off the list and instead talk about the nitty gritty of getting ready.

Being well prepared for your external audit team is the key to an efficient audit (note: this also applies to other services including review, tax return, or valuation). Beyond providing adequate workspace and access to information and personnel, there is advance ground work to consider. While this may seem like much ado about nothing, the truth of the matter is that planning counts.

Before the audit process even begins, the first concern to be addressed is identifying — and communicating to the audit team — exactly who will be relying on the financial statements and for what purpose. Is a sale being contemplated? Will the financial statements be utilized in a valuation of the business? Perhaps regulatory or credit requirements exist. 

Along with potential users come delivery deadlines. It is critical that timelines and expectations be established early and communicated clearly along with the precise nature of the financial statements to be issued. In circumstances where the scope of the audit will be limited in any way, a detailed discussion must take place. 

When non-attest, or “other than audit,” work is to be performed, a clear understanding must be developed for those deliverables. Whether the accounting firm will be assisting in the preparation of financial statements, supplementary information, or tax-compliance filings, the nature and responsibility for the work must be established and documented. A recent change in “Statements on Standards for Accounting and Review Standards” (SSARS) has added a new level of service that a CPA may perform, so don’t be surprised if this comes up in planning conversation. If you don’t feel like you should know what the impact is, just ask your CPA.

In addition, well in advance of the audit, a comprehensive schedule of all checking, savings, money market, investment, transaction, clearing, and debt accounts should be compiled, including complete contact information. Copies of all new debt agreements and banking resolutions should be gathered for the external auditor to facilitate planning. Closing documents for significant assets purchased or disposed of must also be available.

Have you agreed to buy or sell a significant asset, or perhaps lease a new vehicle or building? Even if you have not purchased, sold, or occupied, the documents are still necessary to support financial-statement disclosures, so be sure to pass along to audit personnel. The issuance or retirement of stock or agreement to pay off retiring owners all come with documents that should be added to the list — as should settlement agreements with taxing authorities, customers, or vendors.

Some of the most-often forgotten documents include up-to-date minutes from board and other governance meetings, including annual meetings and related resolutions. These items must be updated throughout the audit process, so be sure to stay on top of communicating to the auditor.

I would like to tell you that by providing all of this data in advance, there would be no further questions, but that would be leading you down the garden path. I can promise you, however, that a comprehensive package of information will limit the questions, and likely the disruptive aggravation so often associated with year-end. 

I will repeat, advance preparation in connection with your annual audit is critical to the process. A well-prepared organization can improve efficiency and avoid hampering progress or completion. There are always plenty of items to chase down during audit fieldwork, so be sure the early gathering is competed well before the audit fieldwork begins.

For quick reference, refer to the following list of documents that should be provided to the audit team as early as possible: loan documents, lease documents, documents relating to the purchase or sale of significant assets, settlement agreements, amortization schedules, cash and investment account statements, factoring agreements, interest-rate swap agreements, stock books, board minutes, conflict of interest policies, whistleblower policies, employee handbooks, employment contracts, policy and procedure manuals, internal-control narratives or flowcharts, benefit-plan documents, regulatory and compliance documents, court decrees, documents regarding pending litigation, commitments or contingencies, IRS, or state taxing-authority correspondence. In short, anything that supports what you own, what you owe, and what is required for inclusion in your financial statements.

Most will agree the annual audit process can be a daunting task. With a bit of organization, forward thought, and communication, the burden can be greatly reduced. The first step is opening a dialogue with your audit firm. Begin the conversation and start writing your own success story.          

Gail Kinsella is a partner in the Syracuse office of The Bonadio Group accounting firm. Contact Kinsella at gkinsella@bonadio.com