How to Prepare for Your First Financial Audit

Co-authored by Hannah Franklin

Whether your goal is to provide assurance to regulators, lenders, or future business partners, or to give yourself peace of mind as a business owner, a financial statement audit is an important event in your growing company’s journey. The final deliverable of an audit opinion attached to your financial statements will allow you to distribute those financial statements to interested third parties that can safely rely on them to make investment or business decisions.

However, even for those with many years of accounting experience, understanding what is needed to help your auditors complete your first audit can be overwhelming. It is normal to be uncertain about which steps come first, how much work will be required, and what everyone can do to make the audit as productive and effective as possible.

Here are steps that successful companies take to make their first financial statement audit run smoothly, and ways an external audit can help prepare businesses for continued success:

First Steps

First, it is essential to have a good handle on the period under audit, and just how long your first financial statement audit is likely to take. Keep in mind, your first audit is likely to take more time than those that follow, as your auditors will need to spend some time gaining a thorough understanding of your business and its unique processes and systems.

One major reason first-year audits may be more involved than subsequent audits is what auditors refer to as “beginning balance procedures.” For instance, say you need an audit of your financial year ending December 31, 2020. In order to ensure that the numbers for those 12 months are correct, the auditors will need to perform testing procedures on the account balances as of December 31, 2019. In other words, opening balance sheet audit procedures seek to provide a full picture of exactly what activity occurred during the financial year under audit, and the first step in doing so is getting comfortable with the balances as of the beginning of the year.

Another reason first-year audits are more challenging than subsequent years is that you, as a client, are learning what the auditors need, and by the same token, the auditors are learning about your company, its people, and its procedures. The best audits are true collaborations, and the steps you put in place to minimize inefficiencies and provide the necessary information will yield major dividends.

Documentation

Making sure auditors have all they need to perform the audit is the single most important step you can do to ensure an efficient and accurate audit.

The documents, covered in the “prepared/provided by client” (PBC) list, usually include the following, among other items:

  • Final trial balance for the period under audit
  • Complete general ledger for the period under audit
  • Cash reconciliations
  • Accounts receivable and accounts payable aging reports, showing how much you are owed and how much you owe—and for how long
  • Detailed list of prepaid expenses, fixed assets, and intangible asset roll-forwards
  • Inventory list and inventory shipment/receipt records
  • Detailed list of accrued expenses
  • Equity roll-forward
  • Revenue detail by customer and by invoice, with any deferred revenue listed and the deferred revenue detail (if relevant)
  • Cash disbursements detail
  • Payroll register
  • Agreements having to do with how the company is structured: company articles of incorporation, partnership or LLC agreements, debt agreements, and stock compensation plan agreements
  • Minutes of the Board of Directors

Additional requests will likely come later as the auditors make selections for testing, and as questions arise; however, by giving them what they need in a timely manner, you will help drive the audit to completion.

Ready for an Engagement?

Before the auditing firm begins its work, it will send you an engagement letter. This is a contract laying out the firm’s duties and responsibilities, as well as the scope, objectives, and approach it will take when providing its audit services. The letter will also note the fee and any responsibilities your company undertakes, such as providing accurate documents on time. At this point, it is helpful to give the auditors a single point of contact at your company to streamline requests and minimize the chances of crossed wires once things get underway. It is also important to make the auditors aware of external reporting deadlines (whether desired deadlines or regulatory deadlines) when scheduling the audit.

A First-Time Audit Timeline

No two audits are exactly the same, but here is a basic timeline:

Week 1: Planning and preparation. The audit team will spend this time planning the mechanics of the audit. How many auditors will be on your audit team? Will they be working at your company’s offices, or will the audit work be performed partially or entirely remotely? Has a main point of contact been established, briefed, and introduced?

Weeks 2 to 4: Testing Procedures. This is where things get exciting! The auditors will spend this time looking over and testing the information you have provided. This involves making sample selections from the details you have provided. Auditors cannot review every transaction that occurs during the year, so they take a sampling approach to determine the accuracy of the details provided. In order for auditors to determine the accuracy, they will need additional support that backs up the transactions made during the year such as invoices, bank statements, shipping documentation, contracts, etc. This will help the auditors determine if transactions have been classified correctly within the company’s financial statements. If not, what is causing the discrepancy? And what else needs to be examined to get a full picture?

Weeks 5 to 6: Reporting. Any remaining loose ends are dealt with, one by one, and the auditors issue the final audit opinion that is attached to the financial statements. The auditors also issue communication letters discussing audit methods, scopes, and any findings, which may include advice about suggested improvements to company procedures and methods for the future.

As you can see, a first-time audit typically takes about a month and a half, though many variables can extend that. For instance, if there have been multiple rounds of questions and changes, that will keep things in flux longer. Make sure to schedule a first-time audit at a time when you and your company’s staff can give it the attention it deserves, and deal with any questions efficiently. Also, make sure you have allowed enough time for any internal or regulatory deadlines.

You will also need to pencil in more time if you need a tax provision completed. The tax provision process includes estimating the amount of income taxes that will be reported on financial statements, including the related necessary footnote disclosures, using generally accepted accounting principles (GAAP). The provision cannot be done until all audit adjustments have been posted to the trial balance, and it requires a tax specialist unless you already have someone on staff who can perform this role. If you do need a tax provision, make sure you tell the auditors before they begin, because it can lengthen the audit process.

Benefits of an Audit

Nobody wants to find mistakes, but remember that the purpose of the audit is to make sure the financial statements you are sharing with outside parties are accurate and can be relied upon. Audits are useful to discover areas where transactions may not be accounted for correctly, how to correct them, and how to improve accounting procedures and methods going forward. Although a first-year audit is not any busy company’s favorite activity, it is an undeniable sign that the company is maturing and growing. Through careful planning and by getting a smart and effective audit services team on your side, you will be able to ensure that the audit process runs smoothly and produces value-added results you can rely upon.

How Holtzman Can Help

Audit & AssuranceIn today’s ever-changing regulatory climate, the right guidance is more important than ever. With diverse experience across many industries, Holtzman has earned a strong reputation for delivering independent audit services in a customized, risk-based manner to help our clients achieve their financial objectives and strengthen their business value. With clients ranging from startups and middle-market leaders, to large multinational conglomerates, we dedicate ourselves to delivering stellar results for our clients. Learn more about our Audit & Assurance Services.

 

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