How to Prepare for an Audit: Your Ultimate Guide

The auditing process is designed to carefully examine your company’s financial records and make sure they’re accurate and honest. Usually, that means going over your business records with a fine-tooth comb.

Unsurprisingly, preparing for an audit can often be a stressful experience, one that leaves your company dreading the end of the fiscal year. But that doesn’t have to be the case. With the right planning and know-how, you can streamline the audit experience and get on your way.

In this article, we’ve brought together what we think are some of the most important things to know when it comes to preparing for an audit. From general information about types of audits to a step-by-step plan to get through your audit with as little hassle as possible, you’ll find whatever you’re looking for below.

AuditWhy Auditing is So Important

Auditing is all about keeping companies honest and establishing trust and efficiency in the greater financial markets. Audits prevent companies from misrepresenting their financial health through false, misleading, or simply inaccurate financial records. 

When investors and creditors are looking to make decisions about whether to invest in a company, they need access to trustworthy financial statements that have been vetted in line with the appropriate accounting standards. 

There are also several benefits that audits can offer businesses, including:

  • Discovering mistakes. A successful audit can offer insight into areas of your business where you might be routinely making mistakes that can impact your successful running of it. 
  • Refining accounting procedures. Going over your company’s own accounting and finding mistakes and miscalculations will allow you to improve your accounting procedures, which in turn will improve the running of your business. 
  • Practicing the process. An audit is a time-intensive process, but the more you practice it, and the more seriously you take it, the easier and faster future audits will be.

Types of Audits

In general, there are three broad categories of audits, which include: 

  • Internal Audits. Internal audits are undertaken by a company’s own employees and are typically reserved for internal use only. This type of review can give a company a better understanding of its internal controls, risk management, and governance.
  • External Audits. External audits are carried out by a third party, and for that reason can give an even clearer picture of your company’s finances by avoiding any conflicts of interest. 
  • Government Audits. Government audits are performed by government agencies.  For example, in the US, Internal Revenue Service audits aim to ensure a company’s tax return provides an accurate picture of taxable income. 

From there, your company might require other types of specific audits, including an employee benefit plan audit and a Provider Relief Fund audit. 

Employee benefit plan audits help ensure the financial integrity of employee benefit plans (EBP), with the ultimate goal of assessing the plan’s current and future ability to pay benefits to its participants. 

While the aim and scope of an employee benefit plan audit may be different, its process is very similar to that of a general audit. To learn more about employee benefit plan audits, you can find additional articles here. For answers to common questions about employee benefit plan audits, including whether or not your employee benefit plan might require an audit, you can learn more here.

Provider Relief Funds are a government initiative created to deal with the effects of the COVID-19 pandemic on healthcare providers. Depending on the size of the funding given, PRFs may be subject to a single audit or a financial-related audit. To learn more about PRF audits and whether your company might require an audit, click here

Audit

First-Year Audits

If audits are stressful, first-year audits can be even more so. Even if you and your team have plenty of accounting experience, figuring out how to prepare for your first financial audit can still feel overwhelming. 

While our general advice for how to prepare for an audit will still hold true for a first-year audit, here are a few additional things to keep in mind as you prepare for a first-year audit:

  • Understand the timeframe. A full financial statement audit can take several weeks to finish, but your company’s first audit will likely take a little while longer, as auditors will need more time to familiarize themselves with your business. 
  • Be prepared to offer extra information. For a first-year audit, auditors will engage in what’s known as “beginning balance procedures,” also known as an opening balance sheet audit. Essentially, auditors will examine financial figures immediately preceding the financial year under audit. This will help them get a better picture of what your company’s finances looked like at the start of the year.
  • Lean into collaboration. Just as the auditors are learning more about you and your business, you’re getting to know the auditors and what exactly they need from you — working well together can help minimize friction and speed up the entire process. 

AuditNonprofit Audits

For a not-for-profit entity, the goals of an audit are slightly different. You won’t be trying to reassure investors; instead, you’ll be providing assurances to regulatory bodies and donors that the organization is being run efficiently and with best practices in mind. 

Fortunately, preparing for a not-for-profit audit is similar to preparing for any audit. There are several general steps you’ll want to take, and a few particulars you’ll want to be aware of — and as usual, we’ve got you covered if you want to learn more about how to prepare for your first not for profit audit.

Because not-for-profits have unique financial logistics, they can be subject to special types of audits as well. If your not-for-profit organization receives federal funding, for instance, it might be subject to Single Audit requirements under the OMB’s Uniform Guidance. But what exactly does that mean?

Essentially, a Single Audit consists of a normal audit of your financial statements, in addition to an audit of compliance over major federal programs. A Single Audit is required when an organization’s federal expenditures exceed $750,000 in a given year. To learn more about Single Audits for not-for-profits, whether one might be required in your case, and how to prepare for one, click here.

It’s also good to keep in mind that risk management, especially during uncertain times, is always a good idea for nonprofits. Financial concerns might be on your mind right now, so making sure your internal systems are prepared to weather uncertainty is a good investment

The Audit Process

As we’ve seen, every audit is going to be different, but generally, the audit process can be broken down into a few common phases. These include the planning phase, fieldwork, the audit report, and the follow-up review. We’ve broken down these phases below:

  • Planning. In the planning stage, you’ll get ready for the real work of the audit by gathering documents, selecting a team of employees to handle the audit process, and establishing a timeline you want to stick to. 
  • Fieldwork. This phase encompasses the performance of the audit. The auditors will meet with your team, go over your documentation, take notes, and in general conduct their investigation. This is the core phase of the audit process.
  • Reporting. After fieldwork is completed, you will work with the auditor to draft the financial statements and related footnote disclosures. The final deliverable will be the financial statements with the auditor’s opinion attached that you can distribute to the appropriate stakeholders.
  • Following up. Before formally presenting the audit findings to the board of directors, the auditor will typically have a discussion with the audit committee and management. At this point, management may want to come up with a plan to address weaknesses uncovered by the audit. The auditor may include these ideas in the final management letter that will be presented to the board.
The fieldwork phase is the most labor-intensive phase for the auditors, during which you can expect them to take a number of investigatory actions, including:
  • Confirming balances, like bank accounts, accounts receivable, and loan balances, with third parties. 
  • Gathering extra documentation, like bank statements, contracts, and revenue records, to confirm the amounts found in your financial statements. 
  • Interviewing staff, including management, to assess your company’s internal control mechanisms. 
  • Running analytics to detect financial variances that might have gone unnoticed. 
  • Observing management processes, like a physical inventory. 

An audit is the highest level of assurance an auditor can provide, owing to the work involved and the level of documentation assessed. This makes audits different from both reviews and compilations, which offer decreasing levels of assurance. For a deeper discussion of the differences between audits, reviews, and compilations, you can learn more here

The Audit Timeline

It’s important to remember that your first audit is almost always going to take longer than a standard audit. This isn’t only because you’ll be adjusting to the process and figuring out how to make it go faster — your auditors will also need to spend some extra time immersing themselves in your financial statements and familiarizing themselves with your company’s inner workings. 

A standard audit process will typically take about three (3) months to complete. How that time is divided between the different phases of the audit process will depend upon the particular business being audited, but in general, the timeframe will be evenly split between planning, fieldwork, and reporting, with each step taking about a month. 

Common Audit Issues

AuditDepending on the type of audit you’re going to be undertaking, you’re likely to encounter some specific issues — employee benefit plan audits, for instance, often struggle with auditees that misunderstand the audit requirements. In general, however, there are three common problems that typify a negative audit experience:

  • Poor audit preparation. As we’ve seen, planning is perhaps the most important step in the audit process. If not taken seriously, the planning stage can make the rest of the audit process chaotic and time-consuming, as your company’s employees rush to find and prepare documents that should already be on hand. 
  • Inflexibility and poor communication. Cooperation is central to a strong audit performance — not simply between your employees and departments, however, but between your company and your auditors as well. Responding quickly and clearly to requests for documents, information, and other queries will help expedite the entire audit process. 
  • Wasted time. One common side effect of poor planning is wasted time. If you haven’t clearly researched your previous audits and the relevant accounting standards, you might end up spending time preparing documents and statements that your auditor ultimately won’t request. 

Steps to Prepare for an Audit

Getting ready for an audit is critical if you want the experience to be as stress-free as possible — but it’s also important for ensuring a successful audit that leaves your company with a clean bill of financial health. Following these steps will help you achieve both of these vital outcomes.

1. Plan ahead

Make sure your records are well-kept throughout the business year to ensure the auditing process is as smooth as possible. Depending on the complexity of your business, the planning stage may take a few weeks or a few months, so make sure to give yourself enough time. 

Effective planning might involve designating someone within your finance department to serve as the point of contact with the auditors, and remaining in contact with your auditors throughout the year, and keeping them abreast of new business developments that might impact the audit process. 

In general, you should make every effort to keep your records as up-to-date as possible throughout the year, so you won’t have to play catch-up in the weeks leading up to your audit. 

Steps to prepare for an Audit

2. Stay abreast of new accounting standards

Accounting standards and regulations are being updated constantly. For that reason, your financial team should do their best to familiarize themselves with any new accounting standards instituted throughout the year. This will prevent the need to go back over your financial statements and adjust them to align with new standards in the weeks leading up to your actual audit. 

Your accounting staff might also need additional training to align their work with the new standards and regulations. Giving your accounting team the resources they need — this could mean funding trips to industry conferences and expos — will help you stay fully equipped for your year-end audit. 

For good sources of accounting standards and updates, you might consult:

3. Review your previous audits

If your past audits contained any mistakes, refresh your memory of them and work to make sure they don’t happen again. You might even schedule a planning session with the auditors to discuss how best to avoid errors made in previous years. This is also a great time to visualize how your business has changed in the past few years and to get ahead of any new issues that might arise from organizational changes. 

Maybe your company has expanded, invested in new projects, or received grants or government support. Pay attention to non-financial changes as well — if your internal accounting systems or standards have changed recently, that’s something to be aware of. These changes should be recognized and communicated to the auditor as soon as possible. 

4. Create a timeline and assign tasks

By now, you should have a solid understanding of what evidence and documents your auditors will need, and when they’d like to see them by. Plan a team meeting to draw up a timeline that will allow you to deliver all the necessary documents in a regular and timely fashion.

From there, you’ll want to take the timeline and assign each item to an individual, who will then break down the task into smaller items. You’ll want to develop an internal timeline as well, to make sure you can meet the auditor’s deadlines. A good rule of thumb is to tackle the most difficult tasks first. 

Don’t silo employees off during the process. It’s a good idea to host regular team meetings to ensure everyone is on track with their individual projects, and during which team members can ask questions that might have arisen during their work. These queries can be relayed to the auditor if necessary, bringing another level of clarity to the process. 

5. Get your documentation organized

Reconcile all accounts before compiling your documents — that means collecting any remaining invoices and paying bills and employee expenses that might have been held over. From there, it’s time to get your documents in order. This is the most important step in preparing for an audit. If done well, it can ensure a quick, precise, and stress-free audit. 

The documents to be submitted usually include the following:
  • 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
  • Copies of leases and other important contracts
  • 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 the auditors what they need in a timely manner, you will help drive the audit to completion.

If you haven’t already done so, now is also a good time to come up with an organizational system for your data to make future audits easier. You might standardize your audit schedule, create a system of subfolders for storing specific transaction categories like cash, investments, and fixed assets, or investigate ways to automate the preparation of your financial statements. 

6. Ask questions

Now is the right time to ask any remaining questions before the start of fieldwork, which also means this is your last chance to head off any delays in the audit process. Don’t be afraid to ask for clarification if you’re unsure about specific items your auditor may be requesting — if you feel like you have a greater understanding of what documents might be helpful for the auditor, you should also feel free to make recommendations, if and when it seems appropriate. 

7. Make yourself available

Your audit is almost over, but it’s important to finish strong. During fieldwork, it’s critical to make yourself as available as possible to the auditor. For the most part, the auditor will have what they need in terms of documents and paperwork, but it’s highly likely they’ll continue asking questions and requesting new information throughout the process of fieldwork. 

What does making yourself available look like in a practical sense? Make sure staff members critical to the audit process aren’t scheduling lengthy vacations in the middle of fieldwork. It might also be a good idea to reschedule any routine financial meetings that could draw away staff members who might be helpful during the audit process. Understand that the auditor will also be available to you — don’t be afraid to ask for updates to better track the audit’s progress. 

8. Self-evaluate

Continue communicating with your auditor as the audit process comes to a close. When fieldwork is finished, there might still be outstanding documents the auditor would like to see. Agree on a final timeline for delivering these documents. Once the audit is finally complete, organize a meeting with your staff to go over the process, discuss results, and collect feedback on how the audit process might be improved next year. Collect this information and preserve it for your subsequent audits. 

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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