How to Prepare for an Audit?

How to prepare for an Audit? Preparation of an audit report can be intimidating for most companies. But it doesn’t have to be. When preparing for an audit report it’s important to understand the audit report format, spend time looking for good audit report examples, and understand the purpose of an audit report as well as an audit opinion.

Prepare for an Audit

When should we perform a financial statement audit?

Deepika explained that there are certain triggers for an audit, including:

  • Investors request an audit, which typically happens around Series C funding.
  • Your company is preparing to go public. Companies are required to have three years of audited financial statements before they can sell their stocks. 
  • You’re planning to sell your business. Purchasers like to see two to three years of audited financial statements. 
  • You are looking to have extended credit from major suppliers.
  • Your business has federal or state government funding. 

Who should do the audit?

One of the first steps in audit preparation is determining who will perform the audit. Wanda explained that accounting firms that conduct audits can be divided into two groups: the Big Four accounting firms, and other smaller and sometimes regional or specialist firms. When deciding which is right for you, budget is often a key consideration, with Big Four auditors typically being much more expensive. (A financial statement audit can run between 50–150K.) Some other things to consider include:

  • Do they have experience in your industry?
  • Do your investors have a preference for Big Four auditors?
  • Have prospective auditors done their homework with regard to your business’s unique needs?
  • Do they have a global presence? This can be important if you plan to expand internationally. 
  • Do they have any financial interest in your company? You shouldn’t work with auditors who do.
  • Do they have enough resources to complete the audit before your deadline?

Types of Audit

Three different types of audits can be performed:

  • External audits are performed by an external third party. External parties provide more unbiased opinions since they are not subject to conflicts of interest.
  • Internal audits are performed by internal employees of a company or organization. They are not usually distributed outside the company, and therefore are mostly for internal use.
  • Government audits are performed by government entities to ensure that the prepared financial records do not misrepresent taxable income. The audits are conducted by tax collectors, such as the Internal Revenue Service (IRS) in the U.S. and the Canada Revenue Agency (CRA) in Canada.

How to prepare for an audit.

Plan ahead

It should come as no surprise that the most important step you need to make in preparing for your audit is to plan ahead. You’ll need additional time in the lead-up to the audit, as well as the extra resources required to do final preparations before you start official work on it. The entire finance team will have to ensure they have the necessary resources and time needed to plan and set expectations for the audit.

This is a crucial element of ensuring the process is as stress-free as possible for all involved. Although year-end audits only need to be completed annually, you should be thinking about it throughout the year. Keep records and schedules as up-to-date as possible as this will reduce the lead-in time you need for each yearly audit.

Types of Audit

Brush up on accounting standards

Accounting standards are almost constantly changing and this may affect your organization and its year-end audit. Familiarize yourself with any accounting development as it could affect how you’re able to track data or operate. Ensuring you keep on top of any new industry standards will make the auditing process easier in the long run, as well as help to identify where you may need more support to comply with regulations.

Standards often require certain training to be delivered to professionals, so it’s essential that you maintain a good understanding throughout the year to safeguard your company and its internal figures. This can also hammer home the value of attending industry conferences, as they can be an effective way of keeping your finger on the pulse of accounting.

Reconcile all accounts

Ahead of the audit, you need to ensure all of your accounts are as straight as possible. This involves paying any bills and employee expenses that may have been left until now, as well as collecting invoices. This will help you give the most accurate projections and analysis during the audit. It may also involve resolving any admin issues, such as ensuring contractual amendments are with the original contract so that there’s no confusion over revenue.

Learn from previous errors

Audits rarely go completely smoothly, especially the first time you complete it or in a year when the organization has undergone a number of significant changes. Most year-end audits will have adjustments made and these can be a fantastic starting point to help you draw more accurate conclusions this year. Schedule a planning meeting with those performing the audit and decision-makers to see how you can navigate the previous errors made and improve the accuracy of this year’s audit.

Draw up a timeline

Auditors will normally ask for certain evidence of your year-end audit at certain deadlines. You need to be clear on when these are and what you need to have achieved as an organization to ensure you can supply the right documents at the necessary time. Make sure you are allowing enough time for things to not go to plan.

In addition, it’s always a good idea to have a regular team meeting so that everyone understands where individuals are at with their tasks. This helps to reduce the amount of time wasted if any member of staff has an unplanned absence in the lead-up to the audit.

Divide responsibilities

Each element outlined on the timeline should be assigned to a person, and they should then break down the smaller tasks that need to be achieved. This makes the whole process much more manageable and quantifiable for both the team and decision-makers. You should designate clear internal deadlines for work to be finished, which should be an appropriate time before the hard deadline given by the auditor.

This should give you time to fight fires and resolve any last-minute problems that arise. With this in mind, your timeline should tackle the most difficult or time-consuming areas wherever possible first.

Prepare your paperwork

You should make sure you have all the items on your auditor’s preparation checklist ahead of the start date. This information should be submitted electronically and usually includes:

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