Financial audits are necessary for every company, they help examine companies’ financial records and reveal the accuracy or otherwise. Auditors do a thorough check of the financial records of a company to certify the records are properly kept. Regulations make it mandatory for public companies to be audited whereas private companies carry out an audit to attract investors and lenders.
There was a particular private software company that lost a good business deal worth millions of dollars because it does not have an audited report. Believe it or not, a financial audit is a necessary evil. More often than not, audit processes are highly dreaded by companies due to their demanding nature. One of the reasons for this is the unpreparedness of companies toward the process.
If you want your company to have a stress-free yet successful audit, just go through our guide here. This post covers everything about auditing and how to prepare for it.
Financial Audit – What and Why Is It?
A financial Audit is an appraisal of a company’s financial statements to ensure the stated values are complete and accurate. A financial audit guarantees investors, customers, creditors, regulators, and other stakeholders of the financial standing of a company. An audit to a large extent helps a company straighten up its financial records. It helps prevent bookkeeping errors and ensures compliance to accounting and regulators’ standards.
Financial Audit – Types
There are three types of audits thus Internal, External, and Government Audits. Each of them has specific purposes as we shall consider shortly.
These are carried out by the company’s auditors (staff) and the report is basically used for internal purposes only. The exercise gives a clearer picture of a company’s internal controls, risk management, and governance.
These are executed by external auditors as such it is devoid of prejudice as to the figures. External audits give an unbiased and clear picture of a company’s finances hence it is more reliable. It is the report from this audit that are usually presented to the general public and regulators.
These are performed by government agencies to ensure companies comply with laid down laws and regulations. An example of that is the Internal Revenue Service (IRS) which audits firms to confirm if their company’s tax returns are accurate viz-a-viz their taxable income.
Financial Audit – The Process
Although there are different audit types, the audit process is the same for the three types. A financial audit process is a three steps process as follows:
Everything requires planning and an audit process also starts with planning. Planning has to do with preparing for the task ahead. This involves assembling documents, picking a team of staff to handle the process, and choosing a timeline for its completion.
This phase is where the work properly commences – the real deal and core of the operation. The auditors interface with your staff to carry out the complete audit process. They investigate, take notes, check records, and so on.
After every process or activity, there is a report. Hence, the conclusion of an audit process is reporting. The auditor draft the financial statement with related footnote disclosures. The final report is a financial statement with the auditor’s opinion attached then stamped and signed. With that, the audited financial statement is ready for public consumption.
How To Prepare For An Audit
Preparing for an audit is no easy task but with special preparation, it can be as tension-free as possible. Apart from the associated challenges of an audit exercise, preparation will make the process a success.
1. Start with a good plan
Planning ahead of an audit is always a great way to start. Begin way before the audit like a few weeks or months just enough time to get everything ready. This involves getting all records for the entire fiscal year. If this is done properly the audit process will be a smooth one.
As you prepare for the audit, this stage entails assigning a finance staff to be at the beck and call of the auditors. The staff must be in touch with the auditors throughout the year and inform them of any development that could hamper the audit process. In addition, every record must be kept up to date throughout the year to avoid last-minute catch-up.
2. Constantly check accounting standards and adopt new ones
Accounting standards and regulations change from time to time. It would be a painful experience when the accounting team has to go way back to adjust past records to align with the new standards. Hence, it is the duty of the accounting team to be up to date with the changes throughout the year.
Such standards include Financial Accounting Standard Board, Internal Revenue Service, etc. Since the new standard would form the basis of the audit so the accounting team must be updated and trained to cope with the new standard.
3. Review past audits
To proceed, it’s always good to refer to the past. In this case, as you prepare for a new audit it makes sense to review recently past audit records. The review will expose errors or misrepresentations – do ensure that area is covered in the new audit to avoid a repeat of such errors. This is a way of tracking the changes or growth that had taken place in your organization in a space of one year. Note and communicate non-financial changes (it might be new industry practice or new accounting standard) to the auditors as soon as possible.
Prepare the list of documents that the auditors would require for their job, hence get them ready for them. Not just that, create an audit support team or task force and prepare them before the audit. Schedule a meeting with them for planning your activities during the audit process. The team is to get documents ready for the auditors and deliver them when required in a timely fashion.
There is nothing as embarrassing as when a document is a request and the staff could not produce it. Such a situation delays the audit and sends a bad signal to the auditors that your company is not organized. Therefore, assign each task force member to a particular document. Also, assign timelines to their activities during the audit.
Furthermore, ensure the group meets regularly for reviews and information exchange that would lead to smooth running of the exercise. Other employees should not be exempted from the audit, they should be kept abreast of the goings-on during the audit process.
5. Organize your documentation
All accounts must be reconciled before putting the documents that would feature in the audit together. Check every invoice, bill, voucher and do the needful regarding every single one of them. Carefully dot every “I” and cross every other “T” before compiling the documents. Ensure no stone is left unturned if you want the audit process to be a smooth one for the auditors.
Documents required for a stress-free audit process in alphabetical order include:
Account receivable and account payable aging reports
Cash disbursements detail
Company articles of incorporation, partnership or LLC agreements, debt agreement, and stock compensation plan agreements
Complete general ledger for the audit period
Copies of leases and other important contracts
A detailed list of accrued expenses
Detailed list of prepaid expenses, fixed assets, and intangible assets roll-forwards
The final trial balance for the period under audit
Inventory list and inventory shipment/receipt records
Minutes of the Board of Directors
Revenue detail by the customer and by invoice, with any deferred revenue listed and the deferred revenue detail (if applicable)
The above list is not exhaustive, it depends on the company. Also, other relevant documents may be requested by the auditors apart from the above.
6. Ask questions
Ensure you ask the auditors all the questions you have before the fieldwork commences. This stage is an important one because all the requirements of the audit would be revealed by such queries. Furthermore, ask for clarifications as to the documents they are requesting to avoid any misinformation. You can also recommend any important document they fail to ask for to them if you have them.
7. Be available throughout the duration of the process
Audit time is not leave time unless it’s an investigative audit that arises as a result of suspicious activities of an accountant or member of staff. Such an officer would be given an indefinite leave to prevent him from interfering with the audit process. However, we are talking about a financial audit, hence you as the company owner have to be available throughout the audit duration.
It’s not enough to provide all necessary documents and records for the auditors to work with. It’s highly important for you to be available. They might need to ask you questions or require some information only you are privy to. Apart from you, ensure the audit task force members are always in contact with the auditors. They should not be engaged in other activities that would take them away from the audit work.
8. Review the results of the audit process
As the audit progresses, ensure you get constant feedback from the auditors. Ensure, all documents they require to prepare their final reports are availed them during or after the fieldwork. After the exercise, call a meeting with your staff and do an evaluation based on the feedback from the auditors. Use the information acquired to plan an improvement of the process of your company against the next audit.
That’s about it.
If you religiously follow all the tips highlighted above, the audit process shall be an experience to look up to. Now you are all set for the audit, do have a stress-free audit.