How To Prepare For A Financial Audit 2024

Financial audits are necessary for every company; they help examine financial records and reveal their accuracy or lack thereof. Auditors conduct thorough checks of a company’s financial records to ensure they are properly maintained. Regulations mandate that public companies must be audited, while private companies often conduct audits to attract investors and lenders.

One private software company lost a lucrative business deal worth millions of dollars because it lacked an audited report. Believe it or not, a financial audit is a necessary process. More often than not, companies dread audit processes due to their demanding nature. One reason for this is the unpreparedness of companies for the process.

If you want your company to have a stress-free yet successful audit, follow our guide. This post covers everything you need to know 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 values stated are complete and accurate. A financial audit guarantees investors, customers, creditors, regulators, and other stakeholders of a company’s financial standing. An audit helps a company straighten up its financial records, prevents bookkeeping errors, and ensures compliance with accounting and regulatory standards.

Financial Audit – Types

There are three types of audits: Internal, External, and Government Audits. Each serves specific purposes, which we will consider shortly.

Internal Audits:

These are carried out by the company’s internal auditors (staff) and are used primarily for internal purposes. The exercise provides a clearer picture of the company’s internal controls, risk management, and governance.

External Audits:

External auditors conduct these audits, which are free from bias regarding the figures. These audits provide an unbiased and clear picture of a company’s finances, making them more reliable. The reports from these audits are usually presented to the general public and regulators.

Government Audits:

These are performed by government agencies to ensure companies comply with laws and regulations. For example, the Internal Revenue Service (IRS) audits firms to confirm whether their tax returns are accurate in relation to their taxable income.

Financial Audit – The Process

Although different audit types exist, the audit process is generally the same. A financial audit process involves three main steps:

Planning:

Every process requires planning, and an audit is no exception. Planning involves preparing for the task ahead, assembling documents, selecting a team to handle the process, and choosing a timeline for its completion.

Fieldwork:

This is where the actual audit takes place. The auditors will interface with your staff to conduct a complete audit. They investigate, take notes, check records, and more.

Reporting:

After the audit, a report is drafted. The final report includes a financial statement with related footnote disclosures, along with the auditor’s opinion, stamped and signed. This audited financial statement is then ready for public use.

How to Prepare for an Audit

Preparing for an audit can be challenging, but with proper preparation, it can be as stress-free as possible. Preparation is key to a successful audit.

1. Start with a Good Plan

Planning ahead is always a great way to start. Begin preparing weeks or months before the audit to get everything ready. This includes gathering all records for the entire fiscal year. If done properly, the audit process will be smooth.

During preparation, assign a finance staff member to be in contact with the auditors throughout the year. Keep all records up to date to avoid last-minute catch-up.

2. Stay Updated on Accounting Standards

Accounting standards and regulations change over time. It would be difficult for the accounting team to adjust past records to align with the new standards. Therefore, the team should stay updated and trained on new standards, such as those from the Financial Accounting Standards Board and the Internal Revenue Service.

3. Review Past Audits

Before starting a new audit, review past audit records to identify and correct any errors or misrepresentations. It helps track changes and growth in your organization over the past year. Communicate any non-financial changes, such as new industry practices or accounting standards, to the auditors as soon as possible.

4. Prepare an Audit Support Team

Prepare a list of documents the auditors will require and create an audit support team to assist during the process. Schedule a meeting with the team to plan activities during the audit. Ensure each team member is responsible for specific documents and tasks. Regular meetings for reviews and information exchange will help the process run smoothly.

5. Organize Your Documentation

Before compiling documents for the audit, reconcile all accounts and review invoices, bills, and vouchers. Ensure everything is in order. Required documents may include:

• Accounts receivable and accounts payable aging reports
• Cash disbursement details
• Cash reconciliations
• Company articles of incorporation, partnership or LLC agreements, debt agreements, and stock compensation plan agreements
• Complete the general ledger for the audit period
• Copies of leases and other important contracts
• A detailed list of accrued expenses
• A detailed list of prepaid expenses, fixed assets, and intangible assets to roll forwards
• Equity roll-forward
• The final trial balance for the period under audit
• Inventory list and inventory shipment/receipt records
• Minutes of the Board of Directors
• Payroll register
• Revenue details by customer and by invoice, with any deferred revenue listed and the deferred revenue details (if applicable)

This list is not exhaustive, and other relevant documents may be requested by the auditors.

Read: ATS: Become ICAN-Certified Accountant After High School (2024 Guide)

6. Ask Questions

Before fieldwork begins, ask the auditors any questions you have. Clarify the documents they requested to avoid misunderstandings. You can also recommend important documents they may have overlooked.

7. Be Available Throughout the Process

As the company owner, you should be available during the audit to answer questions or provide information that only you may have. Ensure that the audit support team members are also available and focused on the audit.

8. Review the Results

As the audit progresses, get regular feedback from the auditors. Ensure that all documents required for the final report are provided. After the audit, hold a meeting with your staff to evaluate the results and plan for improvements.

Frequently Asked Questions

What’s the difference between Accounting and Auditing?

Accounting is the routine process of recording and reporting a company’s financial activities, following the strict guidelines of Generally Accepted Accounting Principles (GAAP). These standards ensure that the financial statements a company produces are accurate and reliable.

Auditing, on the other hand, is a less frequent but essential process that checks the accuracy of a company’s accounting practices and financial statements.

Audits ensure that financial statements are correct and trustworthy. Internal and external stakeholders often require audits to confirm the validity of financial data.

Conclusion

Following these tips can make the audit process a positive experience. Now you’re all set for the audit—have a stress-free audit.

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