6/4/2018 0 Comments
“Well it’s getting close to year end and oh man, the audit is coming up next week. I guess we had better start to get ready.” The shakes set in at that moment. Want to not feel that way?
There are several leading indicators that perhaps there is room for improvement in the audit process. These include an inordinate number of bookkeeping-oriented journal entries, variances from the pre-established plan that seem to happen every year, inability to finish the audit in a reasonable time frame, such as in time to meet required covenant deadlines, out of scope fees, and significant amount of timeframe between on-site auditor fieldwork and delivery of audited financial statements. Do these matters sound familiar?
These delays are caused by significant bookkeeping issues not addressed by management during the year end process, inefficient or ineffective responses to auditor requests for information, and/or time lags in receipt of requests for information.
I’d like to offer a few suggestions to make the audit a much more manageable event for both you and the auditor.
Why - My initial advice is to understand WHY the auditor is doing what they’re doing, WHY they’re asking the questions they’re asking. If you understand the “WHY”, responses will be more accurate and targeted, mitigating the “back and forth” that tends to take place, and the efficiency will vastly improve. If you don’t have somebody on board that has previously been an auditor, have an open dialogue with the auditors to express the desire to better understand the audit process with the goal of improving the process.
Other questions to ask involve taking ownership in the entire set of books. Many auditors know that certain clients struggle with certain accounting matters and without violating any independence matters, they will include as part of their scope preparation of an annual workpaper that helps the organization with the accounting for that particular matter. For example, the auditor may maintain fixed asset records or prepare a prepaid expenses workpaper for the client. Talk to the auditors about these matters, obtain an understanding of the accounting and develop a plan for preparing the workpapers as a part of the monthly or annual close process. This will likely save the auditors time and possibly money.
Evaluate and develop a plan to perform the year end close - A full review and reconciliations of all balance sheet accounts especially should be performed. Of course, having a great understanding of revenues and expenses is essential too. Many organizations only perform the necessary reconciliations of certain accounts in the general ledger once per year (or as stated above, they seek the help of the auditors) instead of monthly. Common examples include updating various receivable allowances, prepaid assets, inventory, various accrued expenses. In the world of financial reporting, that could be problematic if any of these areas have material transactions throughout the year. The organization’s interim financial statements are likely to be inaccurate. As far as how it impacts the audit effectiveness, the annual assessment may be much less efficient as ongoing review.
Identify significant “one time” events - These may include major new contracts, leases, debt, or new accounting pronouncements. Make sure the accounting and reporting for these matters have been properly addressed. It is a best practice to have an early discussion with the auditors.
Identify internal or third party contacts that auditors need - Sometimes delays in the audit are caused by simple matters that could be mitigated with proper planning. Examples include receiving back various audit confirmations from third parties that are traditionally hard to reach. Identify past “problems” and put together a plan to reach out to these parties. Coordinate necessary meetings with various executives or board members.
Internal controls - Evaluate whether there have been any major changes in your internal controls or processes to record transactions.
Evaluate the original requests for information (RFI) - You will receive a list from the auditor. If nothing major changes, the list will likely be similar year after year. Use that list to evaluate ways to prepare for the audit year round and prepare records on an on-going basis. Take ownership for all tasks on the list, delegate tasks, include deadlines, and then stick to it. Finally, and this seems insignificant or perhaps catering to the auditors too much, but organize your packet and titled responses in order of the auditor’s checklist. They gave you a list, and you could respond with the information in the same organized fashion. Believe it or not, this will help the process.
Process - As the audit progresses, there are inevitable questions and requests for additional information. Keep a list and work diligently from that list. Audit teams will often “drive” this process by sending daily lists. If they do not do that, then suggest it as a best practice. Once an item is on a list, trust me it’s not coming off the list until the auditor is satisfied that the issue is addressed. Therefore, it’s best to take ownership in the daily list and treat each item as a “deliverable” to be addressed. I’ve seen many times where an organization will respond to two out of five things on the list, for example, and then ask for an updated list. Next they act surprised when the other three items are still on the list.
In this same category, keep lines of communication open about wrap up. When are draft deliverables going to be delivered? When is a final meeting with the owners or board of directors going to take place?
Debrief after the audit - As soon as possible after the audit is completed and the audited financial statements are delivered, have a quick meeting or phone call to discuss the results of the process of the audit. It will be fresh on everybody’s mind. To be honest, there are likely other matters to discuss anyway, such as tax returns, other reporting, or even other audits, such as employee benefit plan audits.
These are a few high-level matters to address. Implement these steps, and the process is likely to be a more gratifying process for both parties, and the value of the audit will increase with improved collaboration, communication, and hopefully higher-level feedback from the audit firm.
If you are especially struggling with this process, some planning with your auditors will be very helpful. If you want assistance as a representative of the organization, of course, I’m available to offer audit process assistance or coaching.
If you have other ideas that would be helpful to others, please feel free to post comments on this site.
Karl spends his time thinking about ways to help organizations with sound financial decisions.
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