Financial audits are one of the reasons why year-end reporting is stressful. But then, these audits establish you as a reliable company in the eyes of external entities such as banks, government agencies, and shareholders. Furthermore, listed companies are required by law to have their accounts audited- so there’s no escaping this grueling process!
Besides publicly-traded corporations, small, privately-owned businesses may also need to go through rigorous financial audits by independent firms. Thus, taking the necessary steps before, during, and after the audit is important to ensure that the process goes smoothly. This guide to a successful financial audit presents a step-by-step process to make life easier for business owners. But before going into that, let’s understand what exactly a financial audit is.
What Is a Financial Audit?
An audit involves reviewing an organization’s financial statements and related documents to ensure that they are reasonably accurate. Typically conducted annually, it aims to assess the company’s financial health by assessing its accounting practices, internal controls, and other financial details. The purpose of an audit is to express an opinion on whether the company has maintained proper books of accounts or not.
Even though the auditing firm’s opinion is reasonable assurance, not an absolute one, it is enough to convince the stakeholders that the company is not embezzling any funds. Various stakeholders are interested in knowing your company’s financial position and financial audits make sure they receive the correct information. Besides offering a reasonable assurance, financial audits are used to ensure compliance with regulatory policies and standards and protect your business against potential frauds.
Auditors shouldn’t have a stake in companies they conduct the audit for. For this reason, a financial audit can only be conducted by an independent audit firm, not the management of the company. Furthermore, an auditor with a financial or other interest in a company cannot conduct an audit of that company. After the audit, the audit firm issues a statement on the integrity of the company’s financial documents.
As stated above, there are two types of audits: internal and external. The latter is primarily focused on assessing your company’s financial statements and providing reasonable assurance to external stakeholders. Internal audits go far beyond that, and they can be conducted by the management of a company. By considering your business’ growth, reputation, sustainability practices, and employee culture concerning the financials, internal audits suggest ways to improve your company. Regular internal audits are an indication of strong internal controls, which is reflected in the integrity and objectivity of your financial statements.
10 Steps to Conduct a Successful Financial Audit
Despite its importance, conducting a financial audit can be a dry task. It’s a dreadful process for every business. However, by doing things right, you can ensure a smooth financial audit at the end of your fiscal year. Following these steps should help you conduct a successful financial audit:
Step 1: Plan for the Audit
The major reason why professionals are over stressed about financial audits is that they fail to plan for it earlier on. Planning ahead of time defines clear expectations, thereby minimizing frustration and anxiety. You can get an expert to do the work for you so you can focus on the other parts of your business because if you don’t then you need to devote extra time to get ready for the audit, be available at the time of the audit, and engage yourself with everyone engaged in the process.
When it comes to planning and preparation though, you need to treat it as an extensive process. To reduce the stress associated with the year-end audit, it is best to keep reconciliations and schedules up-to-date throughout the year. There should be a single point of contact with independent auditors. Designate an active member from your finance team to maintain open communication with the auditors throughout the year instead of waiting till the last moment.
Ensuring effective communication should keep you updated on any changes and updates in policies and standards, preventing the chances of unnecessary surprises. You will have sufficient time to make the necessary changes before the audit date. It is also recommended that you designate a secondary point of contact with auditors so that the process doesn’t get disrupted when the primary point-of-contact is out of office.
Step 2: Learn from Past Audits
Among the easiest ways to have a successful and stress-free financial audit is to learn from past mistakes. Look into the struggles encountered during the past audits, adjustments made to the last year’s audit, and any internal control recommendations. These are precious pieces of information that will make life easy for you. Once you’ve identified a list of past issues, prepare a plan that highlights how they should be addressed. Even if some of the past issues were already addressed, it will serve as a memory-jogger and ensure that past mistakes aren’t repeated.
Also, when you have the planning meeting with the auditors, you should not only discuss the areas of improvement but also about how to foster more effective communication between the company and the auditors.
Step 3: Stay Informed of Updates in Accounting Standards
Your next financial audit will certainly take into account the latest accounting procedures and any updates to the regulatory and legislative requirements. Failing to take notice of those can lead to serious problems during the financial audit.
While some updates require minor changes, others can demand considerable time to make the relevant changes. For instance, new tax laws or accounting standards may require you to reorganize the documentation or the charter of accounts and track and manage data differently.
Your finance or accounting personnel may even require some training or software to meet the latest requirements. To read through and understand the most recent updates to accounting standards and policies applicable to the upcoming year-end audit, visit fasb.org- the website of the Financial Accounting Standards Board. If you’re a tax-exempt organization, the IRS’s platform is also a helpful resource.
Step 4: Study the Audit Implications of Changes in Business Activities
The financial regulations, standards, and requirements can depend on the nature of your business activities. It is your responsibility to study the audit implications of any changes or additions made to your business. You could have launched a new agenda or discontinued a product that can lead to increased or decreased obligations.
A new grant approval, changes in your company’s organizational structure and leadership, or newer internal control systems might require new reporting and accounting considerations that must be disclosed to the auditor at the time of planning.
Step 5: Analyze the Company’s Tax Records
One of the most critical steps is to analyze the company’s official tax returns and records. Tax records must be kept for at least seven years. Pull out your firm’s tax receipts from the IRS and use them to reconcile any discrepancies in your tax records such as the amounts paid in taxes and tax liabilities. Also, go through the tax credits and deductions claimed most recently, making any adjustments in the financial statements as required.
Step 6: Organize the Data
There has to be a secure way to store audit data that’ available for analysis during the subsequent years. An effective approach is to organize the data using sub-folders for categories or transaction cycles. Classifying the data into groups such as payables and expenses, cash, fixed assets, revenue and receivables, debts, investments, etc also proves quite helpful.
For maximum accuracy, consider comparing the internal records of income, expenses, and cash holdings against the stored external records. For instance, you can compare the internal purchase records against the purchase receipts sent by suppliers for individual months.
However, be sure to secure the work papers and schedules carrying sensitive information through password-protected solutions or stored in an appropriate network location. Look around for accounting software packages that automate the creation of work papers and schedules when you write new reports using them.
Step 7: Assign Roles and Establish a Timelines
Before anything else, you should be totally clear on what financial information is requested by the auditors. In case of ambiguities, request for clarification well before the audit to prevent delays avoid additional fees. You should be comfortable asking questions, demanding clarifications, and seeking assistance from the auditors. They are generally happy to address questions regarding the accounting procedures pertaining to infrequent or unusual transactions.
Obtain sufficient information regarding the preparation of footnote disclosures, which explain important financial aspects to auditors. They may include accounting estimates such as the depreciation method used, pending litigation, contingencies and commitments, confusing transactions, and other aspects relevant to the statements.
Once you know exactly what’s required by the auditors, assign each item from the list of work papers, schedules, and statements to a person to review, giving them a due date for it.
When you assign items to employees, give them enough time to review and to rectify any errors they may identify. If possible, start with the most difficult, time-consuming and complex data. No matter what, all financial statements, schedules, and work papers must be made available for audit on or before the audit date.
Step 8: Conduct a Self-Review
You shouldn’t just jump into the audit after making closing entries and balancing the figures in your trial balance and balance sheet. An important step before the final audit is to look back and review the financial statements. One great strategy is to have a checklist of what information needs to be disclosed to ensure that you have disclosed all information in accounts and notes to financial statements. You should also be in a position to explain the variances of amounts from past years and budgeted statements.
Step 9: Attend to the Auditors on the Day of Audit
While auditors will already have requested all the required information earlier on, they may still demand explanations and supporting documents for specific information disclosed in the financial statements during the fieldwork. Therefore, your key finance and accounting personnel should be available to attend to them and provide any information they require.
Your staff shouldn’t be given time off during the crucial audit period, and any unimportant meetings involving the key accounting and finance staff should be postponed or rescheduled for later. To track progress during the audit, you can hold brief meetings with auditors to obtain an open items list.
Step 10: Evaluate the Results
Keep communicating with the auditors after the fieldwork until they issue the audit report. In case there are some open items, discuss and set a deadline with the auditors for information disclosure. If the auditor is willing to attend a meeting with the board of directors, and the finance or audit committee after the fieldwork, make sure the auditor has all the information regarding the meeting including the date, time and venue.
Besides, consider scheduling a meeting with the staff that worked on the audit process to disclose results and obtain feedback. This is called a post-audit meeting, which is extremely valuable for subsequent years’ financial audits.
To sum it all up, no established company can escape a financial audit but there are ways that can ease the process as you step into the next financial year. You need to give sufficient time to prepare for the year-end audit. Your ability to analyze data matters a lot during preparation as past mistakes and recommendations will help you improve the reporting practices.
On top of that, staying up-to-date on the latest accounting standards and realizing how significant changes in your business activities impact the audit requirements are equally important. Your auditors can be of great help when you study these changes as well as for any unusual transactions you may need to report. Finally, you should actively attend the auditors during the audit process and evaluate the results afterward. Following the above-mentioned steps will keep you on top of your financial audit.