How preparation can make the audit process less disruptive

Year-end audits can be headaches for companies, as management takes time from busy schedules to gather information required by auditors. But a little preparation can make for a much smoother audit process.

“The first quarter is as busy for management as it is for us,” says Kami Refa, a partner at Moss Adams LLP. “But if the right control processes are in place throughout the year, the preparation for year-end audits become relatively easier, since the majority of the auditor’s requests should already be prepared as part of the company’s annual closing process.”

Smart Business spoke with Refa about year-end audits and steps you can take to prepare.

What preparations often get overlooked?

Getting big-ticket items out of the way ahead of time makes the actual audit fieldwork go smoother.  
 
That includes adopting new accounting pronouncements or changing over to the new Committee of Sponsoring Organizations of the Treadway Commission framework. Goodwill impairment analysis, which management is required to perform at least annually, is another example I frequently mention to clients.

This analysis can be done 
before the end of the year — there’s no need to wait for final numbers. Another area management and auditors can tackle prior to year-end revolves around onetime items, such as acquisitions.
  
Accounting for a significant acquisition can be a complex and time-consuming area. I encourage my clients to prepare the acquisition-related work papers as soon as the transaction closes and have us audit them right away. This can usually get done during non-busy times for both management and the auditors.
 
Should auditors be meeting regularly with management?

One approach is to have a continuous audit, which works well with public companies due to their quarterly review requirements. For private entities, auditors and management should meet regularly so the auditors can be brought up to speed as to the company’s operations, and management can learn of any new accounting or tax literature that may impact the company’s financials.

This will avoid surprises at audit time. In addition to ongoing regular meetings, management and the auditors should hold planning meetings when there are significant events, such as an acquisition. U.S. Generally Accepted Accounting Principles requires that the assets purchased and liabilities assumed during an acquisition be recorded at fair value at the time of the transaction.

For software-as-a-service companies, which tend to have large deferred revenue balances, the fair value of deferred revenue tends to be quite lower than the book value. Management needs to be aware of that fact when forecasting revenues and setting covenants. Management often relies on the amortization of the ‘book value’ deferred revenue when forecasting or setting covenants, which is wrong and can have costly consequences.

A lot of companies have debt and related debt covenants. If they’re close to violating those covenants and have set them without taking into account the impact of the fair value adjustments noted earlier, they could end up needing to reset the covenants or risk violating them. Bottom line is that if the auditors and management have discussions on a continuous basis, management has time to get a waiver or have the covenants reset.

What are the consequences of audits not being completed on time? 

Public companies have regulatory deadlines, and many private companies need to meet deadlines set by banks or investors. Failing to meet these deadlines could have dire consequences, such as delisting or impact on stock value for public companies, and lack of access to funds for private companies. If good preventive and detective controls are in place, it shouldn’t take a long time to prepare for an audit.

For example, account reconciliations should be done monthly, with one person preparing them and another reviewing them. If this is done, part of the year-end audit package is already complete. Part of the internal review for the audit should also be ensuring that documents are tied to the general ledger. A lot of this goes back to putting the right internal controls in place — not because of the year-end audit but because it’s good practice and helps both operationally and financially.

 
Kami Refa is a Partner with Moss Adams. Reach him at (949) 623-4161 or [email protected]
 
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