How to prepare for an audit of your financial statements

When it is time to bring in an external audit firm — perhaps because lenders, investors or a regulatory body triggered the need to audit your financial statements — preparation and responsiveness are crucial to ensure the process is as smooth and painless as possible.

“There’s nothing worse than calling the client the Wednesday before you’re supposed to begin the audit and say, ‘We’re scheduled to be there on Monday. Is everything ready?’ And the business owner replies with, ‘I’m not ready. Can we push it back a week?’” says Deborah A. Sabo, CPA, principal at Ciuni & Panichi.

Auditors’ schedules are packed, especially during the busy season, and pushing it off causes chaos, she says.

Smart Business spoke with Sabo about how to get ready for an audit.

How should companies choose an auditor?

Look for an auditor with experience in your industry. If, for example, it’s an employee benefit plan audit, you don’t want to hire a firm that only does three plan audits.

Also, check that the auditor has a clean peer review opinion. Every three years, the American Institute of Public Accountants requires its member firms to undergo a peer review. A peer review is a periodic external review of a firm’s quality control system on accounting and auditing.

Do not select a firm on price alone. Because, like everything else, sometimes you get what you pay for. You need to ask, does the firm do many audits? Smaller firms may do many reviews and compilations, but only perform a couple audits a year.

How should the business prepare for the audit beforehand?

First, confirm the dates that the auditors will be at your location. You will want to ensure that your books and records are complete for the time period the accounting firm is scheduled to audit, such as for the year that ended Dec. 31, 2019. This includes preparing reconciliations for all balance sheet accounts to your general ledger. It is critical to do this because you want to make sure your account balances are correct. If your company goes through this analysis and ensures that its books and records are accurate before the auditors come, it reduces the number of potential audit adjustments.

The accounting firm will send you a prepared by client (PBC) list. This list will include most of the items the auditors will need for the audit. Ideally, you want everything on the list completed a week prior to the start of the audit. What you don’t want to do is not have the information on the PBC list available when the auditor comes out. Delays in completing this list can lead to audit cost overruns and increase the cost of your audit.

Once the audit begins, how can business owners and/or the accounting department help ensure everything goes smoothly?

The key is to be available to the auditors when they are on site, and to be responsive to auditors’ requests. The auditor will understand you have other things to do, but if you are not available, it could delay the audit’s completion. If the auditors do not get the information they need to complete their audit procedures, the report may be delayed.

In addition, after the auditors leave your facility, they usually have follow-up questions, so you’ll want to continue to be responsive. Answer their emails, take their calls and let them know the best way to communicate with you.

An efficient audit will minimize additional audit fees. If your company’s records are a mess and require many audit adjustments, the audit will require more hours and, therefore, you could be charged more. In addition, the audit firm also may be required to issue a letter which states that the company has significant deficiencies or material weakness in internal controls. No company wants a letter like that.

How does a business know whether or not it’s received a quality audit?

Here are some questions to consider. Was the audit team present during the audit? Did they spend sufficient time asking questions and having discussions with your team? Was the partner that signs the audit report present? Did he or she interact with the staff, CFO and CEO? Did the auditors give you recommendations to improve processes or internal controls? Giving recommendations are key, as there are always things you can do to improve processes or internal controls.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.