It’s that time of the year again most companies are gearing up for their year-end audit. Unexpected road bumps can derail the audit process and cause delays in its completion, which can result in audit fee overruns and important missed deadlines.
Smart Business asked Jyoti Pai, CPA, CA, manager at Tauber & Balser, P.C. in the Forensic Accounting & Litigation Services Group, about ways to prepare for the inevitable audit process and some of the setbacks that may come along with it.
What can management do to ensure that the audit progresses smoothly?
Proactivity is key. Plan and put procedures in place to prevent kinks in the year-end closing and audit process, such as the following:
- Agree on the audit timeline with the auditors. Specifically, determine when the fieldwork will be completed and when you can expect to have the audit report in hand. This should be documented in the auditor’s engagement letter.
- Ensure that the accounting staff is aware of the audit timeline, the books are closed on time and all necessary accounts are reconciled and reviewed by the appropriate level of management.
- Obtain a ‘Needs List’ from the auditors in advance. Consider using a client portal (Microsoft SharePoint or a similar application) to provide electronic schedules and other documents requested by the auditors. This will help to ensure that audit schedules and documents are available at one central location, and all members of the audit engagement team can access them at any time. Auditors can also review the uploaded documents before the start of fieldwork and alert you about any additional items needed before they arrive at your office. Authority to upload documents to the portal should be restricted to the CFO or an equivalent person to ensure that only schedules and documents that have been reviewed and approved by management are uploaded.
- Ensure that the accounting staff responds promptly to the auditors’ requests.
- Check in with the audit manager and/or audit partner to ensure that the audit is progressing as planned. Schedule regular status meetings with them to help your management team remain aware of any issues that need to be resolved or delays that the auditors may be encountering.
- Have management review the financial statements and related disclosures for accuracy and to verify that they are presented in conformity with Generally Accepted Accounting Principles (GAAP), before they are handed over to the auditors. This will help avoid multiple revisions to the financial statements because of errors noted by the auditors. Ultimately, financial statements are the responsibility of management, not the auditors.
- For public companies, consider hiring an employee or engaging the services of a consultant who specializes in the presentation of financial statements in accordance with GAAP, Public Company Accounting Oversight Board and Securities and Exchange Commission regulations and guidelines.
- Review with the auditors at the end of the audit any issues that they encountered and items that contributed to delays during the audit process. Ensure that these items are addressed beforehand for the next year’s audit.
What is the importance of the management letter issued by the auditors?
A management letter is a written communication by the auditors to management and those charged with governance that reports significant deficiencies and material weaknesses identified in the audit, in accordance with Statement on Auditing Standards No. 112. Although the auditor is not required to perform specific procedures to identify deficiencies in internal control or to express an opinion on the effectiveness of the entity’s internal control in the audit of financial statements, the auditor may become aware of deficiencies in internal control during the course of the audit. These deficiencies are communicated to the audit committee or to the board of directors, if no audit committee exists.
Understanding the deficiencies in internal control identified by the auditors can provide an insight regarding the auditors’ perception of the effectiveness of internal control implemented by management and will allow management to put in place additional procedures to strengthen controls and reduce opportunities for fraud. It is important to set a timeline for remediation of any reported deficiencies.
An audit does not have to be a painful, time-consuming process. By providing all information and details requested by the auditors in a timely manner and managing the audit process properly, you can reduce the amount of time auditors spend at your office. This will result in significant cost savings and a more efficient audit.
JYOTI PAI, CPA, CA, is a manager at Tauber & Balser, P.C. in the Forensic Accounting & Litigation Services Group with expertise in the manufacturing, real estate and technology industries. Jyoti’s expertise also includes litigation and accounting malpractice. Reach her at (404) 814-4908 or firstname.lastname@example.org.