As another year is winding down, most people are taking the time to reflect on the ups and downs of the past year, while tying up any loose ends and making preparations for the year ahead.
Business is no different, and right about now, many companies are preparing for their year-end audits. Unlike personal reflections, however, for many businesses, a corporate audit is mandatory.
A number of setbacks and hindrances can delay or derail an audit process, so companies need to be properly primed and prepared for issues that may arise.
“The end of the year is hectic for all organizations, but taking time to plan and prepare for your internal year-end closing and external audit process will pay huge dividends,” says Meresa Morgan, an audit shareholder at Briggs & Veselka Co. “You need to be fully prepared for any and all aspects of the audit.”
Financial audits exist to add credibility to the implied assertion that your organization’s financial statements fairly represent your financial position to stakeholders and creditors. A financial audit is an important step in providing a level of assurance not only to your shareholders and creditors, but also to regulators, customers, suppliers and employees. Because of the significance of an audit, some companies may hire consultants to help ensure that they are prepared and that records are in proper order.
Smart Business spoke with Morgan about year-end audits and how your company can be adequately prepared for them.
What’s involved in a year-end audit, and why does it have to be done?
Many organizations public, private and nonprofit are required to have a year-end audit. The requirement may be imposed by various regulators, financial institutions, investors, board of directors, grantors, etc., and is usually required to be performed by an independent certified public accountant. In most instances, there is also a deadline imposed for completion of the audit, which usually ranges from 90 to 120 days after year-end.
What are the first steps a company must take when preparing for a year-end audit?
In an effort to expedite the audit to meet these deadlines, some audit procedures may be performed prior to year-end. If the company has a sufficient accounting department and has internal control processes that have been documented and implemented, the audit firm can test these controls by performing interim audit procedures. Also, if the company has inventory, cycle counts and reconciliations may be performed during the year, versus at year-end. Interim procedures can be especially important if the company’s audited financial statements are due within 90 days after year-end.
The following steps should make the audit process more efficient and less costly:
- Document existing controls and ensure that they are implemented as documented.
- Review prior year recommendations made by the audit firm to ensure any significant weaknesses have been addressed.
- Meet with your auditor prior to year-end to discuss any significant issues or significant changes in management or in the company’s financial statements.
- Notify your auditor if the company is not in compliance with credit agreement covenants.
- If not automatically provided, request from your auditor a list of items you will need to have available for him or her to perform the audit. Then, have all requested documents available when the auditor arrives for fieldwork and preferably in an electronic format.
- Reconcile and document support for all balance sheet accounts prior to the start of the audit.
- Make sure management is available and involved in the auditing process. Also, an exit conference at the end of fieldwork is beneficial for both the company and the auditor.
- Take responsibility for drafting the financial statements, including required disclosures.
What are the consequences a company faces if it doesn’t perform year-end audits?
If the company were unable to meet the due date requirements imposed by a financial institution, they would most likely fall into default of their loan covenants and would need to request a waiver from that particular lender.
Should a company seek assistance in preparing for a year-end audit?
Some companies that feel they are unable to perform the steps above or that have staffing concerns will hire consultants to assist them in preparing for a year-end audit. While that is definitely an alternative solution, it is important for management to maintain responsibility for the performance of the consultant and for the integrity of the financial statements.
MERESA MORGAN is an audit shareholder at Briggs & Veselka Co. Reach her at (713) 667-9147 or email@example.com.