As audit season comes to an end, it’s a good time to reflect on what went well and what you could have done better to ensure a smoother, more efficient audit.
“Audits can be disruptive to your business if you aren’t fully prepared,” says Deborah Sabo, assurance senior director at BDO USA LLP. “Auditors have to come in and ask a lot of questions. And we ask for support from the accounting personnel.
“The key to being ready is to do as much preparation beforehand as possible,” she says. “Keeping organized records, an ongoing general ledger account review and a reconciliation of all balance sheet accounts will help make our job and your job easier — and can result in a more efficient, effective audit.”
Smart Business spoke with Sabo about how companies can prepare for their next audit, to make it as smooth as possible.
What is the most important step a company should take when preparing for an audit?
The most important thing is to actually close your books before the auditor arrives. If you haven’t gone through an analysis of your accounts, it makes the audit a longer and more difficult process for both you and your auditor.
Auditors also send a list of required information, sometimes referred to as a prepared by client (PBC) list, which your organization needs to gather in advance. That information from the PBC list needs to be available on the first day the auditors are at your location.
Ideally, you should be closing your books on a monthly or quarterly basis, so you already know that you have accurate financial information. The CFO and/or CEO needs to review the financial statements on a regular basis to make sure things look right.
Is that part of a long-term strategy a business can employ to keep it prepared?
Yes. You shouldn’t just be concerned about your books and records when the auditors arrive. On a monthly basis, all of your balance sheet accounts should have a schedule that analyzes each of those accounts and is tied to your trial balance.
In addition, you should review your monthly transactions to ensure vendor invoices are properly coded to the correct general ledger account. For example, your accounts payable clerk may get a vendor invoice for advertising and accidentally code it to the printing general ledger account. By reviewing all your transaction activity regularly, you can identify mistakes sooner.
It can be painful to implement a control process at first, but it makes it so much easier going forward. If your internal resources are inadequate, a good accountant can help you set up sound procedures and schedules.
Why is it so important that organizations are ready?
During the busy season, auditors are working with multiple clients trying to meet multiple deadlines — all in a short period of time.
If you aren’t ready for an audit on the date you set, you run the risk of your auditor not being able to reschedule right away because his or her days are already so packed helping other clients. The window of time he or she has available is probably very small, and if you have to delay your audit you could end up missing a deadline.
In that case, there can be financial repercussions.
Your bank may require the audit by March 31 or April 30, and if you don’t make that date you’ve violated your debt agreement. A bank would have the right to call the note or whatever debt there is, but usually the lender will charge a higher interest rate or fee. The auditor cannot issue the audit report until you get a written waiver from the bank — and that waiver could cost $5,000.
How can a required audit be an opportunity to improve the company?
Auditors are looking to understand your business so they can identify any risks associated with your company and where mistakes could happen.
This allows them to provide recommendations, such as better internal controls to make your processes more efficient or ideas for improved processes that control your cost structures.
They also can tell you about additional business resources that are available to you to improve your business. ●
Insights Accounting & Consulting is brought to you by BDO USA LLP