Businesses that reconcile their financial books at the end of each month will make it substantially easier for them to have a well-prepared, problem-free year-end audit.
“If you are reconciling every month, when you get to December you won’t find any surprises, which usually helps a great deal with the year-end audit,” says Leslie Prichard, CPA, audit manager at Rea & Associates.
Smart Business spoke with Prichard about how businesses can prepare for a calm, uneventful year-end audit.
What can businesses do throughout the year to secure a smooth year-end audit?
When conducting year-end audits, auditors will ask businesses for items such as new agreements, loan documents, contracts and board minutes. Keep those in an organized file so it is not necessary to track them down later when the business may be pressed for time.
With each year-end audit, the auditor provides management recommendations or any internal control findings. The following year, the auditor will usually require a statement outlining how the business responded to those points, so it’s a good practice to have that ready for the auditor.
Are there other steps that would be beneficial to take ahead of year’s end?
Usually, auditors aren’t working on-site with companies until a month or two after year’s end. While a business must wait until its books are closed to begin some tasks, in the meantime it can reconcile its significant accounts.
This is also an opportune time for a company to prepare supporting documentation such as bank statements, accounts receivable and payable aging reports, inventory valuation reports, fixed assets schedules and debt documents. In addition, a draft of the financial statements should be ready for the auditor to review.
Another good practice is for the business to meet with the auditor throughout the year to develop monthly and year-end closing processes. If an organization has any new or complicated transactions, it is beneficial to inform the auditor about the matter before he or she arrives.
When a company is being audited, should it fear that some blemishes might be discovered in its books?
The auditor is actually a company’s ally, not its adversary. He or she is not going to penalize the business. Should the auditor find something technically wrong, the business will be informed of the matter. If it is significant, the auditor will ask for it to be corrected. In the case of an insignificant error on the financial statement, the auditor will likely be able to pass on recording it.
The auditor may issue a management comment if there are problems with the accounting processes and procedures. This helps the business owner by keeping them informed of specific concerns related to the accounting department.
What are the particular advantages of meeting audit deadlines?
Meeting audit deadlines keeps a business in compliance with various agreements. Should a bank require an organization’s financial statement in the case of a loan, for example, an uncompleted statement may violate its loan covenants. For some construction contractors, not producing a financial statement on time limits the kind of work for which the company may apply. Investors may require financial statements by a certain date, and are often displeased if those statements are late. A business with overdue financial statements runs the risk of a lender calling in a loan or investors deciding not to loan the organization more money.
Is there any further advice that would be helpful at audit time?
A company has a voice during the audit, and if its representatives don’t understand why the auditors are asking specific questions, they should ask for clarification. If company officials understand what the auditors are trying to test, that knowledge will help them to design the most effective and efficient procedures to use during the audit.
Insights Accounting is brought to you by Rea & Associates