If your company issues audited financial statements and follows a calendar year end, these steps are a part of your external auditing procedures. Once the engagement letter is signed, the process begins with preliminary financial statements and possible year-end physical inventory counts. However, audits can be complicated, so taking time to additionally streamline audit fieldwork can make your process smoother:
Anticipating your auditor’s document requests and inquiries is important. Your auditors will typically ask you to provide similar documents every year. Auditors accept copies or client-prepared schedules for certain items, such as bank reconciliations and fixed asset ledgers. To verify other items, such as leases, invoices and bank statements, they’ll want to see original source documents.
Where your auditor will change their request annually is in the sample of transactions selected (randomly) to test your account balances. The element of surprise is important because it keeps bookkeepers honest.
Prepare for audit inquiries by comparing last year’s financial statements to the current ones. Your auditor is likely to ask questions about any line items that have changed materially. As an example, a “materiality” rule of thumb for small businesses might be to inquire about items that change by more than, say, 10% or $10,000.
Reviewing the adjustments your auditors made at the end of fieldwork the previous year will help give you an idea of what you need to adjust before they arrive this year. These adjustments might include correcting for accounting errors, unrealistic estimates and omissions. Your internally prepared financial statements might need similar adjustments, year after year, to comply with U.S. Generally Accepted Accounting Principles (GAAP).
Your auditor may suggest that you write off bad debts, evaluate repairs and supplies accounts for capitalizable items, and record depreciation expense and accruals. Making routine adjustments before the auditor arrives may save time and reduce discrepancies between the preliminary and final financial statements.
You can also reduce audit adjustments by asking your auditor about any major transactions or complicated accounting rules before the start of fieldwork. For instance, you might be uncertain how to account for a recent acquisition or classify a shareholder advance.
With just a little advance preparation, an external audit, and the corresponding audit fieldwork, will run smoothly and efficiently, with minimal disruption to your day-to-day business.