While preparing for a financial audit isn’t easy, it’s absolutely necessary. Undergoing the auditing process is a great way to get objective oversight and keep your company on the right track. If you’re new to the process, we’ve put this audit preparation guide together to help you know what to expect and how to prepare so that you can take the stress out of your first one.
What’s The Purpose Behind It?
From a high-level perspective, an audit is a tool to review your company’s financial records to ensure they’re accurate and there are no material misstatements happening. The final result of one is a written and documented opinion that covers the state of your financial statements, regulatory requirements, and internal controls.
Ultimately, this process can highlight what you’re doing well and expose any areas of weakness or wrongdoing.
As a result, it can be used to give financial assurance and peace of mind to your stakeholders. (They’re getting accurate information from an unbiased third party outside of the business.) Additionally, it can help protect you from incorrect operations that lead to larger consequences, like business closure, expensive penalties and fines, or even possible jail time for wrongdoing.
Commonly Asked Audit Questions
It’s normal to have a lot of questions in preparing to work with auditors for the first time. Here are some common ones we hear from businesses that are new to this process.
What are the steps of an audit?
Overall there are four main audit process steps you’ll go through. Below we’ve detailed those stages and what you can expect in each one.
Stage 1: Planning
This involves finding an external auditing firm that’s credible. From there you’ll sign an engagement letter with them and commence planning.
Stage 2: Setting Internal Controls
The review goes beyond just assessing your financial documentation, it also includes a study of the controls and procedures set up around it. If you don’t have appropriate internal controls in place, it’s critical to find a reliable partner who can help you determine what those should be.
Stage 3: Testing
This phase is about seeing how well everything is working between your financial reporting and internal controls. At this point, your auditor may request additional information on business transactions.
Stage 4: Reporting
In this final stage, you’ll get official documentation from your auditor on their assessment.
What is the outcome of a financial audit?
Ultimately in the reporting stage, you’ll receive 1 of 3 possible findings from your auditor.
- Unqualified approval. The best rating you can achieve, this means your statements are fairly and accurately presented and compliant with GAAP principles, without any exceptions.
- Qualified approval followed by a disclaimer. This means that most of your matters are being handled correctly, with exception of a few issues. (This outcome happens if there’s a limitation of scope for the auditor or a disagreement around the application of accounting policies. If pervasive enough, your auditor will add a disclaimer related to their inability to provide a ‘clean’ report.)
- Adverse finding. This outcome means the financial information you’ve provided is out of alignment with evidence and findings gathered in the audit. The truth of what’s occurring in your company is unfavorable, not in compliance, and needs corrective action.
What should be my first step in the auditing process?
Before even starting the process, doing a little bit of prep can go a long way. Consider finding a partner who has experience helping companies prep for an audit.
They’ll have a grasp of what your auditors will expect and be able to help ensure your team is ready to handle the audit on top of its regular responsibilities. Plus, an audit readiness partner can help you ensure the proper documentation and records are in place ahead of time.
Another key benefit of seeking this type of support prior to an audit is that it can ensure the actual process is smoother and that the pressure undergoing one puts on your staff is reduced. This is huge as recent survey findings show that workload is the top stressor for employees.
And in an age where executing human resources is challenging, the last thing you need is to lose valuable employees from burnout during the audit process. An audit readiness consultant can make sure your staff is prepared and enabled to take on extra asks from auditors on top of daily responsibilities.
What do I need for a business audit?
Simply put, you’ll need financial statements, documentation of internal controls, and specific records related to transactions. Below we’ll get more into specifics with our audit readiness checklist.
Audit Preparation Checklist
Knowing what auditors look for is difficult if you’re new to the process. That’s why we’ve put together this checklist to reference, so you can feel ready to get started.
General ledger with all transactions documented (covering fiscal year)
Revenue and sales data
Reconciliation and schedules supporting asset liability and equity accounts
Bank notes, security agreements, and/or lease agreements
Access to paid bills and checks
Year-end payroll tax reports (Including W-2, W-3, and 1099s issued)
Internal Control Documentation
Articles of incorporation or org bylaws
Details showing the flow of transactions through your company
Minutes of meetings with the board of directors
Other Relevant Information
Major contracts with suppliers and/or customers
Investment activities summary
Schedule or upcoming fiscal year’s prepaid expenses
Details of repairs and maintenance accounts
Info on deposits that are in transit
True and Tested Advice About Preparing for Your Audit
Ultimately, the goal of the audit is to provide an accurate picture of your business so that you can continue moving forward. It’s perfectly natural to feel some pressure around preparing for your first one, but remember to stay calm.
Take some time to seek out audit prep experts for help. Doing so can go a long way in alleviating stress for you and your team.
And before you start, take some time to get acquainted with your auditor to ask:
- For a quick planning meeting to ensure you’re confident about what the process will entail and what’s required from you.
- A list of what they’ll need ready before arriving.
- If they have any other helpful resources you can use to get prepared.
Make sure to also set apart time before the audit to work on cleaning up your internal records, accounting controls, and ensure you have proper and up-to-date documentation on any internal changes. Pay close attention to all of the most current best accounting practices and standards to ensure if there are any big changes, your team is keeping pace accordingly.
And finally, but most importantly, communicate with your internal team to set expectations, ensure their needs are met, and outline a timeline and responsibilities. Doing this will ensure your team feels ready and confident to undergo the process.
Looking for more support as you undergo audit preparation? Centri’s team is here to help with expertise and experience you can count on.