External auditors usually perform audit fieldwork for calendar-year entities in January through April of the following year. Businesses and not-for-profit entities that are prepared facilitate the process by minimizing adjustments and surprises, lowering future accounting fees, and getting more value out of the audit process. Here are six practical tips for you to consider.
1. Adopt a positive frame of mind
Some CFOs and controllers see audit fieldwork as a painstaking disruption to their daily operations. They may resent having to explain their business operations and accounting procedures to outsiders who will highlight any mistakes and weaknesses in financial reporting.
Although no one likes to be questioned or critiqued, audits shouldn’t be adversarial. Your external auditor is a resource who can provide assurance about your financial reporting to lenders and investors, offer fresh insights and accounting expertise, and recommend ways to strengthen internal controls and minimize risks.
Before fieldwork begins, gather your accounting staff to explain the purpose and benefits of financial statement audits. Novice staff may confuse financial audits with IRS audits, causing them to be guarded. But in-house accountants can be open and candid with their CPA.
2. Assign a liaison
Pick a knowledgeable person in the accounting department to be available to answer inquiries and prepare document requests. This will minimize confusion and duplication of effort within the accounting department, as well as minimize the time that external auditors are on your premises.
3. Establish a timeline
No one likes to wait to find out their final profit numbers or tax bill. So, create a schedule for your audit team that includes these important dates:
- The start of fieldwork,
- Disclosure of adjusting journal entries and adjusted trial balance,
- Preparation of preliminary tax numbers, and
- Delivery of financial statements and tax returns.
Review this timeline for potential scheduling conflicts such as vacations, holidays, medical leaves of absence, business conferences, and bank and regulatory deadlines.
4. Reconcile accounts
Before fieldwork starts, all transactions should be entered into the accounting system for the year. And each account balance should have a schedule that supports its year-end balance. Amounts reported on these schedules should match the financial statements. Be ready to explain and defend any estimates that underlie account balances, such as allowances for uncollectible accounts, warranty reserves or percentage-of-completion for work-in-progress inventory.
A separate person in the accounting department should check the schedules for errors, discrepancies and variances from what’s expected, based on the company’s budget or the prior year’s balance. The reviewer should also be given a copy of last year’s adjusting journal entries to determine whether they should have been made in 2020, too. An internal review is one of the most effective ways to minimize errors and adjusting journal entries during an external financial statement audit.
5. Assemble the audit binder
Auditors are grateful when clients prepare their own audit work papers to support account balances and transactions. You’ve already created many of these schedules when you reconciled your account balances to the general ledger. Examples include:
- Preliminary trial balances and financial statements,
- Bank reconciliations,
- Accounts receivable aging reports,
- Fixed asset listings (including purchases, disposals and donations), and
- Schedules of prepaid items, accrued expenses, and repairs and maintenance expenses.
Review last year’s audit document request and collect the “prepared by client” work papers. Last year’s audit document request will also provide insight into the original source documents that your auditor will need to verify against what’s reported on the financial statements, such as:
- Bank statements,
- Sales contracts,
- Loan agreements,
- Insurance policies,
- Minutes of board meetings,
- Legal bills, and
- Year-end payroll and sales tax reports.
Compile these documents in your audit binder before your audit team arrives. Providing information piecemeal slows down fieldwork.
Important: Auditors generally won’t accept copies of original source documents, because they want to confirm that documents are unaltered and complete. They’ll return the original source documents once they’ve made copies for their work paper files. They may also inquire about changes to contractual agreements, additions to the chart of accounts, regulatory or legal developments, and major complex transactions that occurred in 2020.
6. Evaluate internal controls
Patching gaps in internal controls minimizes the risks of fraud and financial misstatement. If you correct any deficiencies in internal control policies (such as a lack of segregation of duties, managerial review or physical safeguards) or documentation of these controls before fieldwork, your audit will proceed more smoothly and the audit partner will have fewer recommendations to report when he or she delivers the financial statements.
Beware: The COVID-19 pandemic has changed how transactions are being processed by employees who now work remotely, rather than on-site as in prior periods. Your auditor will be on the lookout for changes that your company has made (or should have made) in response to remote working arrangements. He or she needs to be able to determine whether the controls were adequately designed, were put in place and operate effectively. Moreover, auditors have historically relied on the effectiveness of clients’ controls and testing of controls. But, during a pandemic, auditors can’t do so as much.
Financial statement audits should be seen as a learning opportunity and an investment in your company’s future. Preparing for your auditor’s arrival not only facilitates the process and promotes timeliness, but it also engenders a partnership between in-house and external accounting resources.
Sidebar: Which accounts are vulnerable to COVID-19-related effects?
Companies may be required to factor COVID-19-related risks into their financial statements. Examples of balance sheet accounts that may be materially affected by the outbreak include:
Financial assets. Companies should consider the potential for impairment, as well as the need to adjust cash flow projections and other assumptions used to measure nonquoted financial instruments. Financial assets reported at fair value on the balance sheet may result in realized and unrealized losses.
Receivables. Customers that have been adversely affected by the pandemic may be unable to pay outstanding invoices. This situation could result in additional credit and liquidity risks, higher-than-usual bad debt, and even impairments and write-offs. Cash flows from operations may also be affected.
Inventory. The outbreak may have disrupted supply chains and productivity. Companies with reduced or idle production capacity may be unable to allocate overhead costs to inventory as they usually do. In addition, inventory that can’t be turned over because of travel restrictions may have to be evaluated for impairment. Finally, changes in prices and reduction in the level of demand will also have to be taken into consideration.
Pensions and other retirement plans. Financial market volatility has affected the measurement of these accounts. Companies may have to revisit both the expected return on plan assets and the funded status of the plans.
Deferred tax assets. If estimates of earnings of foreign subsidiaries change, companies may have to reconsider some of their tax strategies, or they may not be able to realize all deferred tax assets.
Goodwill and other indefinite-lived intangible assets. Subsidiaries in markets heavily affected by COVID-19 may take a hit to revenue or profits. This may trigger impairment testing for goodwill and other intangibles. The reassessment of key accounting estimates and projections may result in an immediate impairment.