How to Prepare for an Audit
Companies need to learn how to prepare for an audit. Getting financial records audited can be stressful. However, preparation and planning can help ensure you can achieving a smooth and successful audit.
Audits are a process where a company’s financial records are examined and verified to ensure accuracy and fair representation.
Types of Audit
Three different types of audits can be performed:
- External audits are performed by an external third party. External parties provide more unbiased opinions since they are not subject to conflicts of interest.
- Internal audits are performed by internal employees of a company or organization. They are not usually distributed outside the company, and therefore are mostly for internal use.
- Government audits are performed by government entities to ensure that the prepared financial records do not misrepresent taxable income. The audits are conducted by tax collectors, such as the Internal Revenue Service (IRS) in the U.S. and the Canada Revenue Agency (CRA) in Canada.
Auditing is important in maintaining trust and efficiency within the financial markets. Without auditing, companies can misstate their financial records and performance and make themselves appear more profitable or successful than they actually are.
Financial statements are prepared in accordance with relevant accounting standards and are meant to provide information for decision-makers such as investors, creditors, and other stakeholders. If the information cannot be trusted, it will undermine the stakeholders’ willingness to engage with companies.
Preparing for an Audit
Preparing for an audit is crucial in ensuring that the company receives an unqualified or clean opinion. The opinions essentially mean that the auditor stamps its approval that the financial records are not materially misstated.
Steps to ensure a successful audit include:
1. Planning for the audit
Planning is crucial, and additional time needs to be taken to adequately prepare for an audit. It may be a few months or a few weeks, depending on the complexity of financial records.
Time is required leading up to the audit, and additional resources should be allocated for final preparations to plan and set expectations for the audit.
Throughout the fiscal year, records should be kept up to date, which can reduce the pressure near the time of the audit.
2. Keeping up with accounting standards
Accounting standards and legal and regulatory requirements are updated every year. Therefore, it is important to familiarize the finance team with new accounting developments instituted by regulatory bodies.
By staying up-to-date, it reduces the time needed to track data and make changes to comply with regulations.
3. Assess organizational changes
If the company’s been audited before, the changes in its financial situation from the last audit should be taken into consideration. Material changes may affect the auditing process, such as new projects being invested in or government support and grants given.
Non-financial changes should be considered as well, such as if internal control systems and management accounting standards have been altered.
4. Learn from the past
Review previous years’ audit notes and recommendations. Improve by adapting and ensuring past mistakes are not repeated.
5. Develop a timeline and assign responsibilities
Review the list of requirements from the auditors and assign each item to a capable and responsible person, with a due date. Plan the completion of schedules with the auditors to maximize efficiency.
6. Organize data
All working papers and schedules should be organized and prepared to be submitted:
- General ledger
- Fiscal year budgets
- Invoices and bills
- Transaction records
- Financial statements
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: