Preparing for an audit does not have to be a last-minute exercise. Businesses that maintain accurate accounting records, organize supporting documents, and review significant balances throughout the year are generally better positioned to respond to audit requests efficiently.
A Financial Statements Audit involves an independent examination of financial statements and relevant supporting evidence. Good preparation helps the auditor obtain the information needed for the engagement while allowing management to identify and address potential issues before the audit is finalized.
Understand the Audit Requirements
The first step is to understand what the audit will cover.
Businesses should be familiar with the applicable financial reporting framework, reporting period, statutory requirements where relevant, expected deadlines, and the information the audit team is likely to request.
The exact scope and procedures will depend on the company’s circumstances.
Keep Accounting Records Up to Date
Current accounting records provide a strong foundation for the audit.
The general ledger, trial balance, journals, and subsidiary records should be updated before the audit begins. Delays in recording transactions can make it more difficult to reconcile balances and prepare financial statements.
Reconcile Important Accounts
Regular reconciliations can help identify discrepancies before they become audit issues.
Businesses should review and reconcile relevant accounts such as:
- Bank accounts
- Accounts receivable
- Accounts payable
- Inventory
- Fixed assets
- Loans and borrowings
- Intercompany balances
Unexplained differences should be investigated and resolved where appropriate.
Prepare Financial Statements
Draft financial statements should be prepared and reviewed before the audit begins.
Management should check whether the statements agree with the underlying accounting records and whether relevant accounting policies and disclosures have been considered.
Organize Supporting Documentation
Auditors need evidence to support financial statement amounts and disclosures.
Businesses should organize documents such as invoices, receipts, contracts, bank records, payment information, schedules, and other relevant evidence in a logical and accessible manner.
Prepare a Document Request List
A checklist can help management track information requested by the audit team.
Common requests may include:
- Trial balance and general ledger.
- Bank statements and reconciliations.
- Accounts receivable and payable schedules.
- Fixed asset register.
- Inventory records.
- Loan agreements.
- Tax documentation.
- Significant contracts.
- Supporting documents for major transactions.
The actual list will vary depending on the engagement.
Review Accounts Receivable
Receivables should be reviewed before the audit.
Management can examine aging reports, investigate long-outstanding balances, review subsequent receipts, and identify disputed amounts. Supporting customer documentation should also be readily available.
Review Accounts Payable
Businesses should review outstanding supplier balances and ensure that relevant invoices are recorded.
It is also useful to consider whether there are goods or services received before the reporting date for which invoices have not yet been received. Appropriate accounting treatment should be considered for such obligations.
Check Inventory Records
Companies with inventory should ensure that stock records are current and properly supported.
Management should review inventory listings, stock movements, valuation calculations, and physical count procedures where applicable. Differences between physical quantities and accounting records should be investigated.
Update the Fixed Asset Register
The fixed asset register should reflect current additions, disposals, and depreciation.
Businesses should retain supporting invoices for significant purchases and documentation relating to asset disposals. Depreciation calculations should also be reviewed for accuracy.
Review Loans and Borrowings
Financing records should be checked before the audit.
Management should organize loan agreements, repayment schedules, interest calculations, bank statements, and relevant security documentation. Classification and disclosure of borrowings should also be considered under the applicable reporting framework.
Review Significant Transactions
Major or unusual transactions should be identified before the audit.
These may include:
- Acquisitions
- Asset disposals
- New financing arrangements
- Related-party transactions
- Major investments
- Restructuring activities
- Significant contracts
Supporting agreements, approvals, invoices, calculations, and explanations should be maintained.
Review Accounting Estimates
Some financial statement balances require management judgment.
Businesses should review significant estimates such as provisions, impairment assessments, and other estimated amounts. The assumptions and calculations supporting these estimates should be documented appropriately.
Check Related-Party Transactions
Management should identify relevant related-party relationships and transactions.
Supporting agreements and records should be maintained, and applicable accounting and disclosure requirements should be considered before the financial statements are finalized.
Review Internal Controls
Before an audit, businesses should consider whether key financial controls are operating as intended.
This can include reviewing payment authorization, segregation of duties, system access, account reconciliations, and management review procedures.
Identifying control weaknesses early gives management an opportunity to evaluate appropriate improvements.
Review Previous Audit Findings
Businesses that have undergone previous audits should review earlier findings and recommendations.
Management should determine whether previous adjustments, control issues, or other matters have been addressed. Recurring issues may indicate that the underlying process needs further review.
Prepare for Auditor Questions
Auditors may ask questions about unusual movements, significant transactions, accounting estimates, or changes in business activities.
Management should be prepared to explain significant financial developments and provide appropriate supporting evidence. A clear record of important decisions can make these discussions more efficient.
Assign an Audit Coordinator
Designating one person to coordinate audit requests can improve communication.
The coordinator can track outstanding requests, identify the appropriate person responsible for each response, and monitor deadlines. This helps prevent duplicate work and missing documents.
Address Known Issues Early
If management is already aware of an accounting error or documentation problem, it is generally better to investigate it before the audit is finalized.
Early identification allows management to consider appropriate corrections and provide the auditor with relevant explanations and supporting information.
Protect Confidential Information
Audit documentation can contain commercially sensitive and personal information.
Businesses should use appropriate security measures when storing and transferring records. Access should be limited to authorized personnel, particularly when documents are shared electronically.
Avoid Reconstructing Records at the Last Minute
Trying to recreate financial documentation immediately before an audit can create unnecessary pressure.
A better approach is to maintain records consistently throughout the year. Regular filing, reconciliations, and financial reviews can make annual audit preparation more manageable.
Understand Management’s Responsibilities
Management remains responsible for preparing the financial statements and maintaining appropriate accounting records and internal controls.
The auditor independently examines the information and obtains evidence to support an audit opinion. Understanding this distinction helps establish realistic expectations throughout the engagement.
Final Pre-Audit Checklist
Before the audit begins, management can review whether:
- Accounting records are complete and up to date.
- Key accounts have been reconciled.
- Financial schedules agree with the ledger.
- Supporting documents are organized.
- Significant transactions are documented.
- Major estimates have been reviewed.
- Previous audit matters have been addressed.
- Requested information is readily accessible.
Conclusion
Preparing for a financial statements audit is an ongoing process rather than a task that should begin immediately before the auditor arrives. Accurate accounting records, regular reconciliations, organized documentation, and early review of significant transactions can make the engagement more efficient.
Businesses should also communicate clearly with the audit team and respond promptly to information requests. With consistent preparation throughout the year, companies can support reliable financial reporting and approach the audit process with greater confidence.
