Audit Readiness Assessment: Understand the Importance and Start Planning
Dec 22, 2020 | By Brett Hughes
Are you audit ready? Find out with an audit readiness assessment
If your company has never been through a financial statement audit, the prospect of letting someone else look through your books and finding problems can be frightening. We’ve all heard horror stories of audits that never seem to end, or auditors asking for an endless series of documents.
But an audit doesn’t have to be a horrible experience, and can actually be a valuable exercise when your auditor suggests ways to make improvements across your whole business. An audit readiness assessment can help you avoid the horror story audit by making the most of your auditor’s expertise.
What Is an Audit Readiness Assessment?
An audit readiness assessment probes the auditability of your financial reporting processes. It’s like a pre-test to see how well your systems, processes, and documentation are buttoned up, and helps you locate the gaps in your procedures, internal controls, and documentation before the auditor finds them. They may also offer suggestions to improve your financial management.
This assessment can be performed either by the CPA firm that will be performing your audit or by a service provider that specializes in audit readiness. It may also be performed internally by your internal audit department or by your accounting team, provided they have the experience and bandwidth to take an objective look at your financial reporting systems and processes.
A financial statement audit must be an independent audit. This means that the CPA firm performing your audit can make recommendations for process reengineering or technology integrations, but they cannot implement those improvements. But if your audit readiness assessment is performed by another service provider, they may be able to provide hands-on assistance in implementations.
If the assessment finds problems, you’ll be given suggestions of corrective actions to take with milestones for achieving them. You may also receive recommendations for implementing tricky accounting standards — of which there are no shortage, thanks to the constant changes from FASB, GASB, and various government agencies.
Here’s what you can expect your audit readiness assessment provider to do:
- Learn about the organization, its leadership, goals, valuation, accounting systems, business processes, and other operating systems.
- Examine the general ledger for timeliness and completeness.
- Review monthly reconciliations and procedures for retaining and organizing documentation.
- Test that key controls are operating and effective.
- Discuss implementation and application of relevant accounting standards.
How to Prepare for an Audit Readiness Assessment
Update your accounting system. Legacy ERP systems with highly manual processes increase the likelihood of errors and inefficiencies. Today’s cloud accounting technologies interface with business applications and systems for reporting, budgeting and forecasting, making it possible to completely automate end-to-end business processes. Adding in accounting workflow automation software like FloQast helps streamline your close process by housing month-end tasks, supporting documentation and reconciliation tie-outs all in one accessible platform.
Get everyone on the same page. Large organizations with multiple reporting entities need to consolidate their financials, which may be tricky if multiple accounting systems or countries are involved.
Start doing a hard monthly close. Many small organizations skip this, but this is a best practice and an opportunity to identify problems early on. Getting everyone in the habit of a monthly close helps your team establish a rhythm to the monthly work.
Use a checklist. A checklist serves as a reminder of monthly, quarterly and year-end journal entries that need to be made so that nothing is overlooked. An effective close checklist shouldn’t just be a list of tasks, but should also include the resources responsible for those tasks and any dependencies, as well as the reviewer for the task.
Document all your processes in writing. Relying on tribal knowledge introduces inconsistencies into your processes, which makes it harder for the auditors to determine if your financial statements are free from major errors. Having everything clearly documented also makes it easier to onboard new employees, as well as to shift tasks around when key people aren’t available.
Get reconciled. Reconcile all the balance sheet accounts with material balances quarterly if not monthly. Initially, this may be a bit like a game of whack-a-mole because adjustments to reconcile one account can throw off another reconciliation. But when you use a close management solution like FloQast, you get instant alerts when that happens so you never give your auditors out of date reconciliations or documentation.
Get your documentation in order. Your auditors will test financial statement assertions and detect misstatements of financial statements by tracing the flow of data through your system. To do that, they will ask for various invoices and other documents. An online document management system makes it easy to retrieve that documentation. If they can’t get enough audit evidence, they cannot provide reasonable assurance that your financials are materially correct.
Study up on the standards. Organizations must comply with a wide-ranging and ever-changing set of federal accounting standards, laws, regulations, and other reporting requirements. Don’t be afraid to lean on the expertise of your audit team to help you get up to speed on new standards.
Invest in human capital. Having the right people with the right skills and the right experience in place will help your finance team identify problems and develop solutions to streamline operations and reporting. Be sure to invest in continuous learning so your team is always on top of the latest changes.
Importance of Audit Readiness
For most business leaders, the best reason to be audit ready is that it generally translates to lower fees. A primary cause of auditing cost overruns is that the client wasn’t able to provide sufficient documentation for the auditors to verify financial statement assertions. That means that instead of a two-minute tick-and-tie procedure, the auditor may have to spend hours on an alternative methodology to get to the same result.
Audit readiness leads to a better relationship with your auditors: more collaborative and less confrontational. Auditors plan out their calendars months ahead, and if a client isn’t ready when the agreed-upon slot comes up, that throws everyone off. Plus, being audit ready makes it possible for your auditors to focus their time and effort on the more difficult areas, and not get bogged down in the areas of low risk.
Your stakeholders will love you too. Being audit ready means that your reporting to them throughout the year is more in line with reality. They really don’t like big surprises when the auditors nail down the bottom line, and it’s a lot different than what they were expecting.
Being audit ready all year-round means you can rely on your numbers all year, not just at the end of the calendar year or fiscal year. You’ll have better information which helps you make better budgeting and financial decisions. Risk management is easier when you know where you stand at all times — that is to say, significant risks don’t exist and areas of low risk are being tracked.
The Benefits of Going Through an Audit Readiness Assessment
An audit readiness assessment will point out corrective actions in business operations, accounting processes and procedures that you can apply all year long to enhance efficiency.
It will help identify material weaknesses in your reporting, internal controls, and accounting processes. By identifying problems before the audit, you can fix them before they get too big, or when they might result in costly and difficult remediation. Your assessment will provide you with ways to address those before the audit, which may increase the likelihood of receiving a favorable audit opinion.
But perhaps a bigger benefit is that you get more value out of the audit. When you spend less time chasing down documents, recreating lost schedules, or questioning whether the team had adhered to generally accepted accounting principles (GAAP) — of course, they did, your team is rock solid — you have more time to ask your CPA questions and to leverage their knowledge of other similar businesses. Your focus can move to the future and how you can improve your business, instead of dwelling on details of the past.