How to Prepare for the Year-End Audit
Nov 25, 2020 | By Michael Whitmire
A challenging year has come to an end and it’s time to take some deep breaths — and enjoy a cocktail or two if that’s your thing.
Oh, wait, there’s one more thing: Don’t forget to prepare for the year-end audit.
Although the audit process may sound scary, don’t worry. All the hard work you’ve done to close the year will go a long way in your annual audit as well. Let’s look at what the year-end audit is, how it works, and what you can do to make it a little easier to handle.
What is the year-end audit?
First, a refresher. During the year-end audit, an external audit team comes in to review and verify your financial records. An external audit builds credibility and helps you identify any problems missed during the year. If your company is public, you’ll be required by law to have external audits, but even private companies can benefit from them.
Why the Audit Is Necessary
I’m sure your company has internal controls in place and that your board of directors works hard to ensure everything is on the up and up. Your own accounting staff may do an internal financial audit, but an external audit is still necessary — though not mandatory.
Why? Auditors take a different perspective and go over your financial statements with a fine-toothed comb. Audit firms are highly experienced in this specialized work and often identify fraud the company wasn’t aware of.
And, of course, an external audit also protects shareholders against potential fraud hidden by the CEO or CFO (which has unfortunately happened more than a few times). As long as you’re doing things right, auditing is actually a positive process that protects you and gives your company more credibility with the public.
What is the audit process step-by-step?
Accounting firms that specialize in auditing typically follow a six-step process:
- Request for information
The audit procedure starts by requesting financial records and information. Most of these documents should already be ready and accessible after your end-of-year financial reporting.
- Planning the audit
The audit team will review your documents and create an audit plan based on areas of highest risk. They’ll determine what needs review and establish the scope of the audit. All this takes place before you even see the auditors in your office.
- Opening meeting
Next, the auditors will have an opening meeting with your team to get acquainted and clarify exactly what’s going to happen. They need to know they have the necessary documents and that you’ll have the staff on hand to support the audit during its scheduled time.
This is where the audit team begins its on-site fieldwork. They’ll gather information, verify financial data, and interview members of your team to confirm their findings.
- Closing meeting
A closing meeting will be set to debrief on the audit and wrap up any remaining issues. A draft of the report may be ready at this time.
The final report will be completed by the audit team after they’ve completed the audit and left your office.
How Do You Prepare for the Year-End Audit?
So, what can you do to make the year-end audit less painful? Plenty!
Essentially, the audit process is unpleasant because it puts extra demands on an already stressed accounting team and because it can be time-consuming and frustrating to pull together all the information your auditors request. You can minimize the negative impacts by streamlining your accounting processes and being prepared in advance.
As you wind down the fiscal year, it’s always good to remember that next year will bring an audit. It’s not a surprise, so you have time to plan ahead and get things in order for a quicker, easier audit process.
Prep for the Audit Every Single Month
It all starts with a smooth, effective monthly, and yearly close. When you follow a good monthly close process, you’re left with a solid paper trail and more accurate numbers. This is a great start going into an external audit. By following accounting standards and making sure your trial balances really balance (and cleaning up any issues along the way) you won’t come into the audit with a backlog of problems.
You’ll want to be sure your year-end close is closed up tightly and everything is in top shape going into the audit. You want your balance sheet to balance, your reconciliations to be wrapped up, and all your closing journal entries to be good to go. There’s really no better way to go into an external audit than to begin with a great year-end close, built off of great monthly closes all year long.
Let Technology Make Your Job Easier
The right tools can make your audit go even more smoothly (along with cutting time off of every monthly close). For instance, closing software and checklists can be helpful in keeping everything in one place.
When you can identify who performed a certain reconciliation or who was responsible for a certain journal entry, it’s much easier to gather information for the audit. Having the information accessible in the cloud also makes it much easier to share supporting documents and papers with an external team, which can save a lot of time and headaches.
Don’t Wait Until the Last Minute
The biggest problem with the audit is the time-crunch, as any CPA can tell you about tax time, it’s a lot less painful if you prepare way before the due date. First, make sure you have everything wrapped from the yearly close. Next, reach out to your audit team as soon as possible for a list of PBC (provided by client) needs. These are supporting documents your audit team needs from you, and they’ll usually know what they are before they ask. Get the list early, and you’ll give yourself more time to assemble the documents and eliminate the crunch.
By being proactive with your next year-end audit, you can take a lot of the stress away and shrink the number of days your accounting department is disrupted.