Group of people having a meeting in an office by Theo Decker
It can be stressful to get your financial records audited. However, you can achieve a smooth and successful financial audit with the requisite planning and preparation. When properly planned, preparing for an audit can even save your company money and time.
Financial audit preparation will not necessarily disrupt your business processes. Instead, it can be a smooth part of them without imposing additional demands on employees.
Directors, C-level executives and other decision-makers all use the year-end audit to provide guidance on business goals for the next year. Therefore, financial specialists need to provide informed recommendations and present figures in a clear, accessible way.
In this article, we will cover how finance professionals can relieve some of the stress of the audit preparation process, without compromising clarity and quality of information.
Table of Contents
What is a Financial Audit?
A financial audit is a review, verification and examination of the financial statements (and related documentation) of your business. It is generally carried out by practicing accountants who are independent of your company. This is to maintain objectivity and clarity.
Usually, audits are yearly, and check your organization’s financial position. While it can seem like a scrutiny of some of your company’s most sensitive information, the process is meant to give reasonable assurance to any stakeholders and interested persons of your organization’s financial health.
Other reasons for conducting a financial audit include:
Verifying that your company is complying with regulatory agencies
Protecting your company from accounting fraud
Types of Financial Audits
Three types of audits can be performed:
External Audits
These audits are performed by independent bodies with no stake in your company. They assess financial risks and statements and provide opinions on the fairness and truthfulness of your financial statements.
Typically, external audits are concerned with the accuracy of business accounts and the general financial condition of your company. However, in some industries, they may also deal with your company’s compliance with laws and regulations.
External and internal auditors can share information to improve coverage and avoid duplication. External auditors can also leverage internal auditors’ understanding of the company’s risks and controls.
Internal audit departments can ensure better coordination by preparing their documentation (such as risk assessment, reports, and workpapers) in an easy-to-use format.
Internal Audits
Internal audits are performed by internal audit teams within your company or an external agency you have retained or appointed.
These audits consider your business growth, employee culture, reputation, and impact on the environment. Internal auditors report to your senior management or board and suggest ways to improve your company in general, in addition to providing assurance to stakeholders.
Undertaking regular internal audits shows external auditors that your organization has a way to effectively manage itself through improved internal controls.
Government Audits
As the term suggests, government audits are done by government entities, such as the Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA).
Government audits include program-specific audits, compliance audits (called single audits), and other compliance audits attestation engagements required by local, state or federal regulations and laws.
These audits also include financial statement audits for entitles such as not-for-profits, local governments, higher education institutions and some for-profit organizations.
How to Prepare for Audit: 7 Key Steps
There are some steps you can take to ensure a smoother process and better financial audit report.
1. Planning
Assign some additional time to adequately prepare for the financial audit. Depending on the complexity of your financial records, it can take between a few weeks to a few months.
Reduce the pressure near the time of the audit by keeping records up to date throughout the fiscal year.
2. Organizing Data
All required documents and schedules should be organized. These can include:
Financial statements
Transaction records
General ledger
Bills & invoices
Fiscal year budgets
3. Reconciling all accounts
Make sure that all bills and expenses are paid and invoices collected. For best results, conduct bank reconciliation and credit card reconciliation. This will help you provide the most accurate analyses and projections.
Reconciliations often occur monthly, though for certain companies, they may occur weekly or even daily. With regular reconciliations, it is more likely that potential issues will come to the forefront. You can then discuss these and resolve them before the audit.
If you are short on resources or time, professional reconciliation services will be an asset.
4. Keeping up with accounting standards
Accounting standards, as well as regulatory and legal requirements, are updated each year. Hence, your financial team, especially your internal audit team, should familiarize themselves with any new accounting developments.
This reduces the time taken to make changes to comply with new regulations and makes it easier to track data.
Furthermore, industry standards can require that professionals undergo certain training. Hence, there is value in attending industry conferences.
5. Identifying significant changes
Both financial and non-financial changes can affect the financial auditing process. There are some crucial questions you need to ask yourself before the financial audit for proper preparation:
Are you investing in any new projects?
Has there been a change in the company’s financial situation from last year?
Is there greater revenue?
Has your company been given any grants or government support in the last twelve months?
Did you introduce new processes? Have internal controls or accounting standards been changed?
Is there anything that could indirectly affect the year’s fiscal findings?
6. Develop a timeline and assign responsibilities
Check the auditors’ list of requirements. Assign each item to an appropriate person, along with a due date. For maximum efficiency, plan the schedule with the financial auditors.
7. Learn from the past
It is uncommon for financial audits to go totally smoothly. This is especially true if your company is undertaking it for the first time or its last twelve months have seen many significant changes.
Most of the time, year-end audits will require adjustments. These can in fact be a great starting point for more accurate findings in your current year.
We recommend scheduling a meeting with auditors and major decision-makers to determine how you can avoid or navigate previous missteps. Make sure to review your previous year’s recommendations and audit notes.
Conclusion
Financial audit preparation is no simple task, but with the above steps, you should be better prepared for it.
For audit and anti-fraud assurance, you can hire financial consulting services, bank reconciliation services and credit card reconciliation services. NextGen Accounting does a custom setup for every client free of charge.
Our management team has decades of experience and includes former executives of Barclays Bank, Bank of America, and ICBC. NextGen Accounting was founded with your challenges specifically in mind and is dedicated to providing a seamless experience.
If you want to be well-prepared for a financial audit, contact us now.