The objective of a financial statement audit is to obtain reasonable assurance that an organization's financial statements are free from material misstatement. In order to achieve reasonable assurance that an organization's financial statements are fairly presented, in all material respects, an independent auditor needs to perform certain audit procedures on the financial statements and related notes.
For many of our clients, the audit process feels very cumbersome and overwhelming. Fester and Chapman P.C. has identified some simple steps for our clients to perform, prior to the official start of an audit, to ease these feelings toward an audit, in order to meet the following objectives:
Maximize audit efficiency.
Timely issuance of audited financial statements.
Manage the cost of an audit.
Enable management to balance an ongoing audit, and perform their day to day duties that do not cease just because there is an audit.
Steps to prepare for an audit:
Identify which areas are most susceptible to errors or fraud.
Perform an assessment annually of accounts that are most susceptible to being misstated due to either errors or fraud. Then identify how management mitigates these risks. Consider accounts that (1) are more complex, (2) involve estimates and (3) require journal entry adjustments.
Determine if current internal controls are appropriate.
Review your processes and determine if the duties of maintaining custody of assets, authority to disburse assets and record keeping are segregated. For example, responsibility of keeping custody of the organization's check stock should be segregated from the authority to write checks. The responsibility of keeping accounting records of the organization's cash should be segregated from both the duties of custody and authorization. Consider whether it would be possible for any person to single-handedly steal the organization's assets without the timely discovery of others within the organization. Further, consider whether there is an appropriate level of review/oversight in order to prevent or detect errors.
Review schedules for each asset, liability, and revenue and expense.
Each statement of financial position (balance sheet) and statement of changes in net assets (income statement) account should be supported by a schedule with detail to support the account balance. For all asset and liability accounts, the schedule should include only/all assets or liabilities present as of the reporting date.
These schedules should be formatted to be easily read and scanned to identify significant or unusual items that may indicate an error. Accounts that cannot be summarized or substantiated by a schedule present a control risk, because it precludes management from identifying improper variances to accounts due to errors or fraud.
Analytically review each account for reasonableness
Accounts should be reviewed regularly for reasonableness. A general expectation of account balances should be developed by management and then compared to the trial balance. Significant variances should be investigated. Examples of some analytical reviews include (1) budget to actual analysis, (2) horizontal/trend analysis (A review of changes in the same account with the prior year, month, pay period, etc, such as comparing current year payroll expense to prior year payroll expense) and (3) vertical analysis (A review of one account in relation to another account in the same period, such as comparing payroll expense to total expense, interest expense to debt, depreciation expense to changes in fixed assets, etc.).
Start preparing for the audit early
Regardless of the size of the organization, when an audit starts, there never seems to be enough hours in the day or resources to help. There are some steps that can be done early to reduce the overwhelming feel of an audit including, but not limited to:
Early/frequent contact with the auditor (even before year end).
Start on the prep list early.
Establish a reasonable timeline for completion. Give consideration to the date financials will be closed, the start of field work and any deadlines (from banks, the board of directors, grantors, others).
Communicate with the audit team any changes that may affect the audit (new or discontinued activities, grant requirements or awards, fundraising activities, debt, other changes in operations, etc.).
Early communication will help the audit team better plan for the audit, which may include reducing the number and/or the extent of procedures to be performed, or identifying that additional procedures will be required. If the change in audit procedures is identified early on, the audit team is able to adjust their planned audit approach, which could include (1) reducing/expanding the engagement team, (2) implementing planned changes in procedures timely and effectively, (3) advance contact/confirmation with third parties as applicable.
If the need for changes to procedures is discovered after the start of fieldwork, many times this can result in delays, cost overages, and an overall more difficult audit than if the audit were more effectively planned.
While Fester and Chapman P.C. does their best to meet the objectives identified above, your early consideration and implementation of the steps identified will ease the cumbersome and overwhelming feel of an audit.