Audit Preparation Series: How to Prepare for an Audit
An audit can be time consuming no matter the size and type of your organization. There are steps you can take to ready your organization for an audit and help to eliminate some of the time spent during the audit gathering information. The first step is to understand the components of an audit. There are three stages to every audit: planning, fieldwork, and completion.
The planning stage of an audit is best described as the “getting to know you” stage. The auditor will ask general questions about your organization, changes that occurred during the year, control procedures, and request the trial balance and general ledger. Information is also usually requested during this period using an items request checklist. This list is a roadmap to the audit experience and helps set up expectations for the type of information that will be required during fieldwork. As you are recording year end adjustments, keep the paperwork that you needed to determine what the entries were, the auditors will need this same type of information. Walking through each account in the trial balance and making the proper adjustments will assure less adjustments are proposed during the audit. It is advantageous to send this information as it is gathered or have it ready for the auditors on the first day of fieldwork, which will in turn decrease the amount of information requests that occur during the fieldwork stage.
Throughout the planning stage, the auditor assesses risk by transaction classes (i.e. cash, debt, revenue, etc.) and designs the audit approach based on those risks. Based on the risks determined, the auditor determines what type of audit procedures to implement for this specific audit. There are six categories of procedures the auditor can use to audit the transaction classes: 1) inspection, 2) observation, 3) inquiry, 4) confirmation, 5) re-performance, and 6) analytical procedures. Which procedures are used is determined at the end of the planning process. The auditors use a combination of these procedures to “fill their bucket”. This terminology is used as a way to explain the overall audit process. To complete an audit, the auditor must make sure they are gaining sufficient audit evidence in the most effective way possible. For example, with receivables it is common for confirmations to be sent out to help substantiate the balance of receivables and there is usually an inspection of documentation to determine that each receivable is properly recorded. Is this enough? It depends on if these two procedures provide reasonable assurance the financial statements are not misstated. This decision is based on the auditor’s judgment and every transaction class is different just as every organization is different. The types of procedures tested may also be based on control testing or substantive testing. Control testing tests the controls the organization has in place for that transaction class to determine if control procedures are implemented properly and work. Substantive testing tests the balances of the transaction class to determine if they are recorded properly. Either type of testing may be used alone or together to gather appropriate audit evidence.
This stage is where the gathering of information by the Organization is crucial. When the information requested is ready for the auditor at the beginning of fieldwork, interruptions to your staff are less frequent. Take time to ensure that all subsidiary ledgers agree to the trial balance and questions about differences should generally be less time consuming. The fieldwork stage is when the auditors are “filling their bucket” and they should have access to finance staff. If staff will be unavailable during the week, let the auditors know up front so they may schedule any questions or information requests accordingly. For example, if the accounts payable clerk has vacation planned later in the week, the auditors can shift their focus to ensure they are able to work through the accounts payable balances first.
Reaching this stage of the audit process signals that your audit is almost complete. A bulk of the work by the auditors is internal at this point. Once fieldwork is completed and all evidence has been gathered, the work goes through a rigorous review process. On most files, this entails a manager review, a partner review, and a concurring partner review. The concurring partner review is essential as a cold review as the partner did not have any other role during the audit of the Organization. There may be follow up questions from members of the audit team during this phase of the audit, but they should be limited in number. Once the reviews are completed, the draft financials are delivered. The draft financials should be reviewed and approved by the auditee and, at this point, if there are any questions regarding the financial statements or any findings that are reported, please ask them. A representation letter will be delivered to the auditee; this letter should be reviewed, signed, and returned to the auditor. This letter includes representations from the auditee as to the fairness and accuracy of the information provided to them during the audit.
Once the final report copies are delivered, the audit process is complete. However, the relationship with your auditors does not have to cease and are available year round for any questions you may have on accounting standards, internal controls, etc. If you have any questions, please do not hesitate to contact us, we are happy to assist you.