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Going through a financial statement audit for the first time can bring plenty of questions. What will the auditors need? Who should be involved? What happens if the accounting records aren’t fully ready?
An initial audit often requires more preparation than future audits because the audit team is learning about your organization, accounting processes, internal controls, significant transactions, and financial reporting practices for the first time.
In this Q&A, Rebecca Muehl, Principal at SVA, answers common questions organizations may have as they prepare for their first financial statement audit. Rebecca specializes in assurance services, working with closely held businesses on audits, reviews, compilations, and agreed-upon procedures.
A financial statement audit is an independent examination of an organization’s financial statements and related records. Auditors perform procedures designed to determine whether the financial statements are materially correct and prepared according to the applicable financial reporting framework.
An audit provides reasonable, rather than absolute, assurance that the financial statements are free from material misstatement. Auditors don’t review every transaction. Instead, they use risk assessments, testing, sampling, analytical procedures, and other methods to form an opinion on the financial statements as a whole.
The first year typically involves more groundwork.
Auditors need to understand how the organization operates, document significant accounting processes and controls, review opening balances, and become familiar with accounting policies and historical transactions.
In future years, auditors can build on knowledge gained during prior engagements, while still updating their understanding for changes in the organization, its risks, and its financial activity.
The finance and accounting team usually have the greatest involvement, particularly the CFO, controller, or other person responsible for financial reporting.
Depending on the organization and audit scope, auditors may also need information from executives, IT personnel, human resources or payroll staff, operational leaders, and members of the board or other governance groups.
Assigning internal owners to different audit requests ahead of time can help keep the process moving and prevent every question from falling on one person.
Auditors typically provide a prepared-by-client, or PBC, request list outlining the information they need.
Common requests include trial balances, account reconciliations, bank statements, contracts, debt agreements, board minutes, fixed asset records, payroll information, revenue support, and legal information. The exact list will depend on your organization and its financial activity.
Start by getting your accounting records as complete and organized as possible.
Close the books, reconcile significant accounts, investigate unusual balances, organize supporting documentation, and review the PBC list well in advance. It also helps to assign responsibility for individual requests so everyone knows what they’re expected to provide.
If management is already aware of an unusual transaction or unresolved accounting issue, raise it with the audit team early. Addressing those matters before fieldwork can reduce questions and delays later.
Unreconciled accounts can lead to additional questions, audit adjustments, delays, and more work for both management and the auditors.
If a balance doesn’t agree with supporting records, your team may need to research historical activity or correct errors before audit testing can be completed.
Organizations should pay particular attention to significant accounts and other areas where incomplete information could affect the financial statements.
Auditors want to understand how transactions move through the organization and what controls are in place around financial reporting.
They may perform walkthroughs and ask questions about areas such as cash, revenue, purchasing, payroll, journal entries, and financial reporting.
The expectations will vary based on the organization’s size and complexity. A smaller organization isn’t expected to have the same control environment as a large company. The goal is to understand the controls that exist and how they relate to financial reporting risks.
Transactions outside the normal course of business may require additional attention.
Examples can include acquisitions, new debt arrangements, new leases or lease amendments, equity transactions, related-party transactions, restructurings, major contracts, or significant asset purchases.
Discussing these transactions with your auditors early gives them time to evaluate the accounting treatment and identify any documentation they’ll need. Waiting until fieldwork can create additional research and slow the engagement.
During the audit, auditors may identify amounts they believe should be adjusted in the financial statements.
Some proposed adjustments are recorded by management, while others may remain unrecorded depending on their nature and significance. First-time audits can uncover accounting or financial reporting matters that management hasn’t previously addressed.
An adjustment can also highlight an opportunity to improve an accounting process or financial reporting procedure going forward.
Common causes include incomplete reconciliations, missing documentation, delayed responses, unavailable personnel, complex transactions identified during fieldwork, accounting policies that are not in compliance with the applicable financial reporting framework and/or need additional evaluation, and late financial statement changes.
Many of these delays can be reduced through early preparation, clear ownership of requests, and consistent communication with the audit team.
Use the experience to make next year easier.
Maintain reconciliations throughout the year, document accounting processes, address control recommendations, retain supporting documentation, and evaluate complex transactions as they occur. Establishing an ongoing audit-readiness calendar can also help spread preparation throughout the year rather than concentrating it all around year-end.
In addition, contact your auditor as new issues arise throughout the year. This will aid in the audit planning and reduce surprises during year-end fieldwork.
A first-time audit may require additional preparation, but organizations can make the process much smoother by starting early, assigning clear responsibilities, and discussing significant accounting matters before fieldwork begins.
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