Demystifying Financial Statement Audits: An Audit Preparation Guide

Most of us cringe when we hear the word “audit” …and for good reason. When it comes to financial statement audits, the entire process can bring a mountain of work for accounting teams already stretched thin. These audits come with numerous information requests, follow-up questions, proposed corrections, and countless calls to walk through files or argue an accounting position.

As a former financial statement auditor, let me walk you through some key tips on how to best navigate the financial statement audit process, and how to avoid many of the common pitfalls that can lead to countless hours, back-and-forth communications, and headaches from additional requests.

Step 1: Know Your Specific Audit Scope/Requirements

As a first step before anything else, you should know exactly what type of audit you need to meet your requirements. These are generally based on the agreements executed by your investors for your latest equity raise, or in the loan agreement from your lender. The larger the amount of funding you require, the more likely that an investor/lender will require audited financial statements to ensure accurate financial reporting for their investment. If you are planning to become a publicly traded company, through an IPO or otherwise, audited financial statements are required regardless.

There are multiple considerations to make sure you have the right audit being performed. This includes key factors such as:

• Period under Audit

• Audit Standards

• Legal Entity(ies) subject to audit

• Audit Deadlines

Confirming the right details of your audit requirements can help you ensure that the audit is meeting the necessary standards, and that you are not engaging for a far more detailed (and costly) audit scope than might be needed.

For more guidance on these audit considerations, see our blog article on picking the right audit scope and auditor.

Step 2: Find the Right Auditor

Once you have a general understanding of your audit requirements, you then need to find an accounting firm with the right capabilities to perform an audit, and make sure you pick the right firm based on your needs.

Picking the right audit firm can be tricky and involves multiple considerations. The general rule of thumb is that the larger the accounting firm, the higher reputation and credibility they bring to investors/lenders. However, that also means a larger price tag and greater efforts in meeting their requests. Even with knowing the right type of audit firm, the success of an audit can vary widely based on the specific team, especially the audit partner and manager(s) involved, as well as their resources and capacity to meet your specific timeline.

For more guidance on choosing the right auditor, see our blog article here.

Step 3: Collaborate on Audit Planning Early

Once you have identified the right auditor and audit scope and signed the contract, push to have an audit planning call as soon as possible. Have both teams discuss and get aligned on the following:

• Key Audit Areas. Audits are generally focused on the higher-risk, significant, and complex areas of the company. Provide your auditor with a thorough background on the Company, including:

  • Org/Legal Structure, such as subsidiaries/divisions and where they are located)

  • Products and revenue streams

  • Systems used

  • Level of processes/controls implemented (or lack thereof)

  • Significant transactions (e.g., recent acquisitions, equity investment and loans)

• Audit Timeline. While the general timeline should have been established before signing the audit contract, this is a more in-depth discussion to discuss:

  • When certain audit areas will be tested; higher-risk and complex areas should be started earlier when possible

  • Deadlines for both your team in providing information to the auditor, as well as when they plan to provide requests/testing samples and complete certain audit areas. The biggest pain points of an audit come from delays and slippage on timelines.

  • Interim vs. Year-End Testing. If available, push to perform certain testing before year-end, such as in Q4 of the fiscal year. This allows a significant portion of the audit work to be performed upfront, vs. after year-end when you and the auditor will be busiest.

Step 4: Obtain and Compile Auditor Requests

After the initial audit planning discussions, push your auditor for a request list, often referred to as a PBC (provided by client) list, as soon as possible, even if it is a tentative list. This allows you to begin to see the level and types of requests that the auditor will be making to perform their work.

A lot of information is required for an audit, and so many companies may be surprised by the number of requests. Asking for the list upfront allows you to see how long it will take to gather the necessary information, including if new reporting or involving other departments is required. If certain items are complex or unknown, you may want to engage a third-party audit preparation or technical accounting consultant to assist.

For additional guidance on some common focus areas for a financial statement audit, see our blog article here.

Step 5: Consistent Communication

Once the actual fieldwork/testing begins, and even with sufficient planning in the earlier steps, the level of audit requests and questions can be overwhelming, and open items can easily fall through the cracks.

Make sure you set up frequent recurring status meetings with your auditors on at least a weekly basis. If timelines are tight, then plan to have multiple meetings per week. These calls are generally 30-60 minutes, with the goal to provide status/progress on the audit, and to discuss the most important open items/areas that may be potential bottlenecks for audit completion. Any complex or critical issues should be identified and communicated on these calls as well.

Conclusion

If you have been following each step of this guide, then you have hopefully been able to perform some significant audit preparation and set yourself up for success. However, planning doesn’t solve everything; there are many unexpected matters and issues that can arise throughout the course of an audit. Things get hectic, and audits always come with their headaches, especially with an accounting team that is juggling many different responsibilities.

If you have any questions, reach out to our team, and make sure you have the help you need to successfully navigate your financial statement audit.