Top Reasons for Financial Statement Audit Overruns (and how Audit Preparation can help you avoid them)

The initial quote you get for your company’s financial statement audit is unlikely to be what you ultimately pay. This is especially true for companies undergoing a first-time audit, or for an audit year with major activity. For messy audits, the amount of “overruns”, or auditor costs/fees in excess of the quoted price, can be as much as the original amount, or even 2-3x! 

Part of this lies in an auditor’s capabilities, whether they have the resources and experience to effectively scope, plan, and execute their audit. Overruns can be challenged to understand their cause and rationale, and without a legitimate reason, you should consider whether you are partnering with the right audit firm.  

However, there are many times where overruns can be attributed to the client. Despite an auditor’s best efforts to plan and manage the many uncertainties of an audit, issues and findings generally come up, and additional work is required to understand and address these matters. 

As a former auditor myself, my goal is to help you understand top reasons behind an auditor’s overruns, and how you and your team can avoid these pitfalls through sufficient audit preparation. 

Reason #1: Insufficient/No Technical Accounting Evaluation 

When you account for your company’s financials under the more complex accounting standards of US GAAP (or IFRS), these frameworks bring a wide range of topics that requires a specific way of accounting for most areas of a business. Understanding the correct accounting guidance, and interpreting how it applies to your company, often results in a major change beyond basic bookkeeping and/or cash-basis accounting. Key areas include: 

• Revenue Recognition 

• Leases 

• Business Combinations 

• New/Amended Equity or Debt Financing 

• Stock Compensation 

See our other articles for a more detailed understanding of these technical accounting topics and key audit requests to help with your audit preparation. 

Most companies and their accounting teams don’t have the experience or resources for a comprehensive technical accounting evaluation, and many companies may not even know what needs to be considered. But these tend to be the most complex areas of an audit, and where an auditor will consult with their own technical experts to ensure the right accounting treatment.  

If you don’t have an evaluation completed on behalf of your company and ready for audit, or if not properly prepared with the right expertise, this can be extremely costly. Technical work requires significant time spent by specialized reviewers within an accounting firm, some of which have hourly billing rates up to $1,000 or higher. If an auditor must do their own evaluation from scratch, rather than reviewing your prepared position, overruns build up fast. Consider connecting with one of our technical accounting experts for a comprehensive evaluation of these areas and save yourself costly audit overruns. 

Reason #2: Delays in Audit Requests 

At the beginning of an audit, an auditor does a LOT of planning. They scope the company and its accounting risk areas as best they can and determine the necessary information to request (often referred to as “prepared-by-client” items, or “PBCs”). They then build a timeline and schedule all the team members they expect to need throughout the project, including the dates that their team plans to review client information, make samples, and perform testing. Finally, they set due dates for each audit request, based on carefully planned timelines, to ensure they meet the audit deadline. 

Even the best laid plans never go as they should. For almost any audit, a company will have delays in providing necessary information to the auditor, or in the format or level of detail that was requested. If the necessary information is not ready when scheduled, an auditor must go back and reschedule resources for a different time, often during a busy period with competing deadlines, or with whatever resources are available. Worst case, an audit team is onsite or remains scheduled during the original time, with hours being billed while waiting on work. 

Delays in providing information is understandable; the list of audit requests is often long and overwhelming. However, having the right knowledge of which requests are high-priority, that require more time for review, or are a bottleneck for additional audit procedures, is a crucial step of audit preparation. Timely delivery of key requests can ensure audit progress, and that additional hours aren’t incurred due to delays and rescheduling. 

Reason #3: Insufficient/Incorrect Information 

The worst thing for an auditor is not having any information necessary for them to perform their procedures. However, a close second is receiving information that is insufficient or incorrect. 

When auditors provide their list of audit requests, each item generally includes notes of what they expect to be included and in what format. If the files provided do not include that necessary information, or are not in the correct format, this can be a huge pain point for auditors. Common examples include: 

• Short Answers for Detailed Information Requests: Sometimes, requests that are not applicable to the company can be addressed with a quick “N/A” or “Does Not Apply.” However, many times a request is applicable, and an auditor needs sufficient information to evaluate. Common pitfalls like submitting a one-sentence response for a significant inquiry, leads to follow-up and additional calls to obtain the necessary information. 

• Wrong Format: These days, most data requests are available in spreadsheet format, such as Microsoft Excel or Google Sheets. Auditors LOVE spreadsheet formatted files, as it allows them to see underlying formulas and quickly recalculate amounts; this saves a lot of time in testing. However, receiving quantitative information in other formats, such as PDF or physical copies, leads to follow-up requests for a new file in different format, or significant hours to manually recalculate and/or understand how a workbook flows. 

Providing PBC’s and information to an auditor in the wrong format, or with insufficient/incorrect information, leads to a major amount of additional work, back-and-forth conversations, and headaches for everyone involved.  

Make sure you deliver the right audit request the first time around or have someone that can help make sure that it checks all the boxes. If not, you can already expect that follow-up e-mail looking for more information. 

Conclusion 

Financial statement audits can demand a large amount of time, money, and energy. By having the right information in an audit-ready state, and by avoiding some of the most common pitfalls discussed above, you can set yourself up for success and avoid costly overrun bills from your auditors.  

For a more detailed understanding of where you and your company stand, connect with one of our experienced audit preparation professionals.