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  Preparing For A Financial
  Audit

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  January, 2003


Most people think of an audit in terms of their tax filings with the IRS.  However, if you are a business owner who has borrowed significant sums from a bank or other lending institution or you have outside investors, you may well be aware of another type of audit - a financial audit performed by a certified public accounting firm.

In that context, an audit is a process through which a CPA renders an opinion regarding whether your company’s financial statements accurately represent (a) its financial condition at a given point in time and (b) the result of its operations during a specified period.

While there’s no denying the expense and inconvenience that audits represent, there are two critical steps that you can take to reduce costs and minimize the disruption to your business:

  • Develop a cooperative relationship with your CPA firm 
  • Get your financial and business records in order.

Developing a cooperative relationship

Unlike an IRS audit, the process of auditing your financial statements should not be an adversarial one. If your staff and the auditors can work together smoothly, you will save money, the audit will be completed more quickly, and the transaction that created the need for the audit can move forward.

Here’s what you can do to help:

Explain to your people the purpose of the audit and the importance of it proceeding quickly and efficiently. Urge them to cooperate fully with the auditors.

Select an individual with authority to be the primary contact with the auditors. This will minimize duplications and omissions and promote consistency and coordination.

Provide a suitable work place for the auditors to use when they are working on site.

Before the auditors begin their work, arrange a meeting in which they and your people can get acquainted and develop rapport. This meeting should also include a discussion of timelines, the information that the auditors will need, and who will be responsible for what and by what date.

Ask the auditors to provide you with a list of schedules or work papers they will need from your records. Thoroughness at this step will maximize efficiency and hold down the audit costs.

Bringing your records up to date

Have everything ready for your auditors to review on the day they start their work. Providing information in a piece-meal fashion will only slow down the process.

Needed information will vary from audit to audit, but you should count on providing the following:

  • General ledger, up to date through the end of the period covered by the audit
  • Trial balance
  • All bank statements, accounts receivable, inventory and other subsidiary accounts reconciled to the general ledger
  • Schedule of aged accounts receivable
  • Schedule of priced inventories
  • Schedule of fixed assets and depreciation taken on them
  • Schedule of prepaid expenses
  • Schedules of loans, trade payables and other liabilities reconciled with the lenders’ and creditors’ records
  • Schedules of all other accrued liabilities (for example, accrued vacation and sick time for all employees)
  • Corporate minute book and stock certificate book
  • Lease agreements, loan covenants and notes of all lenders
  • In addition, all original source documentation, such as canceled checks, bank statements, vendors’ invoices, sales agreements, insurance policies, etc., should be available to the auditors.

Conclusion

Your goals at all stages of the audit process — from selecting the audit firm to updating of your financial records — should be to achieve a quick result at the lowest possible cost. Achieving those goals depends to a large extent on how prepared you and your company are, with respect to both attitude and preparation.

 

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