Insights: Article

Preparing for Audit and Tax Time

January 29, 2018

Year-end is always a hectic time. There’s the internal documentation, the state and federal filings and the preparation for both audit and tax time. It’s okay to be a little overwhelmed.

One thing to note is that it’s never too early to start preparing. We live in a world where activity happens every day which affects your tax planning and your audit. Paying attention and staying up-to-date is vital to your preparation.

Here are a few tips to help you get prepared.

Review, review, review.
At a minimum, you should have a review process in place that documents when purchase orders are created, when bills are paid and when cash/checks or electronic payments are reviewed and deposited. This will help lay a solid foundation to ensure you’re on the right track.

Monthly you should be doing reconciliations for the following common accounts:

  • Bank accounts – this helps verify all revenue and expenditure activity is captured in your records on a monthly basis.
  • Accounts receivable – this helps ensure your customers are paying in a timely manner and will also help your collection procedures.
  • Accounts payable – this helps verify the amounts shown due are true payables and allows you to pay your vendors in a timely fashion. This may also help you take advantage of discounts given by your vendors for early payment.
  • Capital asset inventory – this establishes that any capital outlays are added to your software and/or external schedule. This list is an audit necessity.
  • Payroll accounts (accruals and expenses) – this verifies that payroll is being accounted for properly in the correct accounts.

Doing these tasks on a monthly basis will help you establish review and control habits. Need one extra layer of review? Have your management or ownership team review all financial information before you submit it to your CPA. You might catch a mistake that needs to be fixed.

Don’t forget about year-end.
By taking the time to set up monthly processes, your year-end procedures should be a little less burdensome. After all, you’ve been addressing these issues throughout the year. However, there are still some things to keep in mind as you approach year-end:

  • Review checks paid after year-end to make sure they are properly included in or excluded from your accounts payable ledger. This not only helps make sure your auditor isn’t finding any adjusting entries during their audit, but also helps ensure you have included all your expenses in the proper year.
  • Review old outstanding payables/credits to see if either payment was missed or if payments were misapplied.
  • Review your deposits received after year-end to make sure you applied payments to the correct customer and year.
  • Review old outstanding accounts receivable to see if an allowance is necessary for accounts that may not be collectible.
  • Update your capital asset listing for any disposals/deletions that have happened. This can be done by having each program/department/etc. do physical counts of their assets and submitting that to the finance department or selecting a lucky individual to verify the entire list.
  • Review year-end adjustments, usually prepaid, accruals, and current versus long term debt, which are required for the audit. This is the last part that has an impact on your findings if the auditor is the one posting these journal entries. Below are a list of accounts that are usually adjusted:
    • Prepaid rents, real estate taxes and insurance
    • Accrued payroll and taxes
    • Compensated absences
    • Long term debt (car and equipment loans)

Designate a point person.
Designate an employee to serve as the main contact with your CPA. This is usually someone who is responsible for most of the financials, or someone with strong project management skills.

As a side note, if you outsource your accounting, your outsourced accountant can serve as your CPA’s main contact.

Know what they’re looking for.
Take a look at the tax organizer list or list prepared by the client that your accountant or auditor gives you. It may sound simple, but you need to make sure all these items are good to go. It also doesn’t hurt to have it reviewed by someone else too.

When it comes to your audit, know when your auditors plan to be on site or work on your information. Ensure your main contact is around and has the answers they need. The assistance of these people can ultimately improve the turnaround time on your audit and tax return.

Think big picture.
As you’re preparing for your audit or tax preparation, here are some other points to consider:

  • Consider all the changes to your business that happened throughout the year: growth, new customers, etc. Are all the effects of those changes reflected in your financials?
  • Did you have any ownership changes? Even if you’re not quite sure how to put this on paper, bringing them to your CPA’s attention is always a good choice.
  • Did you add any long term assets (think building additions, vehicles, equipment, etc.)? If so, there are some details your CPA will want to know to make sure you’ve capitalized it correctly and are capturing the correct depreciation (hopefully some accelerated depreciation, too).

Year-end can be tedious and time consuming, but by taking simple steps during preparation, you can make the process go a lot smoother. And remember, your CPA is hired by you to help you. Audits and taxes help give you a picture of what’s happening in your business. Your CPA can be a valuable ally on the road to growth and success for your business. 

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