Three Steps to an Easy Audit

January 15, 2020 | Article

Audit time doesn’t have to be all that stressful. Honestly. If you’re looking to add some zen into your audit, you’ve come to the right place.

It’s important to adopt the right mindset so that your thoughts, which rule your actions, match the underlying reality of the audit cycle and the way audits actually get done. Stephen Covey, best-selling author of The 7 Habits of Highly Effective People, suggested we all should ask ourselves the question, “Is real life more like school, or the farm?” At school, it’s sometimes possible to slack off for a while, then cram the night before the exam and still get by with a passing grade. Does that work on the farmto slack off, then at the last minute till the soil, plant the seeds, water the plants, pull the weeds and grow the crops the night before the harvest?

Well, duh. Of course not.

The audit engagement is like the farm. The lesson in this comparison is that you can reduce, if not eliminate, audit stress by being the farmer: tending your crops throughout the year, so when harvest time arrives, you are ready to enjoy the bountiful fruits of your labor.

Here are three steps you can take to get the most from your audit with the least stress.

1. Tend to Your Crops All Year Long
Accounting systems that function well do so because they are designed to continually self-correct. Chances are your system is good at this for everyday things. You probably also do some things every month, like reconcile the bank accounts, and that’s great. But do you have a solid month-end closing checklist and timeline to ensure an accurate (and self-correcting) month-end close, along with preparation of accurate, reliable monthly financial statements?
If so, congratulationsyou are well on your way to a reduced-stress audit. If you’re not quite there yet, here are a few things to consider for your month-end closing checklist.

Every month, you should:

  • Analyze, review, and reconcile significant balance sheet accounts, preferably using a “rollforward” type schedule to capture all the account activity.
    • For example, beginning balance + additions – reductions +/- adjustments = Ending balance
  • Use a rollforward schedule to ensure that the account balances roll forward from the prior month-end to the current month-end.
    • This provides assurance that the income statement effects of the changes have been properly recorded.
    • Do this every month during the year, and come audit time, you will have rolled forward all your accounts for the year, and your auditors will save themselves (and you) a lot of time.
    • This also assures that you and your Board of Directors have accurate financial statements on which to base important decisions.

Below are the primary balance sheet accounts and related income statement accounts that you will want to reconcile/roll forward every month. Use this chart to keep track, and add other accounts to meet your organization’s unique needs.

Primary Balance Sheet Account(s) Related Income Statement Account(s)
Cash Various income statement accounts
Investments Net investment return
Accounts receivable Program revenue
Promises to give Contribution income
Accounts payable Various income statement accounts
Accrued expenses Various income statement accounts
Deferred revenue Program revenue
Debt, including capital lease obligations, and deferred debt offering costs Interest expense and amortization expense
Net assets, including reclassifications of temporarily restricted net assets in satisfaction of time or purpose restrictions Contribution income, reclassifications of temporarily restricted net assets in satisfaction of time or purpose restrictions (e.g., expenditures in satisfaction of donor restrictions), losses on uncollectible promises to give, and amortization of discounts to present value

Generally, it is not necessary to perform monthly rollforward analyses for property and equipment, as the detailed schedules of these assets are often posted only quarterly or annually. If this is the case, estimated depreciation expense can be recorded monthly, pending a “true-up” adjustment later at quarter-end or year-end.

The most important factor when tending to these proverbial crops is communication. Talk to your auditor often throughout the year about difficulties you’ve encountered and accounting questions you have as well as the opportunities you’re seeing within your industry and organization. If you have the right auditor, they will not only be able to answer everyday questions, but they will also provide the sound business advice and counsel that comes from years of working with many organizations over time. If your auditor can’t or won’t do this, it’s time to find a new one.

2. Plan and Prepare for Harvest Time
Don’t expect your audit to go smoothly without some advance planning. Investing in careful planning now will pay out in multiples later. Don’t underestimate how important this step is to a successful audit.

Two or three months before year-end, you should:

  • Sit down with your auditor to plan the audit and set the audit timeline, in detail.
    • Be sure you both understand the Who, What, When, Where, How, and Why for each step of the audit process, from engagement letter to delivery of the final reports. The result of these efforts should be a matrix of roles, responsibilities and dates that you both can agree to uphold.
  • Review all the audit confirmations, schedules to be prepared, documents to be pulled and other support functions your organization will be expected to provide to the auditor. Ask your auditor for workpaper templates, sample confirmation letters and other items that can help reduce your work in preparing for the audit. Accountability here is critical to ensuring that your audit will stay smooth and on track.
  • Gather the support and commitment of your staff to execute on the audit plan; if the team won’t come together, neither will the audit. Each person on the team should be ready, willing and able to do their part.
    • You can help ensure this by scheduling adequate time for each member to perform their part in preparing for the audit, as well as scheduling time during the audit for them to be responsive to the needs and questions of the auditors.
  • Make others in your organization aware of the audit timeline and tell them what to expect in terms of anticipated interactions with members of the audit team.

3. Bring in the harvest
Now comes the payoff for all your hard work, which is not to say the audit itself is a cakewalk. Yes, it will be somewhat disruptive, at times irritating, and it will probably cause you and your team some inefficiency compared to days in the office with no auditors around. But all the work you’ve put in throughout the year will allow you to reap the benefits of a smooth harvest.

At year-end, you should:

  • Close the books, but only after you have finished recording all the activity for the year, including accruals and adjustments to put your books fully on GAAP (assuming you present your financial statements on a GAAP basis, of course).
    • This includes updating your fixed asset schedules, adjusting depreciation, recording all payables and receivables, adjusting bad debt allowances, etc. The objective at the finish is to have a closed general ledger that will not need to be further adjusted by your auditor.
  • Complete all the rollforward schedules and account reconciliations.
    • If you’ve been doing this as part of the closing process, the rollforward schedules will have been tied out to the final general ledger balances. So now, at year-end, they will be ready for the auditor.
  • Complete any other audit schedules or other information items requested by the auditor.
    • Here, the objective is to have everything ready for the audit team when they arrive on the first day of year-end fieldwork. The last thing you want is a field full of combines if the crop’s not ready.

Remember: Communication throughout the audit will produce the best results while reducing everyone’s stress along the way. Your auditor wants you and your organization to be successful and hopes to help you by providing a high-quality audit, sound advice and personal support to you throughout the year.

Bringing in the harvest is almost always accompanied by celebration. So, don’t forget to celebrate the successful completion of your audit! After a long process well done, you deserve to feel great about it. Then, it’s back to tending to those crops for next year!

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