For all but one day of the year, the end of your financial year is always approaching — sometimes year-end is still months away, other times year-end is right around the corner. Regardless of where you are in your current accounting cycle, are you experiencing that familiar feeling of audit dread?
Audits don’t have to be your worst nightmare if you’re working year-round to plan and prepare for them carefully. With an audit strategy and a dedication to using best practices year-round, you can relax when the audit team comes calling.
Explore these 12 steps you should take to ensure you’re audit-ready when the time comes.
Closing Checklist. A closing checklist should be used throughout the year to ensure all month-end processes are performed and all journal entries are posted. Without a checklist to follow, quarterly and annual entries can be forgotten.
Documentation. Documenting, filing and organizing seem like a mundane task, but it’s one of the keys to a smooth audit. You don’t want to be scrambling later to find documentation for the auditors. Keep track of debt agreements, leasing arrangements, lawsuits, complex transactions, technology modifications, and contracts with major customers and vendors.
Internal Controls. Make sure strong internal controls are established, operating, and effective. Don’t forget the IT General Controls (ITGC) that govern access and changes to the systems that store the financial information. A control assessment conducted by an experienced consultant is a savvy way to ensure your controls are up to standards.
New Accounting Rules. Be aware of new accounting pronouncements and modifications to existing pronouncements continually being introduced. For example, the rules on revenue recognition, accounting for leases, and non-profit accounting were all changed recently. Pay attention to the effective dates, and because these changes often require more work than expected, you should start on them early.
Non-Recurring Transactions. If there are questions about how to record a non-recurring or unusual transaction in the current year, reach out early to the auditors. Don’t wait until year-end. Some examples of this include the sale of property, acquisition, significant leases, a new incentive plan for management, a new line of business with a unique revenue stream, change in debt, etc.
Balance Sheet Reconciliations. Do these every month! A clean and reconciled balance sheet is a sign of healthy financials. Paying attention to bank reconciliations is one of the easiest ways to identify errors or issues in the accounting processes. Smaller companies may choose to do other account reconciliations on a quarterly basis (fixed assets, prepaid expenses, A/R, A/P).
And, you should do more than just perform the reconciliations. Use this opportunity to identify discrepancies, correct errors, and fix processes throughout the year. For example, old outstanding checks on the bank reconciliation can be a sign of lost or duplicate checks. Negative balances in an asset account can mean there’s a missing or inaccurate system posting. Research and fix these issues in a timely manner; there may not be time to address them at year-end.
Customer and Vendor Aging Review. Each month, review the accounts receivable (A/R) and accounts payable (A/P) aging for old or outstanding items. Establish a collections process to follow up with customers. Research old vendor balances, and again, make adjustments as needed throughout the year.
Revenue. To ensure accurate recording of revenue, have a process to verify that all shipments or services are billed in a timely manner. Do your year-to-date revenue and gross margin make sense? Have a strong process in place to ensure proper year-end sales cut-off, an area sure to be scrutinized by auditors.
Expenses. All expenses should be properly recorded at year-end. Look at subsequent disbursements to catch anything that’s fallen through the cracks. An analytic review of year-over-year and budget-to-actual expense variances will also help identify recording errors and additional expenses that need to be accrued at year-end. Also, don’t forget to make payroll-related accruals (hourly wages paid after year-end, bonus, vacation earned, etc.) And, you should review repairs and maintenance expense accounts to identify items that should have been capitalized as fixed assets.
Physical Inventory. For companies that will be performing a year-end physical inventory, plan carefully and educate your count teams. Consider counting before year-end and doing a roll forward, with approval from your auditor. Like your year-end sales cut-off, you should also have a strong process in place to ensure proper cut-off of shipping and receiving, since these are two items auditors will look at carefully.
Valuation can typically be addressed before year-end. Tackling it early will allow plenty of time to research, analyze findings, and make good decisions.
While every company faces its own unique challenges, following these basic “housekeeping” guidelines throughout the year is a great start to a healthy audit. With a small time investment each month, you’ll rest easy when audit time comes.