An external audit is a little bit like taxes. It’s a part of life in financial reporting and accounting; a regular occurrence that you simply have to get through the best you can, even though you’re not particularly thrilled about it. For most organizations, audits are more or less perceived as a necessary evil that will disrupt your schedule, devour your time and put a strain on your resources. But the extent to which this is true largely depends on how well prepared you are. In fact, over the past several years, I’ve picked up several crucial strategies that can greatly minimize these factors come audit time. And, much like with your taxes, you’ll see that you can definitely reap the rewards of savvy planning and prep work. Here are my top seven tips to help you tackle the audit process in the most time- and cost-effective manner possible:
Tip 1| Communicate priority to all stakeholders.
There’s no getting around it: an audit will put a strain on your already-busy employees, from accounting to finance and beyond. It’s often difficult for those employees to shift their focus from other important initiatives, and audit requests are typically pushed down to the bottom of everyone’s daily task list. This mentality can be costly, though. Auditors charge by the hour – and significant delays will quickly lead to significantly higher invoices.
To avoid this, upfront communication can go a long way. Employees should know ahead of time that requests from auditors are a top organizational priority and not to be viewed as an “add-on” once everything else is done. This directive should ideally come from an executive — all too often, the costliness of audit delays is simply not communicated well by internal upper management. One very effective way to do this is through an audit kick-off meeting to set clear expectations and get all employees, at every level, aligned on priorities before the audit begins.
Tip 2| Get smart about your PBC list.
As you well know, your PBC (provided by client) list is a preliminary list of items that the auditor requires from your organization prior to the start of audit fieldwork. After receiving the PBC list, there are a few ways to keep things moving quickly and efficiently:
- First, request the PBC list from your auditors as early as possible. You may even be able to work on a few general items preemptively that you know are always requested from any auditor (cash reconciliations, fixed assets, cash and revenue, accounts payable, etc.)
- Next, review the timelines set forth to make sure they are reasonable. If a timing request does not seem attainable, it’s best to have that discussion right away so you can prevent delays. Auditors are generally very good at being able to shift schedules and resources to accommodate their clients, so voicing your concerns early on will help them do so.
- From the moment your PBC list is in hand, don’t waste any time. Many audit requests can and should be prepared before the auditors come into your office to conduct fieldwork. Items like Board of Director minutes, fixed asset rollforwards, and the like should be prepared and reviewed prior to the auditors’ arrival.
Tip 3| Stay on top of your documentation (all year round).
Stellar documentation of your financials is not only best practice for an audit – it’s good business practice in general. For example, have there been significant events or transactions in your company? Has your organization sold or acquired a major business unit? Or recently entered into debt refinancing? It’s safe to make some assumptions on what your auditors will ask for, so you don’t have to wait to do the legwork. Be sure to have all transactions fully documented with analyses and memos. Make sure your reconciliations are complete. Provide footnotes and disclosures (for example, for debt refinancing) in your financial statements throughout the course of the year, so you’ll be ready when the time comes. Again, I can’t emphasize enough the importance of being proactive. Too frequently, companies do not start preparing their documents until an auditor shows up to do fieldwork – and by that time, everyone is entrenched with other requests. Identifying and getting ahead of such requests is an easy way to avoid costly delays in your audit timeline.
Tip 4| Hold weekly status meetings to stay on track.
As mentioned in Tip 1, an initial kick-off meeting helps align everyone on priorities. But it doesn’t end there: ongoing communication is vital throughout the entire audit process. Be sure to conduct weekly status meetings with both auditors and key internal stakeholders who are assisting with the audit. Realistically, it’s inevitable that certain items will be delayed due to issues beyond your control. Testing of inventory and its reserves may take longer than estimated, or perhaps your system takes a longer time to perform key calculations that have been requested. Whatever the scenario, weekly meetings are a good opportunity to bring up issues, concerns and successes; as well as identify and address foreseeable delays. Weekly check-ins also improve accountability and ownership of tasks – when individuals know they will have to speak to the tasks on their list in a more formal setting, there’s a better chance they’ll get them done. Simply put, such meetings are a great way to keep everyone on their toes.
Tip 5| Take steps to improve the accuracy and quality of deliverables.
One of the best ways to rack up your billable hours with your auditors is to hand over items that are confusing or do not agree with the trial balance or financial statements. In many cases, the employee who is performing the analysis may not have the right experience in generating a trial balance – and will hand over his or her work to the auditors without verifying that an analysis does, indeed, agree with the trial balance. Just a handful of these incidents can cause significant delays to the audit process, as auditors must spend precious time backtracking and reviewing the items that don’t agree. Additionally, there may be documentation that makes sense internally, but may be confusing to auditors.
Fortunately, these scenarios can be avoided with some awareness. For one, all work should be reviewed and verified by a more senior employee prior to submission to the auditors. No exceptions. Also, be sure to provide the proper supporting documentation for items that may be confusing. Remember: auditors do not work at your company, so the more cognizant you are of this during your documentation process, the more time it saves the auditors. Let’s look at a quick example: an inventory manager has of his all data captured in a comprehensive, multi-tab spreadsheet. While navigating this massive file has become second nature to the inventory manager, it can be daunting and time-consuming for an auditor to navigate. By taking the time to ensure there are clear and concise notes and instructions to help auditors extract the data they need, you can drastically reduce your company’s billable audit hours.
Tip 6| Create a central data source.
During the audit process, it’s critical to keep one centralized file, shared folder, or SharePoint site to house all materials. This saves both employees and auditors a ton of time they would otherwise spend chasing down files and trying to access pertinent data. Audit requests should not be saved locally: employees need a real-time view of all audit deliverables so they can easily track which audit items are complete, which items have been delivered to auditors, and when. This is especially important for larger companies, where multiple employees are working on audit requests. Resources inevitably shift (due to everything from vacations to maternity leave to employee terminations), so keeping everything in one central location is key.
Tip 7| Appoint the right person to take charge.
Given the nature of the audit process, it’s a good idea to appoint a single, dedicated resource to take the reins. That person should be able to effectively manage and oversee internal staff, as well as serve as the primary liaison with the auditors. But you’ll want to be selective with your decision – if that resource is too junior, he or she may lack the right level of credibility and rapport to keep things on track; and if that resource is too senior, he or she may be too busy managing other business functions that, if left unattended, could be costly to your organization. Your best bet (if choosing someone internally) is to appoint someone at the mid-management level, ideally in the accounting or finance department. Keep in mind, though: that person’s day-to-day activities will have to take a lower priority, so you’ll want to assess whether or not that’s feasible for your organization. For this reason, many companies find that outsourcing is a smart choice. Outsourcing not only helps employees stay focused on initiatives that drive your core business — but allows you to leverage a special brand of expertise that can save your company time and money, similar to the tips provided here.
While these quick tips are a good start, there are several additional strategies that can make for a smoother, more cost-effective audit. 8020 Consulting’s dedicated consultants have years of expertise and know-how in helping companies through the audit process, so call us any time at (855) 367 8020 to see how we can help you.
About the Author
Brandon Li, CPA, is a finance and accounting leader with over 15 years of experience. He started his career as an auditor with the “Big 4” assisting and then leading audit engagements in a wide range of industries, such as consumer products, financial services, and biotechnology. Prior to joining 8020 Consulting, Brandon served as Director of Financial Reporting & Analysis at Lucky Brand Jeans, as well as years of technical accounting experience with The Walt Disney Company. Brandon is experienced in accounting topics that include: mergers and acquisitions; disposals; asset valuations, asset capitalization, restructuring, impairments, investments, revenue recognition, implementation of new accounting guidance, and financial and accounting policies.
Categorized in: Financial Reporting & Accounting