How to Prepare for a Financial Review or Audit
Many business owners mistakenly think an audit is something that’s only forced upon a business. It certainly can be, but companies can also voluntarily undergo financial reviews or audits, and doing so can be beneficial.
Sometimes there’s no getting around it: your lender might require it, or your investors might expect it. But even companies that aren’t legally required to undergo an audit can benefit enormously from being “audit-ready.” The process forces discipline, surfaces hidden problems and signals to banks, partners and stakeholders that your financials can be trusted.
But no matter the circumstances of your review or audit, you want to be prepared.
Here’s what you need to know to get your books in shape before an auditor or reviewer ever walks through the door.
Understand the Difference Between an Audit and a Review
Before diving into preparation, it helps to know what level of scrutiny you’re dealing with.
- A financial review involves a lighter touch. An accountant applies analytical procedures and makes inquiries to provide limited assurance that nothing is materially misstated.
- A full audit provides a more comprehensive level of assurance. It involves independent verification of account balances, transactions and internal controls. And the auditor must express an opinion on a company’s financial statements.
What Do Auditors and Reviewers Actually Look For?
Financial reviewers and auditors aren’t trying to catch you doing something wrong. They’re trying to confirm that your financial statements fairly represent your company’s financial position. To do that, they focus on a few key areas:
- Completeness and accuracy. Are all transactions recorded? Are they recorded in the right period? Are account balances supported by documentation?
- Consistency. Are accounting policies applied the same way from year to year? If something changed, is it disclosed?
- Supporting documentation. Can every significant transaction be traced back to a source document: an invoice, a contract, a bank statement, a receipt?
- Reconciliations. Are your bank accounts, credit cards and balance sheet accounts reconciled regularly and do they tie out?
- Internal controls. Are duties appropriately separated? Are there checks and balances to prevent errors or fraud?
Understanding these focus areas tells you exactly where to direct your preparation energy.
Common Red Flags That Trigger Extra Scrutiny
Auditors are trained to notice anomalies, and a few common red flags tend to invite deeper examination.
Unusual spikes or dips in revenue, expenses or margins without a clear business explanation will draw attention, as will accounts receivable aging issues — for instance, a large volume of old, unpaid invoices that might be uncollectible.
Unsupported journal entries raise concern, especially those made late in the accounting period or by a single individual without oversight. Reconciling items that sit unresolved for months in bank reconciliations are another warning sign. So are related-party transactions that aren’t clearly documented or disclosed, and inventory discrepancies between physical counts and book records.
Identifying and resolving these issues before your reviewer arrives is far less painful than trying to explain them under pressure.
A Practical Pre-Audit Checklist
You can’t get audit-ready overnight. But with time and a structured approach, it’s manageable. To help, here’s a series of steps to follow in the weeks or months before your review or audit:
- Organize your supporting documents. Gather contracts, invoices, loan agreements, lease documents, fixed asset purchase records and any other documentation that supports significant balances and transactions. A well-organized digital file system saves enormous time.
- Review your accounts receivable and payable. Investigate old outstanding items. Write off uncollectible receivables, resolve disputed payables and be prepared to explain anything that’s aged significantly.
- Reconcile every account. Bank accounts, credit cards, loans, payroll liabilities, sales tax and other relevant accounts should be reconciled and tied to supporting documentation.
- Close your books properly. Make sure the accounting period in question is fully closed. All transactions must be been posted, and all adjustments should be made.
- Document your accounting policies. Articulate how your company recognizes revenue, depreciates assets, values inventory and handles other key accounting judgments.
- Assess your internal controls. Can you demonstrate that more than one person is involved in financial processes? Are check signing, payment approvals and bank reconciliations handled by different individuals? Auditors look favorably on strong controls.
- Inform and prepare your staff. We’ll reiterate: A professional review or audit isn’t about trying to catch people doing something wrong, and your relevant personnel needs to know that, too. Let your team know about the pending audit and ensure that they’ll be cooperative during the process.
Why Being Audit-Ready Is Worth It … Even Without a Mandate
Many small and midsize business owners view an audit or review as a burden. That’s not entirely unfair, given that an audit can take time away from the business.
However, companies that maintain audit-ready books year-round can gain a competitive advantage. Lenders may extend credit more readily. Buyers may pay higher valuations. Partners and investors may engage with more confidence.
More immediately: The internal discipline required to maintain clean, well-documented books reduces errors, deters fraud and gives ownership a clearer picture of the business at any given moment. The process of getting audit-ready often reveals inefficiencies or errors that, once corrected, improve day-to-day financial management.
Proactive preparation can also save you time and headaches. The more organized your records are when an auditor arrives, the less time they spend digging, and auditors often bill by the hour.
Are You Ready to Strengthen Your Financial Foundation?
If you’re looking to bolster your business’s financial credibility, you’ll want to consider an audit from seasoned professionals.
For more than 40 years, McManamon & Co. has been guiding privately owned, small and midsize businesses through the auditing mire. Our approach to audits involves risk assessment and evaluation of the design effectiveness of internal controls over financial reporting. We place a strong emphasis on communication throughout the auditing process, and regularly meet with your management team, audit committees, CFO, controller and accounting staff to ensure everyone is well-informed.
Call us at 440.892.8900 or contact us online today to learn how we can help you take control of your financial reporting.
Tags: audit, IRS audit, McManamon, small business | Posted in audits, McManamon & Co.