What to check before a financial audit

An audit drags on for reasons that have nothing to do with the numbers

The auditor does not spend their time recalculating. They spend it asking for evidence and waiting for it. Every document that takes two days to appear is two days the audit does not advance, and the cost of an audit is measured in time, not in findings.

So the question to ask before it starts is not whether the accounts are right. It is whether you can prove they are, without looking for anything.

The balances you have to be able to explain

Not every line of the trial balance gets the same attention. These four carry most of the questions:

• Banks. Reconciled up to the last day of the period, with the outstanding items identified one by one. A reconciliation that ends in “difference to be investigated” is an open question with your name on it.
• Accounts receivable. With an ageing breakdown and a view on what is actually collectable. An old balance nobody wants to talk about is the one that will be asked about first.
• Inventory. With a physical count and the trail from the count to the recorded figure. If the two numbers differ, say so before being asked and explain why.
• Fixed assets. With a detail that adds up to the balance, and depreciation that follows a criterion somebody can state out loud.

The papers that should already be together

Half the delay in an audit is a search for documents that exist and nobody has in one place. Before it starts, put these in a single folder: current contracts, loan agreements with their amortisation schedules, insurance policies, lease agreements, minutes of the shareholders’ and board meetings for the period, and the filings you have submitted with their acknowledgements.

It sounds obvious. It is the single thing that most often turns a planned audit into a long one.

The three reconciliations that set the tone

An auditor forms a view of a company in the first days, and these three are what forms it:

1. Bank against accounting. The basic one. If this is not current, everything after it is read with suspicion.
2. Physical inventory against the system. Not only the total: the differences, and what was done about them.
3. Payroll against what was filed. What you paid, what you withheld and what you declared have to tell the same story.

When those three line up, the rest of the audit is a verification. When they do not, the rest of the audit is an investigation.

What not to do

Do not adjust in a hurry. An entry made the week before the audit to tidy a balance is exactly the entry that gets selected, and it will be asked about with the date in hand.

Do not redo closed periods. Correcting a prior year because a figure looks better that way turns an explainable difference into a restatement, which is a much longer conversation.

And do not fix a balance before anyone has asked about it. A difference with an explanation is a normal finding. A difference that was quietly made to disappear is a finding about the controls, which is worse.

What an audit is not going to do for you

It is not going to put your accounting in order, and it is not meant to. An auditor gives an opinion on information you prepared; if the information arrives unfinished, what you buy is a longer audit and a worse opinion, not a free clean-up.

It is also not going to find everything. An audit works with samples and materiality, so passing it is not a certificate that every figure is right. It is a reasoned opinion, and that is already a lot.

A one-page checklist

1. Banks reconciled to the last day, with outstanding items itemised.
2. Receivables and payables with an ageing breakdown.
3. Physical inventory count done, and the difference against the system explained.
4. Fixed asset detail adding up to the balance, with its depreciation criterion.
5. Contracts, loans, policies and minutes in one folder.
6. Filings submitted, with acknowledgements, matching your own accounting.
7. Payroll reconciled against what was declared.
8. A named person able to answer about each of the above.

That last one is the one that gets forgotten and the one that saves the most time.

At FusHer Services we audit, and we also prepare companies that are about to be audited by someone else. If you want to know where you stand before the date is set, write to us.