Auditors will usually ask you to provide similar documents each year, and anticipating an auditor’s document requests can make external audits less stressful and intrusive.
For certain items, including bank reconciliations and fixed asset ledgers, auditors will accept copies or client-prepared schedules. Other items, such as invoices, leases, and bank statements, will need to be verified using the original source documents.
However, auditors do randomly select a sample of transactions to test your account balances, and this sample will change from year to year. These random selections keep bookkeepers honest by ensuring that not every element of the audit can be planned for.
Predicting audit questions
Auditors will usually ask about any line items that have changed materially, so comparing last year’s financial statements to the current ones can help your accounting personnel prepare for audit inquiries. For small businesses, a “materiality” rule of thumb might mean that inquiries are made about items that have changed by more than around 10% or $10,000.
For instance, a 20% increase in sales commissions or advertising fees might raise a red flag for auditors, especially if this increase wasn’t correlated with an increase in revenue. In this case, you may want to prepare to explain the increased costs and provide auditors with invoices or payroll records.
Auditors may also ask new or unexpected questions whenever there are new accounting rules scheduled to go into effect.
In 2022, for example, private companies and nonprofits will need to implement new rules governing reporting for long-term lease contracts. If your company provides comparative financial statements, it’s a good idea to start gathering additional information about your leases now in order to prepare for additional disclosure requirements next year.
Minimize discrepancies with routine adjustments
At the end of audit fieldwork each year, auditors typically make adjusting journal entries to correct for accounting errors, omissions, and unrealistic estimates—ideally, your company’s management should learn from these adjustments. Internally prepared financial statements often require similar adjustments each year in order to comply with U.S. Generally Accepted Accounting Principles (GAAP).
For instance, auditors may need to ask clients to write off bad debts, record depreciation expense and accruals, or evaluate repair and supply accounts for capitalizable items. You may be able to save time and minimize discrepancies between your preliminary and final financial statements if you make routine adjustments prior to auditing season.
It’s also a good idea to ask your auditor about any complicated accounting rules or major transactions before they begin their fieldwork. For example, you might need clarification on how to classify a shareholder advance or how to account for a recent acquisition.
Start preparing now
The right preparation can help to ensure that audit fieldwork runs smoothly and your external audit won’t be time-consuming or disruptive. If you have questions or concerns as you prepare your preliminary year-end statements, contact us.