Audits can be stressful and time consuming, and it can be tempting to kick the can down the road. But, like many things in life, the more you ignore an audit, the bigger and scarier it becomes. The key to a successful audit is preparation. By working out a system in advance, filing and logging documents and keeping up with key tasks through the year, you will ensure the audit runs smoothly and save yourself a lot of headaches along the way!
What is an Audit?
Audits break down into three categories: External Audits, Internal Audits, and Government Audits.
- External Audits are performed by an external third party who can offer a non-biased assessment of your finances. Only firms licensed by CPA Bermuda can offer external audit services – that list is found at CPA Bermuda Member Firms
- Internal Assessments are performed by your own employees and generally aren’t made public.
- Government Audits are performed by Bermuda’s Office of the Tax Commissioner to ensure you have not misrepresented your taxable remunerable or by Department of Social Insurance to ensure all of your eligible employee contributions have been accurately deducted and submitted.
For the purposes of this article, we will be focusing particularly on External Audits.
Why are Audits So Important?
Audits are essential to ensuring stakeholders have confidence in your business. Unless investors and creditors can rely on your financial statements, they will be reluctant to deal with you. Audits are mandatory for some organizations (for example, public companies and non-profits over a certain revenue threshold). In short, failure to treat an audit with the reverence it deserves poses a large threat to your business.
How to Prepare for an Audit
Firstly, you need to allocate sufficient time and resources to prepare for an audit. It could take weeks or months – depending on the complexity of your financial records. And throughout the fiscal year, it’s essential you keep your financial records up to date, to reduce the pressure during the final stretch.
Keep up with Accounting Standards
Accounting standards change frequently, so make sure you stay up-to-date with changes and adapt your record keeping and accounting practices accordingly. This helps avoid any last-minute surprises that could derail things at the final turn.
Address any Changes at your Company over the Last Year
A lot can change in a year. You may be receiving new government grants, for example, or pursuing new projects with distinct implications for the audit. Even changes to your internal processes or management accounting standards can make a difference. You need to consider these points at the early planning stages.
Learn from Your Mistakes
If you’ve been audited before, how did it go? What worked well and what evolved into a lowkey nightmare? Was there anything that got overlooked? Take the time to review previous audit reports and write a summary of your business’s response, explaining what you’ve done to rectify any issues that came up. Have you addressed all these issues satisfactorily or is there more work to do? If you’re not quite there yet, write a note to the auditor explaining your action plan and where you’re at with it.
Get Your Finances in Order
Go through your last financial statements with a fine-tooth comb and update the explanatory notes if anything has substantially changed since the last end of year. You also need to check all your accounting schedules and year-end closing reports to ensure your closing and trial balances agree. If not, you need to find out why before the audit!
Build a Timeline, Assign Responsibilities and Organize the Data
Soon after the end of the financial year, look at everything the audit requires you to do. You should then call a meeting with all your team members who will be supporting the audit, go through all the documents the audit requires, and develop a timeline for dealing with them.
Depending on the size of your team, you may wish to make different staff members responsible for different documents. Also be clear on which staff members will need to be available to talk to the auditor – your auditor may also need an interview list in advance.
The following working papers and schedules will be prepared and submitted to your auditor:
- General ledger
- Fiscal year budgets
- Invoices and bills
- Transaction records
- Financial statements
Appoint an Audit Go-Between
Regardless of the size of your team, one thing you should always do is appoint one single team member to be the auditor’s direct liaison point. Having one person acting as go-between makes the whole process more efficient – saving your and the auditor’s time.
Depending on the size of your premises, this may be tough, but you should have a space entirely dedicated to the audit. This is where paper copies of all audit documents can be stored and will also effectively be your auditor’s office for the duration of the audit. You should also keep a digital folder dedicated to audit documents ordered by category.
If the audit is being done remotely, it’s always best to make sure that all document uploads are done via a secure portal to ensure your data is being kept private and safe.
Communicate Clearly with Your Auditor
Involving auditors throughout the planning stage can avoid misunderstandings and help the whole process run more smoothly. The audit will start by signing a written agreement specifying the audit’s terms and conditions, also known as an “engagement letter.” As well as laying out fees and timescale, this will clarify key issues like the documents you must have ready for the auditor on the first day on the job.
Do You Need Some Help with an Audit?
Here at Abacus, our experienced professionals are ready to help you prepare for an audit or deal with any specific issues related to one. Get in touch today for a confidential consultation!