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January 20, 2022

Basics and Importance of Preparing for an Annual Audit

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An audit is a comprehensive assessment of the economic and financial elements of an organization, verification of the reliability of the information in financial reports, as well as analysis and assessment of the prospects for its development, which can be carried out both by specialists of the organization itself (internal audit) and by third-party audit companies commissioned by management (independent audit).

For an objective analysis of the financial and economic activities of the organization and to obtain an impartial report, it is better to resort to the services of third-party audit firms. In addition, as many are aware, both individuals and businesses can also be audited by the IRS if it has any doubts about your returns.

The main purpose of an independent audit is to assess the correctness of accounting in the audited company, as well as to сheck if the users can trust the reports. Another objective of the annual audit is to analyze the profitability and efficiency of the main, financial, and investment activities of the company. This task requires a detailed study, analysis, and evaluation of the information presented in the financial statements of the organization.

As you can see, the purpose of an audit is not to destroy your business, but to help you make it better, so there is no need to dread it. Plus, this article will help you get prepared for an annual audit in the best possible way.

Importance of Preparation for an Annual Audit

Auditing is a time-consuming and detailed process, so the company should prepare ahead of time. Only in this case, the auditor’s interaction with managers and employees of the company will be effective, and the expert opinion will be correct.

The auditing process can be stressful for both sides. Not properly prepared reports, unorganized financial documents and lack of thereof makes the whole process even more stressful, time-consuming, and ineffective.

If you work with the auditor as if they were your partners and see how they are there to help your business, then an annual audit will be greatly sped up and, as a result, you will not only get your finances in order but also receive valuable information about your accounting and state of business affairs. This will turn accounting from an unnecessary expense into a valuable investment.

Basics and Importance of Preparing for an Annual Audit

How and What to Prepare

Although you should always discuss with the auditor what they would like you to prepare for the audit, here are some steps you can take beforehand.

  • Responsible individualAt the initial stage of the audit preparation, it is necessary to select an employee who will be responsible for all stages of the upcoming audit and who will have all the necessary information. Such a person is needed in order not to disrupt the normal work of the accounting department and business as a whole.
  • Accounting policyOne of the first documents that the auditor will ask you is your organization’s accounting policy. When preparing the accounting policy documents for the auditor, make sure they are properly signed and, most importantly, not outdated. Also, if your policy does not fully reflect the applied accounting methods, questions might arise. So, double-check your accounting policies when preparing for the audit.
  • InventoryTo ensure the reliability of accounting data and financial statements, organizations are required to carry out an inventory of property, during which a condition and amount/quantity are checked and documented. Also, be sure to do this before drawing up the annual financial statements. Therefore, when preparing for the audit, make sure that an inventory is carried out in your organization and its results are documented since a procedure such as an inventory simply cannot be ignored by the auditor.
  • Accounts reconciliationThe reconciliation of all Balance sheet accounts is a vital step in the process of audit preparation. It ensures that the balances on the report are accurate. Reconciliation of accounts receivable and payable allows you to identify doubtful or bad debts, which should be taken into account to prepare the most accurate financial reports. During the reconciliation, you will reference bank and credit card statements, invoices, inventory count sheets, payment receipts, and other source documents.
  • Financial reportsThe business must get the Balance sheet, Income statement, Cash flows report, and Equity report ready for the auditor. You also need to check the completeness of your reporting, the consistency of accounting and reporting data, as well as the accuracy, which is partially checked when you do the reconciliations. The reporting should contain all forms, including attachments. After all, these are the key documents the auditor will be assessing.
  • Source documentsIf any questions arise in regards to the information presented in the financial statements, the auditor will ask you to provide source documents. Thus, make sure that you not only save all the receipts, invoices, orders, and so on, but also keep everything well organized for easy and quick reference.
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Communication with the Auditor

During the audit, you will be communicating with the auditor in one way or another. To ensure that auditing brings the most value to your company, do not be afraid to ask questions, voice out your concerns, and so on.

When the auditor asks questions or requests information, be polite and open. If you have any recommendations or thoughts, let the auditor know about them. After all, you know your company like no one else. If there are any big changes coming up or events that have recently happened and might affect your business in any way, be sure that the auditor is aware of these.

Also, be ready to explain to the auditor any substantial variances in any of the numbers you report in comparison to previous years. The auditor might also inquire about changes in the key personnel, owners, technology, and anything that can significantly impact business activity and its results.

Interpreting Auditor’s Conclusions

The best confirmation of the reliability and honesty of a company in the modern business world is the opinion of an independent auditor. In addition, an audit opinion is necessary to confirm the image and business reputation of the company when concluding contracts and agreements with partners or various credit institutions. So, what do these opinions or conclusions the auditor comes to actually mean?

  • Unqualified. If a company got this report, you can trust its documents without a second thought because the auditor did not find anything that would make you do otherwise.
  • Qualified. If the auditor has doubts about any transactions and cannot confidently proclaim that the company is clean, they give this type of opinion. This means that the auditor determines that the financial statements can be materially misstated and such misstatements should not be present.
  • Disclaimer. In the event when the auditing firm is unable to complete the audit whether it is because there is not enough data or the entity itself does not want to cooperate, they distance themselves from providing any opinion and simply write a disclaimer.
  • Adverse. There are cases when the financial data, unfortunately, is materially misstated or includes irregularities, so a negative conclusion is made.

Bottom line

Before the audit, it is imperative to get all documents in order. You also need to make sure that all the required documents are available, as their absence can be a very unpleasant moment for verification. All of them must be correctly prepared since special attention will be paid to this during the check.

It would be great if you could conduct a preliminary reconciliation of all the accounts. This will allow you to have time to find the necessary documents or restore them as well as correct any errors. It will not be superfluous to conduct an inventory because if the inspector finds any discrepancies in the actual assets of the organization, this fact will be reflected in the report.

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Author: Charles Lutwidge

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