Preparing for Your Annual Financial Statement Audit or Review – Some Key Considerations
It is that time of year again. Your business (or not-for-profit) is closing the books on one year, preparing for the next, and the year-end financial statement audit or review is upcoming. Or maybe this is your first experience going through an audit or review in your role as CFO, controller, accounting manager, staff accountant, payables clerk, etc. Here are some thoughts for you to consider as you prepare.
Purpose for the audit or review
For the uninitiated it can be helpful to step back and take a look from 5,000 feet. Who are these auditors, why are they requesting all this stuff, and why are they asking all these questions? Well the requirement that an audit or review be performed could result from many sources. Maybe your company has a loan and the bank requires audited or reviewed financial statements. Perhaps you are a not-for-profit and the Board of Directors or state requires it. No matter the reason, the company has hired an independent CPA firm to put a fresh set of eyes on the books in the form of an audit or review engagement.
Scope: audit vs review
Whether an audit or review, the CPA firm has been engaged to provide an opinion on the financial statements and provide some level of assurance on those financials. An audit provides “reasonable assurance” whereas a review is “substantially less in scope than an audit” and provides only “limited assurance.” It is important to distinguish between these, as the level of assurance dictates the level of detail the independent account will likely request from their client.
Timing: mutual buy-in from all parties
It is important to start with the due date for the finished product and work backwards in scheduling the phases of the engagement. Stick to the plan as best as possible. All parties should buy into the schedule and timing of deliverables.
Start with asking yourself “are my books ready to be audited?”
Are you comfortable that the majority of the closing entries and accruals have been booked and that the year-end has been properly closed? Is your year fully closed or do you expect that several more entries will need to be booked throughout the course of the audit or review?
What are some of the items I can expect my CPA firm to request as part of the audit or review?
For an audit or review engagement, you can generally expect to see the following items when your CPA sends over the request list.
- The financial statements – balance sheet and income statement
- “Trial balance” – a rollup of all the accounts comprising the statements
- Supporting schedules for balance sheet and P&L accounts
- Receivables aging by customer
- Payables aging by vendor
- Property and equipment listing
- Inventory listing
- Sales by customer report
Note that one way an audit differs from a review is that an audit is more detailed and in-depth and the CPA will likely perform tests at the transaction-level. This means auditors will request that you provide (generally on a sample basis) underlying supporting documentation for transactions that occurred during the period. In contrast, a review engagement relies more on analytical procedures and inquiries to management.
Maintain open communication with your CPA firm throughout the year.
While the audit or review takes place once a year, your CPA firm is there for you as a resource throughout the entire year. It is important to maintain open lines of communication throughout even while the audit or review engagement is not currently in process. Bounce ideas, thoughts, and questions off of your CPA as you navigate new opportunities – business combinations, financing, etc. It will be beneficial to both sides to have these conversations in real time as they are happening throughout the year as opposed to after year-end as the audit or review is getting underway.
Contact Us with Your Questions
If you have questions or need help with financial statement audits or reviews, contact our professionals at The Innovative CPA Group at 203-489-0612. Or contact us online.