An audit can protect business stakeholders from the risk of fraudulent practices and therefore stakeholders will often require audits to be done annually. If a business doesn’t have a choice whether to have an audit done or not, they can still control the expense to a certain extent by planning for the audit and supporting the auditors as best as they can.
The main purpose of a financial audit is to ensure that a business’ accounting information accurately reflects its financial position. By trying to put yourself in the shoes of an auditor and attempting to anticipate what information they might require to complete their audit procedures, you can prepare a significant amount of the information needed for an audit in advance. Thorough preparation will reduce pressure on the side of both the auditors and the business during the time of the audit and can potentially reduce audit fees.
A business owner and/or management can increase the efficiency and reduce the costs of an audit by following the proposed steps below.
Preparation before the start of the audit
Designate an audit liaison person
Designate one person with experience as well as good communication and organisational skills as the auditors’ main contact with the business. Ideally all communication between the auditors and the business should happen through this person first.
First meeting with auditors
Make a list of items to discuss with the auditors and arrange a preliminary/planning meeting a while before the audit. Some of the points that can be included for discussion are the following:
- the purpose and scope of the audit
- information required by auditors
- who the audit liaison person will be
- how communication between the auditors and the audit liaison person and ultimately the employees will be handled
- the expected finish date of the audit
- a budget for the audit broken down in terms of the time the auditors expect to work on the audit and the resulting costs to the business (for a first audit with a new auditor it might be difficult to budget for audit hours as the auditors will probably not have much background information about the business or experience with the client)
Financial records and other information
Obtain a list of the reports, documents and other information from the auditors that they will require to conduct the audit. Generally auditors will require the following documents where relevant:
- Income statement
- Balance sheet
- Cash flow statement
- Trial balance
- General ledger
- Debtors ledger, age analysis and reconciliations
- Inventory reconciliations and stock counting records
- Creditors ledger, age analysis and reconciliations
- Bank statements and bank reconciliations (including petty cash)
- Tax related documentation e.g. tax returns submitted and paid during the year being audited
- Major contracts e.g. sales contracts, purchase agreements, leases, insurance policies
- Minutes of meetings where important decisions were taken which had or can have a material effect on the business
- Policy and procedure manuals
- Internal audit reports
- Any other information which might have a material effect on the financial health of the businessCollect as many of the above items in advance as you can, review them thoroughly and try to anticipate what questions the records may provoke from the auditors’ side.
During the audit
- Communicate with the auditors regularly.
- Respond to auditor queries as soon as possible with accurate information.
After the audit
Audit management report
Obtain an audit management report from the auditors setting out suggested solutions and improvements in the way business is conducted. Implementing as many of these suggestions as possible before the next audit can reduce audit fees for the next audit.
Identify weaknesses and time-wasters experienced during this audit and consider possible solutions and different approaches to improve the next audit.
As can be seen from the above, there is quite a bit of planning and preparation that can be done in advance to make an audit less disruptive for a business and its employees and at the same time also pay off in reduced audit fees.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)