For business owners and CFOs, a financial statement audit is an essential process that promotes internal accountability and ensures compliance with external regulations. Audits play a vital role in scaling businesses, securing capital, and qualifying for specific contracts or grants. However, many organizations find the audit process stressful, disruptive, and costly. The key to reducing these challenges lies in thorough preparation and an ongoing commitment to financial compliance. As a CPA and auditor with over 10 years of experience in both nonprofits and for-profits, I’ve often encountered common issues like improperly rolled-forward equity, outdated account balances, and incomplete reconciliations—typically stemming from insufficient preparation. Addressing these issues before your audit begins can make the experience smoother and more productive.
In this article, we’ll explore key strategies for audit readiness, highlight common compliance pitfalls, and discuss how partnering with a proactive CPA can ease the audit process.
1. Start with Early Preparation: No Last-Minute Scrambles
Many businesses wait until the last minute to prepare for their audit, leading to rushed corrections and heightened anxiety. Early preparation not only ensures your financials are in order but also allows you time to address discrepancies well in advance.
Key Steps to Take:
-
- Comparative Balance Sheet Review: Perform a comparative analysis of this year’s and last year’s balance sheets. This can help identify issues such as improperly rolled-forward equity, unchanged accrued expenses, or outdated account balances. Spotting discrepancies early means you can resolve them before the auditor does.
- Monthly Account Reconciliations: Reconcile accounts such as cash, accounts payable, and receivables regularly throughout the year. Unreconciled accounts can lead to significant discrepancies during the audit.
- Address Prior Year Findings: If your business has undergone previous audits, review the prior year’s audit adjustments or management letter recommendations. Recurring issues should be addressed to prevent them from reappearing in the current audit.
Starting early allows you to anticipate and resolve potential audit issues without the added pressure of last-minute fixes.
2. Ensure Proper Documentation and Support for All Accounts
Audit readiness goes beyond having the right numbers; it also hinges on having proper documentation to support those numbers.
Focus on the Following Areas:
-
- Accrued Expenses and Other Accounts: Ensure accounts like accrued expenses are supported by detailed schedules and calculations. If these accounts show no change from the prior year, it could indicate that they haven’t been properly reviewed.
- Revenue Recognition (ASC 606): For businesses with complex contracts or multiple performance obligations, document your revenue recognition policies under ASC 606. This clarity helps prevent restatements and audit adjustments.
- Lease Accounting (ASC 842): Under ASC 842, lease obligations must be recorded on the balance sheet. Ensure your business has updated its accounting practices to comply with this standard, or your audit could uncover significant issues.
Properly documenting all accounts supports financial accuracy and ensures a smoother audit.
3. Address Common Audit Pitfalls
Several issues commonly arise during audits, often leading to delays and increased costs. Identifying and addressing these pitfalls ahead of time can greatly improve the audit outcome.
Common Pitfalls to Address:
-
- Inconsistent Account Updates: Accounts that haven’t been updated, such as accrued expenses or equity accounts, are frequent sources of audit findings. Review these accounts through a comparative analysis and update them as needed.
- Revenue and Expense Classification Errors: Misclassifying capital expenditures as operating expenses—or vice versa—can distort financial statements and lead to audit adjustments. Ensure that revenue and expense classifications are accurate.
- Failure to Segregate Duties: Strong internal controls depend on the segregation of duties. Ensure that no single individual is responsible for multiple steps in a financial transaction (e.g., approving, recording, and reconciling). Auditors will scrutinize your controls in this area.
By addressing these issues proactively, you can avoid the common headaches and costs associated with major audit findings.
4. Leverage Technology to Enhance Audit Readiness
Technology is a key tool in preparing for an audit, providing an efficient way to manage financial reporting and documentation.
How Technology Can Help:
-
- Automated Reconciliations and Real-Time Reporting: Modern accounting software can automate reconciliations, reducing the risk of human error and ensuring accounts are accurate before the audit. Real-time reporting also helps management catch discrepancies early.
- Cloud-Based Document Storage: Centralized, cloud-based systems organize and store documentation, making it easily accessible. This simplifies the auditor’s work and reduces back-and-forth that can delay the audit process.
Using technology not only saves time but also increases the accuracy and reliability of your financial data.
5. The Value of Year-Round Support from a CPA
Perhaps the most important step in audit readiness is building a strong relationship with a proactive CPA who offers ongoing guidance and support throughout the year. At Veris, we believe audit preparation should be an ongoing process, not something left to the last minute.
Benefits of Year-Round Support:
-
- Unlimited Access to Expert Guidance: With ongoing support, you have access to unlimited calls and emails, helping you stay on top of evolving accounting standards and address issues as they arise.
- Continuous Monitoring: Our year-round support ensures your financial statements remain in top shape, preventing common audit findings that stem from a lack of preparation.
By partnering with a CPA firm like Veris, you can build a stronger, more resilient financial future, knowing that expert guidance is always available.
Conclusion: Preparing for an Audit as a Strategic Advantage
Audit readiness is more than just ticking boxes to meet regulatory requirements—it’s an opportunity to improve internal controls, ensure compliance, and increase financial transparency. By starting early, reconciling accounts regularly, properly documenting policies, and addressing common pitfalls, businesses can avoid costly audit findings and disruptions.
Moreover, partnering with a CPA firm that offers year-round support provides an ongoing, proactive approach to maintaining financial health. With this approach, businesses can confidently scale operations, obtain access to capital, or qualify for specific contracts or grants.