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How to Prepare for Your Annual Audit

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Many people view an audit/review engagement as a negative process, however it should not be something that you have to fear. It can help you and your association.

An audit can have as many positive outcomes as negative. An association’s board should look at it as a chance to better the organization’s financial processes for the future or at least double check to make sure the methods you are using are appropriate. Doing so will ensure your business is running smoothly and that your financial records provide you with the most useful information.

Auditors are primarily concerned with helping your business, not finding mistakes and reprimanding you for them. The auditor should also be viewed as a resource throughout the year as well, for when you need guidance or have a question about the best method to use for anything in your accounting and financial reporting processes.

Why is it important to be prepared for the audit?

Being prepared in advance of the audit is extremely important for both your association and the audit firm. If you are not prepared and organized it could lead to the audit costing a lot more time and money than budgeted, as well as a lot of frustration on both sides.

It will also ensure that you have a good understanding of the state of your accounting information and will be able to answer questions effectively and efficiently.

Communication is key

An organization’s treasurer or bookkeeper should be in contact with the auditing firm months in advance (preferably sometime before year end). Scheduling the field work of the audit is important to ensure that the auditor is available at the necessary time to meet your expectations. The auditor should be made fully aware of when you expect to receive draft financial statements and final financial statements so that they can plan accordingly.

It is also important to make sure that key people are going to be available within your association at the time you would like to schedule the audit as there are usually answers required of more than one person during field work. Make sure the time frame for the field work is communicated clearly with the people in your office that it will affect.

Where to start

Don’t let the process scare you! If you have been organized throughout the year, preparing for the audit will not be as difficult as you may think.

The auditing firm should provide you with a list of documents/information they require to complete the audit. This should be provided shortly after year end. The list is a great starting point for gathering the information needed. The list includes reconciliations that tie into the trial balance of all accounts as well as summaries of what is in each account if it’s not clear from the reconciliation.

Most likely a few adjustments will be needed to your books at year end before the audit begins. Some areas where mistakes commonly occur are and where you should double check include:

  • Prepaid expenses
  • Fixed assets and accumulated depreciation
  • Accrued liabilities
  • Deferred income/other deferred items (for example, membership dues/fees paid before the end of the fiscal year)

Another area to make sure is reconciled is the retained earnings account. Net Assets should agree to the closing balance on last year’s financial statements and if it does not it can create a lot of extra work for auditors to find out what the discrepancy is.

Also, prior to the start of the audit you should provide the auditors with an explanation of any changes in the way financial reporting has been done over the past year.

During the audit

It is important to be available for any questions during the field work, since that will make the process go as quickly as possible and avoid any unexpected costs or delays.

Also, if they ask for a piece of information that you were unaware they would need (and therefore did not prepare in advance), do not expect the auditor to make the efforts to prepare it. Chances are you know more about the system/processes and how to reconcile that account than they do and it will be much easier and faster for you. It will also avoid being charged additional fees or cause delays in the audit.

Once again, remember that questions are not meant to accuse you of something you have done wrong, but rather to make sense of the financial records as a whole. Auditors do not look at every single transaction throughout the year, but rather they use a series of tests and methods that they use to make sure everything looks reasonable and all the pieces of the “puzzle” make sense together.

In conclusion

Be open and honest with the auditors. The more they know about what happened during the past fiscal year, the better they will be able to do their jobs and the easier the process will be on everyone involved. Most importantly, it will result in better the information available to the board and the members.

Finally, if you are don’t know why they are doing something, just ask! In most cases, they would be happy to explain the reason for what they are doing, rather than have you be unsure and nervous of the outcome.

The audit process should be a relatively stress-free experience for both you and the auditors and it will be well worth the effort to do what you can in advance to make it that way.

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