How to Prepare for Your Financial Statement Audit

How to Prepare for Your Financial Statement Audit

As your organization’s year-end approaches, you may be starting to stress about all the year-end procedures that need to be completed. Preparing for your year-end financial statement audit can add to the stress. Whether your organization is new to the audit process or has already participated in an audit, proper planning and preparation can make for a smooth experience.

The first step in audit preparation is performing the organization’s year-end financial statement close. This includes reconciling all balance sheet accounts to the general ledger. Roll forward and annual reconciliations should be performed to ensure the account balances are accurate. A roll forward starts with the prior year ending balance of an account, then shows the current year activity for the account (the debits and credits) to arrive at the ending balance of the account. The ending balance should agree to the general ledger balance. For example, a roll forward of debt would begin with the prior year debt balances, adding any additional borrowings, and subtracting any principal payments to arrive at the ending balance. The ending balance should agree to the general ledger. Any significant variances or unusual items should be investigated, and adjustments should be made as appropriate. Bank reconciliations will need to be performed for all bank accounts with activity. Make sure to maintain all documentation that supports account balances or substantiates transactions that occurred during the year. The auditor will request support for certain transactions during the audit.

The auditor will issue a Prepared by Client (PBC) List before the audit begins that will list the items the auditor anticipates needing for the audit. Ideally, the items on this list should be completed the week before the audit. Some of the items on this list include the final year-end trial balance, general ledger detail, bank reconciliations, accounts receivable and accounts payable aging reports, inventory listing, details of accrued expenses, equity rollforward, debt agreements, lease agreements, and minutes of the board. Additional items will likely be requested during the audit. Delays in completing the PBC List can lead to the audit not being completed in a timely manner or overruns in audit cost.

The audit will start with the auditor obtaining an understanding of the organization’s processes, procedures, and internal controls. To prepare for this process, the organization should document a narrative of their processes, procedures, and internal controls for cash disbursements, cash receipts, payroll, financial statement close, and any other significant accounting process of the organization. The narrative should include the entire process for that accounting area and the individual that performs each step of the process.

Audit preparation is key to reducing your stress and ensuring a smooth and successful audit. ADKF is here to help with any questions you might have as you prepare for your audit.

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