Mid-sized company, but first ever audit

Without knowing how well your current processes and controls are working, you are probably going to identify some areas for improvement.

Don't waste a lot of audit time and billable hours on things you can deal with in advance -
(1) Do a physical inventory now and make whatever adjustments needed for Book/Physical Variance, Excess/Obsolete Stock, Valuation (LCM)....Double check WIP for 'Orphans' and write-down or make an allowance for MRB/Discrepant items (Quality Issues)
(2) Document your revenue recognition process and validate your YTD sales recorded - you don't need to pay someone else to tell you if you're not compliant with your own policies
(3) Review your AR and make appropriate write-downs/book reserve allowances as necessary (document your reserve policies)
(4) Bring your Account Reconciliations current (catch-up if you're behind)
(5) Validate your AP and Liability Accruals (Payroll/Benefits/Vacation/Commission/Bonus)
(6) Review your Fixed Asset & Depreciation Schedules (check Repairs & Maintenance Expense for items that should be capitalized)
(7) Review any Amortization Schedules and validate the assumptions
(8) Assess any liability for product returns/consignment, warranty claims, and vendor/supply chain committments in excess of current backlog/demand
(9) Evaluate any lease agreements (Capital/Operating) and make sure they're properly recorded
(10) Review your Credit Facilities and make sure that you're properly classifying the ST and LT balances for Debt

Ultimately you should be giving your auditors the schedules that you are actively using to manage your business - not inventing new ones to support your auditors needs.

Make sure you have the audit requirements - schedules, contracts, etc (PBC List) in advance and that you are complete before field work begins

Your Banking, AR and AP Confirmations can take longer than you think....make sure you alert the selected Customers and Vendors that you need their prompt response and provide contact information for individuals you are working with rather than just a Company name and address.

I hope you are in good shape and all goes well

In my experience, it's important to minimize the audit's disruption to the work flow. Definitely ask the auditors for a list of documents they want to recieve. At my office, we call this this "PBC list" or "prepared by client list". It may not be all-inclusive, but should hit all the high and mid-points. Then, your staff can have all the documents ready before the auditors even hit the door.

Next, I would carefully define, to the staff and to the auditors, how the auditors will communicate with the staff. Directly? Go through you? Go through their supervisor? (Do the auditors know who the supervisor is?) Also, who on the audit team will be making requests? Coordinating audit communications prevents a lot of frustration on both sides.

I hope this helps!

It may cost you a little more, but for a first audit you may want to hire an external company to be your Internal Auditor and straighten the books out.

This way, they catch the material misstatements, not the CPA firm and you get a clean(er) audit than you would if you didn't hire someone to find the errors.

The CPA firm wins, (maybe not in year 1 financially) because they give you a clean audit (and aren't spending time fixing mistakes and looking for more) and you don't fire them (that's there big win)!

It also doesn't disrupt your work flow as much because you will have everything ready for the audit.

Get your policies and procedures documented ASAP. If you have someone with the time, patience, talent, and copy of Visio, have them flow charted. This will save a lot of billable time the auditors will spend developing their audit program.

Jane,

As a former auditor I can tell you there are a number of areas that could create problems for you (sorry but that's just reality with a first time audit). Michael gave a lot of good advice that will, as he said, save you some billable hours. I'm going to attack this from more of a process-oriented perspective and leave you with the three things I always found would either derail or streamline a first time audit.

1. Since you never had an audit they will need to validate 'opening' balances for your balance sheet accounts. This can be a time-consuming activity if current balances (like P&E) are based on activity in prior years. Ask your auditors to provide you a list of the opening balances they will want to audit so you know what to focus on.

2. The auditors should be discussing preliminary work with you. Since this is your first audit, you will want to break it down into smaller pieces and preliminary is a good way to do this. During this phase you can begin work on opening balances, provide documentation for internal controls and systems, and begin planning for year end activity like PBCs and confirmations.

3. Be realistic about assessing your current accounts. If you are way behind, it is definitely more cost effective to push back the audit date (if possible) and hire some folks with lower billing rates to come in and help with the clean-up. Audit costs rise when the auditors have to come in and then leave because stuff isn't ready. Do a solid assessment of your accounts compared to the auditor provided PBC list and then figure out your best approach.

As an ex-auditor I can say that most are really good people. They aren't out to get you, but they do need to follow standards. Communication is key - both to and from your auditors. Good luck.

Tom Rogers, CPA
CEO
Vendor Centric

In addition to the comments posted above about PBC's and flow charting (which is an excellent first step to SOX compliance (if you are not already there), I recommend running trial walk throughs with all staff who may be subject to the audit inquiry, to insure that they can explain the logic of their entries. Often, regrettably, I have found that the junior staff can cite the section of the accounting manual that they follow, but cannot explain the P/(L), B/S implications of their journal entries. When they can, not only have you a better qualified staff, but the chance for a clean audit. Best.

All the above advice is spot on; my only addition is minor. I would give a heads up to your operations folks (plant managers, project managers, inventory/purchasing, etc.) that an audit is coming up. More importantly, communicate to them what you'll need from them and provide guidance on what should be in order in advance of the audit. One big hurdle I always encounter is contracts - people can never seem to find the right paperwork when you need it. Giving them time to get that pulled together in advance can save both you and the auditors time during the audit.

Good luck!

Hello, glad to see you are being proactive about the audit! Sorry to state the very obvious, but I have seen some companies miss the basics which can derail an audit. The audit will be a reflection of how tight a ship you run. If you personally know what is in each balance sheet account and why (ex.-you know that the equipment listed in the FA schedule is still in the building and being used), the audit will be a good exercise and proof of that.

For each balance sheet account you should have a schedule ready that ties to the balance. Having an opening balance and showing what has been added since you have been employed there is not sufficient. Start with Cash, if you are meticulous about your monthly bank recs, that is easy. Accounts Receivable - print an aging report and question all invoices over 120 days old ... do they need to be written off, is your allowance for bad debt accrual still accurate, etc. Deposits - have you ever called the companies with which you show a deposit to verify that they still also think you have a deposit? Probably not. For example, an electric deposit usually gets coded properly when placed, but when the electric company refunds it later on an electric bill, many oversee that. At an audit, all these little things are being verified. So if you can verify them all during the next couple months and be confident about all your BS balances, you will do great in the audit.

Inventory can be difficult, especially if you only do a physical count once a year. If that is the case, you may want to consider doing a November month end physical so the December physical count is more accurate. It is a pain for everyone, but brings out any issues you will have ahead of time. If you are already reasonably meticulous with monthly inventory, then this part will be much better. It is frequently a difficult area with small to mid size companies, especially if you have a lot of parts, assemblies and WIP.

Fixed Assets can be difficult to match older equipment sometimes. Entries that include multiple computer parts are sometimes difficult to match but your IT person can help with that. Print out your month-end October's FA list and with the help of your department managers try to identify all the equipment on there and see if anything needs to be written off and removed.

Keep going down each BS account, one by one, and make sure each one ties to your schedule and all the line items are still valid. Create a schedule for any accounts that need one. I usually do one workbook of supporting schedules for an auditor and have each account as a separate tab for the period being audited. Obviously, many reports will come from your accounting system which you can print as a PDF in addition to your standard hardcopy. Your auditor should provide an initial list of things they want, most of the above, which I will email to my auditor when I am ready for the audit to begin. Your auditor will tell you what they want. Your auditor is there to make sure your books are pristine and in order, which is a good thing. Make friends with the person doing the field work and it will be a good experience/exercise for all.

Good luck!
Edwin

Assuming the audit is a financial statement [not tax] audit, you have received good suggestions. Make sure you can support your balance sheet accounts, inclusding for the prior year if comparative financials are involved. Review you accounting proactices and policies for GAAP conformance. Finally evluate your risk assessments and internal cotrols for significant financial captions.

One thing that I haven't seen anyone bring up are the financial disclosures. If you are having audited financials issued on your company, you will be expected to review a checklist of required disclosures and prepare the document for the financial statements. The CPA firm cannot prepare this, as that is a part of what they are auditing. We are a private company and the checklist is 200 pages long. Our disclosures are about 40 pages. This is a huge project and I bring in a consultant to prepare them. The first time you are audited, you are so consumed with the audit itself, that it is easy to overlook the fact that the disclosures have to be prepared. These have a lot of technical issues that you don't normally deal with on a daily basis.