How to Prepare for a Successful Financial Statement Audit

If audit season makes you groan, you're not alone. The word "audit" carries a lot of baggage, but a well-planned audit can be one of the most useful things that happens to your organization all year. Here is a practical guide to preparing, drawn from a GGFOA presentation on getting audit-ready.

What an audit is, and why it's worth having

A financial statement audit is an independent examination of your financial statements and disclosures. The auditor gives a professional opinion on whether they fairly present your financial position and performance, in all material respects, under GAAP. That opinion adds credibility to your numbers, and for many governments, it's required by law.

Beyond the opinion, a good audit gives you:

•        An assessment of your policies and procedures

•        Identification of control weaknesses

•        Recommendations for improving controls and operations

•        Training and assistance

•        Help drafting the financial statements

At Rushton, we encourage year-round communication from our clients to provide a constant stream of information, questions, and discussions. Audit time, once a year, is not the best, most effective time to have conversations about changes that impact the audit.

Who does what

Knowing the roles up front prevents a lot of friction.

The auditor gives an opinion on the fairness of the statements, reviews internal control over financial reporting, and reviews accounting policies and procedures. The auditor is not a decision-maker for management, an adversary, or a fraud investigator.

Management prepares the documentation and "prepared by client" (PBC) workpapers, builds strong internal controls and financial policies, and ideally sets up an internal audit team to get ready for the audit and support the auditors during fieldwork. Also, be positive. Attitude sets the tone for the whole engagement.

Planning: where audits are won

Eisenhower said, "Plans are nothing, planning is everything." That applies here.

Build an internal audit team

Start by getting your own house in order:

•        Discuss the purpose and benefits of the audit with your team. New staff can be guarded, since "audit" sounds negative. Remind them this is not an IRS audit and that the auditor is a resource.

•        Agree on goals and a timeline, and assign tasks with deadlines.

•        Build a schedule for PBC workpapers, and ask your auditor for a comprehensive list of what they'll need.

•        Leave time for internal review before handing anything over. It cuts down on questions and audit entries.

•        Set up an audit "binder" or shared folder, or use a platform like Suralink or Smartsheet to share documents with the auditors.

Treat documentation as a year-round habit

Internal control and risk assessment shouldn't happen only in the weeks before the auditors arrive. Build workpapers with the audit in mind, understand why each one exists, and keep in touch with your auditor all year. Raise new issues as they come up, because nobody likes surprises at audit time.

Hold a real planning meeting

Sit down with your auditors before the work starts and cover:

•        Last year's audit. What worked, what didn't, and what can improve? Review prior-year journal entries and management comments together.

•        What's changed. New debt, agreements, staff, funds, GASB pronouncements, software, SPLOST referendums, significant grants, and any new risks or expected problem areas.

•        The full timeline. Don't just schedule fieldwork. Map every milestone through the issued report, and keep it flexible, because surprises happen.

At Rushton, we encourage both pre-audit and post-audit meetings with partner/manager and clients to discuss ways to improve the audit, discuss big changes from the prior year, and to continue that avenue of communication. There’s always room for improvement, and there’s no better way to achieve that than through frequent check-ins.

Get the trial balance done first

The trial balance is arguably the most important item, and it's the easiest way to derail the whole schedule. If a final version won't be ready in time, a preliminary trial balance is a good fallback.

On workpapers, aim for a reconciliation for every balance sheet account. A general ledger printout doesn't count, and one presenter described it as "connecting your arm to your elbow." For accrual schedules, be ready to show support for individual items. Give every document a specific name, and make your request list as complete as you can.

A sample audit calendar

Here's what a full timeline might look like for a city:

Onsite work

Preliminary testing and inventory

This phase usually happens near year-end and takes one to two days onsite. Expect inventory observation, transactional testing (receipts, disbursements, credit cards), random interviews, and walkthroughs of internal controls. It's also a good time for a follow-up conversation about scheduling, new reporting standards, and potential problem areas.

Fieldwork

Fieldwork is the "meat and potatoes" of the audit and typically runs three to five days onsite. By then, your trial balance should be complete with adjustments posted, workpapers finished for every balance sheet account, and requested documents organized and ready.

A few best practices make it go smoothly:

•        Assign a primary liaison, someone knowledgeable in accounting or finance who is available every day the auditors are there. This person manages requests, keeps the schedule on track, and can discuss significant estimates, budget-to-actual and year-over-year variances, and allowances on major receivables.

•        Be ready to discuss changes in internal controls, operational structure, and grant programs.

•        Be open in interviews. You and the auditors want the same thing: strong controls and accurate reporting.

At Rushton, it’s important for our clients to know just how valuable they are to us. We want to be onsite as much as is needed and to add expertise to the audit team through partner and manager participation in the process. This leads to knowledge, experience, and efficiency that is second to none.

Wrap-up

Close the loop with an exit conference covering journal entries, management comments, schedule status, and outstanding items. Decide who owns each open item and whether a return visit is needed, and make a to-do list.

When the draft report arrives:

•        Post the adjusting journal entries and agree the audited trial balances.

•        Collect your questions and review them with the auditor in one batch, which saves time.

•        Communicate your turnaround time for changes.

•        Confirm the presentation date and who will submit the final report.

Common shortfalls to avoid

•        A trial balance that's late or never arrives

•        Not being available for questions

•        Preparing items only after the auditors are already onsite

•        Incomplete or incorrect workpapers

•        Poor teamwork

At Rushton, we are happy to handle the submission process of audit reports to the Department of Audits and the Federal Audit Clearing. We are also happy to be part of the GFOA submission process, through application review and any other assistance. We enjoy helping the audit get across the finish line for our clients, when possible and needed.

The takeaway

The best audits come down to planning ahead, staying organized all year, communicating early, and keeping a positive attitude. You and your auditors share the same goals, and treating them as partners makes the process smoother for everyone.

This post is based on "Preparing for a Successful Audit," presented by William T. Harris, CPA, at a GGFOA session.