Preparing financial records before an audit can make the process more organized and efficient. Complete accounting records give auditors the information they need to perform their procedures and can help businesses address discrepancies before formal audit work begins.
A Financial Statements Audit typically involves reviewing financial statements, accounting records, supporting documentation, and other relevant information. Preparing these materials in advance can reduce delays, make information requests easier to manage, and help management respond to questions more effectively.
Finalize the Accounting Records
Before the audit begins, ensure that the accounting records for the relevant reporting period are substantially complete.
Review the general ledger, trial balance, journals, and subsidiary ledgers for missing or unusual entries. Any known corrections should be properly documented and recorded before providing the final records to the audit team.
Reconcile Bank Accounts
Bank accounts should be reconciled with the company’s accounting records.
Review outstanding deposits, payments, bank charges, transfers, and other reconciling items. Investigate old or unexplained differences rather than carrying them forward without review.
Review Accounts Receivable
Prepare an up-to-date accounts receivable listing showing amounts owed by customers.
Review aged balances and investigate long-outstanding amounts. Supporting invoices, credit notes, customer statements, and subsequent payment records should be organized so they can be provided when requested.
Check Accounts Payable
Review the accounts payable ledger and supplier balances before the audit.
Make sure significant invoices and obligations have been recorded in the appropriate period. Supplier statements and invoices can be useful when reconciling balances and identifying potentially unrecorded liabilities.
Organize Inventory Records
Businesses holding inventory should ensure that inventory records are accurate and up to date.
Prepare relevant stock listings and supporting information, including quantities, locations, costing records, and details of damaged or obsolete items. If a physical inventory count is planned, establish clear procedures and retain the count documentation.
Update the Fixed Asset Register
Review the fixed asset register and compare it with the accounting records.
Check additions, disposals, transfers, depreciation, and accumulated depreciation. Keep purchase invoices, disposal documentation, and other relevant evidence available for significant assets.
Gather Loan and Financing Documents
Collect agreements and schedules relating to loans, credit facilities, leases, and other financing arrangements.
Auditors may need to verify principal balances, interest, repayment terms, security arrangements, and relevant classifications or disclosures. Keeping the underlying agreements together can make this review more efficient.
Review Payroll Records
Payroll records should be reconciled with the amounts recorded in the financial statements.
Depending on the audit requirements, useful documentation may include payroll summaries, employee-related expense records, bonus calculations, payment records, and relevant statutory documentation.
Examine Revenue Transactions
Review revenue records to ensure sales have been recorded accurately and in the appropriate reporting period.
Contracts, invoices, delivery records, credit notes, and receipts should be maintained for significant transactions. Particular attention may be appropriate for transactions recorded close to the reporting date.
Review Major Expenses
Significant or unusual expenses should have appropriate supporting documentation.
Organize invoices, receipts, contracts, payment records, and approvals. Reviewing unusual movements in expenses before the audit can help management identify items that may require clarification.
Check Accruals and Prepayments
Review accrued expenses and prepaid expenses to determine whether the balances remain appropriate at the reporting date.
Supporting calculations should be retained for significant accruals. Prepayments should also be reviewed to ensure that expenses have been allocated to the appropriate accounting periods.
Review Tax-Related Balances
Tax-related balances should be reconciled with the company’s accounting records and relevant supporting documentation.
Depending on the business, this may include corporate income tax, indirect taxes, payroll-related obligations, and other applicable liabilities or receivables.
Examine Related-Party Transactions
Identify transactions involving directors, shareholders, management, subsidiaries, or other related parties where relevant.
Maintain appropriate documentation describing the nature and amounts of these transactions. Clear records can help auditors assess whether related-party balances and disclosures have been appropriately considered.
Review Journal Entries
Review significant manual journal entries before the audit.
Check that entries have appropriate explanations, supporting documentation, and authorization. Pay particular attention to unusual adjustments and entries recorded near the end of the reporting period.
Check the Financial Statement Draft
Prepare a draft set of financial statements and compare it with the underlying trial balance and supporting schedules.
Check that the figures in the financial statements agree with the accounting records. Also review whether required notes, accounting policies, and other disclosures have been considered.
Prepare Supporting Schedules
Supporting schedules can make the audit process more structured. Depending on the business, these may include:
- Bank reconciliation schedules
- Accounts receivable aging
- Accounts payable aging
- Inventory listings
- Fixed asset schedules
- Loan schedules
- Prepayment and accrual schedules
- Tax reconciliations
- Revenue analysis
- Expense analysis
- Equity movement schedules
The exact schedules required will depend on the nature and complexity of the business.
Organize Documents Electronically
A clear document management system can make responding to audit requests much easier.
Create logical folders for financial statements, bank records, invoices, contracts, payroll, tax documents, assets, liabilities, and other relevant categories. Use consistent file names so documents can be located quickly.
Review Previous Audit Findings
If the company has undergone an audit before, review previous audit findings and recommendations.
Determine whether identified issues have been resolved and retain evidence of corrective actions where appropriate. Recurring issues may require additional attention during the current audit.
Identify Unusual Transactions
Management should review significant or unusual transactions before fieldwork begins.
These could include major asset purchases, business acquisitions, new financing arrangements, unusual contracts, large related-party transactions, or significant changes in revenue or expenses.
Prepare explanations and supporting documents for such transactions so questions can be addressed efficiently.
Create an Audit Information Checklist
Assign responsibility for gathering information and responding to audit requests.
A simple checklist can track:
- Documents requested by the auditors
- Person responsible for each item
- Date the information was provided
- Outstanding questions
- Follow-up actions
- Completion status
This approach can reduce the risk of overlooking important requests during a busy audit period.
Communicate Significant Changes
Inform the audit team about significant developments that may affect the financial statements.
Changes in ownership, financing, business operations, accounting systems, major contracts, or organizational structure may be relevant to audit planning and financial reporting.
Avoid Last-Minute Adjustments
Making unnecessary accounting changes immediately before or during the audit can create additional questions and reconciliation work.
Where adjustments are required, ensure they are properly supported and documented. A consistent month-end and year-end closing process can help minimize unexpected issues.
Keep an Audit Trail
Every significant accounting adjustment should have a clear audit trail showing what was changed, why it was changed, and who reviewed or approved it.
Good documentation allows both management and auditors to understand the basis for significant accounting treatments and adjustments.
Conclusion
Preparing financial records for an audit involves more than simply submitting the final financial statements. Businesses should reconcile accounts, review significant transactions, organize supporting documents, update schedules, and ensure that financial information is consistent with the underlying accounting records.
Starting preparation early can reduce avoidable delays and make communication with the audit team more efficient. A structured recordkeeping process also helps management respond confidently when auditors request evidence or clarification.
