The busiest time of year for external financial statement auditors generally runs from January to April each year. But CPAs usually start gearing up for audit season in November of the preceding year. Accountants meet with clients, assign staff and schedule fieldwork. Then, the team conducts preliminary financial analytics, observes physical inventory counts, assesses risk factors and customizes your audit plan.

Now it’s time for clients with calendar year ends to prepare for audit fieldwork to begin. Are you ready? A little advanced preparation can go a long way toward facilitating the process, minimizing adjustments and surprises, lowering future accounting fees and getting more value out of the audit process.

Ready, Set, Audit

Preparing for a financial audit requires more than finding a dedicated spot on your premises for the team to conduct its fieldwork. Here’s a checklist of other preparatory steps you can take:

Adopt a positive frame of mind. Some CFOs and controllers see audit fieldwork as a painstaking disruption to their daily operations. They may begrudge having to explain their business operations and accounting procedures to critical outsiders who will highlight mistakes and weaknesses in financial reporting.

Although no one likes to be questioned or critiqued, audits shouldn’t be adversarial. Your external auditor is a resource that can provide assurance about your financial reporting to lenders and investors, offer fresh insights and accounting expertise, and recommend ways to strengthen internal controls and minimize risks.

Before fieldwork begins, gather your accounting staff to explain the purpose and benefits of financial statement audits. Novice staff may confuse financial audits with IRS audits, causing them to be guarded and uncooperative. But in-house accountants can be open and candid with their CPA advisers.

Assign a liaison. Pick a knowledgeable person in the accounting department to be available to answer inquiries and prepare document requests. This will minimize confusion and duplication of effort within the accounting department, as well as minimize the time that external auditors are on your premises.

Establish a timeline. No one likes to wait to find out their final profit numbers or tax bill. So work out a schedule for your audit team that includes these important dates:

• Start of fieldwork;

• Disclosure of adjusting journal entries and adjusted trial balance;

• Preparation of preliminary tax numbers; and

• Delivery of financial statements and tax returns.

Review this timeline for potential scheduling conflicts such as vacations, holidays, medical leaves of absence, business conferences and bank and regulatory deadlines.

Reconcile accounts. All transactions should be entered into the accounting system for the year. And each account balance should have a schedule that supports its year-end balance. Amounts reported on these schedules should match the financial statements. Be ready to explain and defend any estimates that underlie account balances, such as allowances for uncollectible accounts, warranty reserves or percentage of completion.

Another person in the accounting department should check the schedules for errors, discrepancies and variances from what’s expected, based on the company’s budget or the prior year’s balance. The reviewer should also be given a copy of last year’s adjusting journal entries to determine whether or not they should have been made in 2014, too. An internal review is one of the most effective ways to minimize errors and adjusting journal entries during a financial audit.

Review recent accounting rule changes. Do your financial statements comply with the latest accounting rules? Here’s an overview of the major changes to U.S. Generally Accepted Accounting Principles (GAAP) that the Financial Accounting Standards Board issued in 2014:

Accounting Standards Update (ASU) No. 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council). This update allows private companies to elect to amortize goodwill on a straight-line basis over 10 years (or less if the entity demonstrates that another useful life is more appropriate). This standard eliminates the need to test goodwill for impairment annually. But businesses that elect this alternative must continue to test for impairment when a “triggering event” occurs that might cause the fair value of an entity to fall below its carrying amount.

ASU 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Hedge Accounting Approach. This alternative allows nonfinancial institution private companies to apply a simplified hedge accounting approach to their receive-variable, pay-fixed interest rate swaps as long as the terms of the swap and the related debt are aligned. Companies that use hedge accounting report interest expense as if the company had directly entered a fixed-rate loan, instead of a variable-rate loan and an interest rate swap.

ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the Private Company Council). This update provides an elective accounting alternative for private companies when applying variable interest entity (VIE) guidance to lessor entities under common control.

ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under the new guidance, disposal of a component must be reported in discontinued operations only if the disposal represents a “strategic shift” that has or will have a major effect on the company’s operations and financial results. Examples include disposal of a major geographic area, a line of business or an equity method investment.

Important Note: The rules for reporting revenues from contracts will also be changing in 2017 for most public companies and 2018 for most private companies. For more detailed information on this updated standard or any others issued in 2014, contact your audit partner.

Assemble the audit binder. Auditors are grateful when clients prepare their own audit work papers to support account balances and transactions. You’ve already created many of these schedules when you reconciled your account balances to the general ledger. Examples include preliminary trial balances and financial statements, bank reconciliations, accounts receivable aging reports, fixed asset listings (including purchases, disposals and donations), and schedules of prepaid items, accrued expenses and repairs and maintenance expenses. Review last year’s audit document request and collect the “prepared by client” work papers.

Last year’s audit document request will also provide insight into the original source documents your auditor will need to verify what’s reported on the financial statements, such as:

• Bank statements;

• Sales contracts;

• Leases;

• Loan agreements;

• Insurance policies;

• Minutes of board meetings;

• Legal bills; and

• Year-end payroll and sales tax reports.

Compile these documents in your audit binder before your audit team arrives. Providing information piecemeal only slows down fieldwork. Also be advised that auditors generally won’t accept copies of original source documents, because they want to confirm that they’re unaltered and complete. Auditors will, however, return the source documents once they’ve made copies for their work paper files. They may also inquire about changes to contractual agreements, regulatory or legal developments, additions to the chart of accounts and major complex transactions that occurred in 2014.

Evaluate internal controls. Patching gaps in internal controls minimizes the risks of fraud and financial misstatement. If you correct any deficiencies in internal control policies — such as a lack of segregation of duties, managerial review or physical safeguards — or documentation of these controls before fieldwork, your audit will proceed more smoothly and the audit partner will have fewer recommendations to report when he or she delivers the financial statements.

Adding Value

Financial statement audits should be seen as a learning opportunity and an investment in your company’s future. Preparing for your auditor’s arrival not only facilitates the process and promotes timeliness, but it also engenders a partnership between in-house and external accounting resources.

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