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preparing for a financial audit

How to Prepare for a Financial Audit

Embarking on your first financial audit can be nerve-wracking. As a small business owner or finance manager, it’s crucial to approach this process with a clear plan. This article includes small business accounting tips to prepare for an audit while minimizing its expenses and findings.

What Do Financial Auditors Look For?

Auditors assess your financial statements’ accuracy, ensuring they are free of material misstatements. An audit evaluates:

  • Compliance with accounting standards (GAAP or IFRS.)
  • The validity and accuracy of financial transactions and records.
  • The efficacy of internal controls.
  • Risks of fraud or non-compliance.

Do not expect to walk away from an audit with zero findings. Auditors are good at finding issues, so even the best accounting teams find themselves working with auditors to improve their processes. Consider them accounting tips from unbiased outsiders customized for your business.

How Long Do Financial Audits Take?

Auditing financial statements takes anywhere from a few weeks to several months, depending on the size of your business and the complexity of your financial records. Three months is average for most small businesses. Efficient organization throughout the year can significantly shorten audit duration. 

Audit Preparation Throughout the Year

The bulk of your audit prep happens during normal daily transaction processing. Attempting to do all audit prep at year-end is like showing up to the Olympics without training the prior 12 months. Here are some small business accounting tips to prep for audits every day:

  • Organize Documents: Systematically save and organize invoices, bills, contracts, and other documents digitally for easy search and reference.
  • Maintain Clear Accounting Schedules: Develop and regularly update easy-to-follow accounting schedules. Attach these schedules to journal entries for transparency and ease of understanding.
  • Consistent Accounting Policies: Establish clear accounting policies and follow them meticulously. Consistency in these practices is key for a smooth audit process.

Year-End Audit Preparation:

Year-end is the final quality assurance check before an audit. Follow these steps to front-run any audit issues:

  • Review and Adjust Policies: reassess your accounting policies in light business or regulatory changes. Ensure they are sensible and supported by appropriate documentation, like invoices and contracts.
  • Balance Sheet Support: Go through every line on the balance sheet and identify the schedule or document to support the amount.
  • Peer Review: share your draft financials with other accountants and executives to check for reasonableness. Ask them to be critical and poke holes.

Audit Post-Mortem

Audits are an excellent source of professional feedback and an opportunity to improve processes. Conduct a post-audit meeting with the following agenda:

  • What went well? Especially focus on issues from a prior-year audit that were no longer issues due to changes in your process.
  • What did not go well? This will include auditor recommendations but also audit-process issues like communication, file sharing, and general project management.
  • Are critical changes required? Most accountants want to fix every issue identified, but business resources are limited. What one or two changes are essential to the going concern? 

Based on the audit findings, create an action plan to address any issues and refine your financial processes.

Audit Preparation Best Practices

An effective audit preparation strategy is rooted in good accounting practices all year round, not just before an audit. By staying organized, adhering to policies, and understanding the audit process, you can avoid stress and embarrassment and embrace the financial audits as a learning opportunity and validation of your excellent work.

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