Are You Prepared for An Annual Audit? Steps to Limit Pain
Many small businesses, nonprofit organizations, governments, school districts and employee benefit plans are required to have an annual audit. An audit assesses an organization's financial information reliability and evaluates its internal controls through a series of tests. It provides an independent auditor's assurance to management that finances are recorded correctly in accordance with accounting standards.
An audit may be stressful for staff, boards and volunteers, but needn't be. Here are some tips to help prepare for an annual audit so it's as painless as possible.
Determine if you need an audit.
Audits may be required by the federal government for federal grant funding, by the state for a nonprofit charitable solicitation license, by a bank for terms of a loan agreement, by a donor for a specific grant, or by the board of directors.
Understand the audit process.
The auditor must determine the validity and reliability of the organization's financial information. They do so by reviewing evidence that supports financial statement amounts and disclosures on a test basis.
– Before the audit, consider having a planning meeting with the auditors to discuss significant events that happened during the year, to review the listing of audit schedules and to review your standard operating procedures, including internal controls in place to safeguard the assets of the organization. The auditor is required to communicate with those charged with governance, typically the board of directors, prior to the start of the audit. This is generally accomplished through a letter inviting the board members to contact the auditor if they have any concerns, and through phone or in-person interviews.
– During the audit fieldwork, the auditor will review and test account balances, and may perform compliance testing if required by an outside source.
– After the audit fieldwork, the auditor will complete a draft of the financial statement, the audit related communications letter and the management representation letter. The auditor may also present the audit results to the board of directors.
– The auditor's responsibility is to issue an opinion on whether your financial statements are fairly presented in accordance with generally accepted accounting principles. Financial statements are the responsibility of an organization's management and should be reviewed in draft form prior to issuing final audited financial statements.
Determine what you need
in an audit.
Ask your auditor for a listing of schedules and documentation they would like to see so that they can be prepared in advance. These are some of the documents that will be inspected and used to test the organization's records.
Consider keeping an audit file throughout the year to accumulate significant documents or items out of the ordinary for the audit. Also, discuss whether the schedules will be provided to the auditor in electronic or paper format.
Typical items include:
– Year-end trial balance
– Lease, debt or grant agreements, and other agreements signed during the year
– Minutes of board of directors meetings
– Bank reconciliations and statements
– Accounts receivable and payable balances and aging schedules
– Fixed asset schedule including current year additions and deletions
– Analysis of significant revenues and expense accounts and changes in services or programs from the prior year
– Payroll expense reconciliations to payroll reports filed
– Detail of any restricted assets
Understand how to interpret
your audit report and auditor
The audit reports are also tools for an organization, its management and its board.
– The report of the independent certified public accountant (CPA) will include the auditor's opinion on the financial statements.
– The management representation letter to the auditor states that everything was provided by management of the organization to support the financial statement amounts and that management answered all audit inquiries to the best of their knowledge. This is signed by the chief executive and financial officers and is given to the auditor.
– The audit related communications letter includes the significant accounting policies, estimates in financial information, audit adjustments, any internal control deficiencies, and any operating efficiency recommendations.
– The organization may wish to respond to any internal control deficiencies with a corrective action plan prepared by management and approved by the board of the organization.
The annual audit is a tool to assure that good financial practices and internal controls are being utilized. This is good for business and for the ongoing success of an organization. If you have questions about the process, requirements, reporting or any related issues, you should discuss them and how they pertain to your specific organization with your auditor or a CPA firm that specializes in audit services.
Trina B. Edwards, CPA, CGFM is a certified public accountant, a certified government financial manager and an audit manager at Dennis, Gartland & Niergarth in Traverse City. For more information, contact Trina at 231.946.1722 or email@example.com.