July 11, 2017
GRF Partners Ian Shuman and John Pace and Senior Manager Elinor Litwack recently presented a webinar on planning for an easier audit. Additional information including the webinar recording and PowerPoint slides are available here.
The presenters provided 8 key takeaways to make your next audit easier based on years of experience assisting clients as members of the firm’s Outsourced Accounting and Advisory Services practice.
Tip #1: Give yourself time to prepare for the audit! It can take a lot of time to close the year and prepare schedules for your auditors. Avoid scheduling your audit too close to year-end (unless you are an overachiever).
Tip #2: If you feel that you may be getting behind on audit preparation, let your auditor know right away. The sooner you inform the audit team, the greater the likelihood that you will receive useful guidance and advice, or perhaps help with rescheduling the audit.
Tip #3: Analyze your organization like an auditor! Understanding how auditors think can help you prepare for your audit. Auditors consider:
- Existence: Does the item being tested really exist?
- Completeness: Is this all of it?
- Rights and Obligations: Does the client really own this?
- Valuation and Allocation: Is the item valued at the correct amount?
- Presentation and Disclosure: Is the item properly represented in the financial statements?
Tip #4: Ensure your balance sheet is supported by schedules and/or documentation, such as:
- Bank, credit card, and investment reconciliations
- Accounts/grants receivable aging reports
- Fixed asset schedules
- Schedule of prepaid expenses
- Schedule supporting inventory
- Accounts payable aging
- Support for accrued salaries
- Support for any loans or lines of credit
- Schedule of deferred rent
- For nonprofit entities, a breakdown of net assets
Tip #5: If your organization buys and sells investments on a regular basis, ask your broker for an annual summary of investment purchases, investment sales, realized gains and unrealized gains (so you do not have to do it yourself)!
Tip #6: Pay special attention to revenue recognition and payroll reconciliations.
- Establish policies and procedures for revenue recognition and follow them
- Evaluate all contracts, grants, etc. for revenue recognition
- Evaluate each revenue deliverable separately
- Perform regular reconciliations of salary accounts to payroll tax filings
- NEVER mix W-2 salary activity with independent contractors or consultants. This makes reconciling payroll extremely difficult.
Tip #7: Auditors always request your general ledger for the first few months of the next fiscal year to look for transactions that may belong to the prior year, also known as a cutoff analysis. Do your own cut-off analysis by scanning the first 2-3 months of the next fiscal year, particularly revenue and expenses occurring in the first month of your fiscal year.
- Ex: a legal invoice recorded on 1/5/17 was almost certainly for services provided during 2016
Tip #8: Ask your auditor or outside accountant for assistance. Don’t wait until the end of the year if you have a question. Your CPA is here to help!
As many of the tips above recommend, good communication is a key factor for ensuring a successful audit. Your CPA should be in close communication, function as a resource, and work together with your organization’s internal accounting staff to make sure the financial statements are usable, accurate and timely. For more information on preparing for an audit, contact John R. Pace, CPA at 301-951-9090 or email@example.com.