Let’s say you’ve decided to get an audit and have chosen a firm to perform it. What should you expect the process to look like? What will the auditors ask of you and what should you expect of them?
The most helpful you thing you can do in advance of an audit is to have your financial records organized and in good order. Draft financial statements should be prepared, bank accounts reconciled, and supporting documentation for accounting entries should be readily accessible. Review your financial statements and related reports to find any obvious mistakes that should be corrected before the audit starts. The more you have to do while the audit is in process, the longer it will take. In addition to the hassle, if the auditors have to do significantly more work than expected, it will also be more expensive.
Some items of special interest to auditors are accounts with balances that are high or different from expected, accounts with a lot of activity, and transactions for large dollar amounts. If you review these in advance, you may anticipate questions they will ask and documents or files they will want to review.
Before they start field work, your auditors will give you a list of reports, documents, and information they will ask to review. They’ll ask you to either send it to them in advance or have it ready when they arrive for field work. During field work, they will typically review a range of transactions – bank balances, revenue, expenses, purchases or sales of assets and inventory, etc. You’ll want to have documentation ready for them to review, that supports and confirms the entries in your accounting system.
Staff who will be working with the auditors, and representatives of the audit committee of your board of directors should have a pre-audit meeting with the auditors. You’ll discuss a timeline for their work, documents you’ll need to send them and related deadlines, as well as your internal controls, fraud risk, and how you manage risk. The documents auditors ask for will be largely consistent from year to year, unless your organization goes through significant changes. Knowing what to expect in future years will help you prepare and have documents and information ready in advance. This document from the Office of the New York State Comptroller gives some examples of documents your auditor may ask for.
Field work is the phase when your auditors are actively reviewing your financial records. They will typically spend some time on-site at your office while they’re looking through things; this phase gets its name because they’re working “in the field.” They’ll give you a list of transactions they want to review and ask you to provide substantiation. The documentation they’ll need will depend on what they’re reviewing – bank statements, bills from vendors, invoices you sent to clients and proof of payments they’ve made, payroll records, loan agreements with your bank, etc. They may ask to physically inspect fixed assets and if you sell products, they will review your inventory to confirm that the amount on hand ties out to the balance sheet and if the condition it’s in merits a write-down of its value.
Your auditors will also ask a lot of questions along the way, such as explaining large or unusual transactions, additional documentation for transactions, and reasons account balances have changed from year to year or differ from your budget. If their work raises concerns about the accuracy of your financial records or risk of fraud, they will bring this to you for feedback. They may also have recommendations about best practices for organizations in your industry and improvements you can make to increase efficiencies.
The auditors will propose changes and adjustments for you to make. Since management, not the auditors, are responsible for maintaining financial records, you have the final say over whether to make the changes. If the changes are immaterial, you can pass on them easily. If there are significant changes proposed and you decline to make them, you may not get a clean audit report.
After field work is over, your auditor will provide their report to you in the form of a management letter. This includes the auditor’s opinion of whether your financial statements are free of material misstatements, and presents any material weaknesses and significant deficiencies they found, as well as operations and procedures you may want to improve or redesign. The staff or board member(s) overseeing the audit will confirm receipt of the letter and respond to the weaknesses and deficiencies it raises. If you have already handled them, report this to the auditors in a formal response. Before the audit report is finalized, you should have a post-audit meeting between the CPA firm, management, and, if appropriate, a representative from the board of directors. Take this opportunity to discuss their findings and concerns that came up during the audit.
At the close of the audit, management should present the results of the audit to the board of directors, or audit committee if it exists. This will keep them informed of your financial operations and feedback from the auditors. Review the management letter and audited financial statements with the board and discuss any findings that require correction or further action.
This article by the National Council of Nonprofits lists questions for management and/or the audit committee to discuss with the auditors at the post-audit meeting, plus questions for the audit committee to discuss with management after the audit.