How to Lead the Audit Process & Get Ahead of Complex Issues
Part 2 of 4 of Getting Through Your First Audit
It’s an important working relationship when it comes to your auditors so set the parameters for working together at the start of your first audit engagement.? Just like any relationship, many things can go right or many things can…well, you know.?
Our recommendation is to establish a timeline and communication workflows and set the tone for proactive dialogue.? Lead the process and make sure everything funnels through you, the CFO. Verify how you’ll be sharing files and that your documents will be stored in a secure location. Go over the timeline for when your documents will be ready to be shared. Work together and evolve the relationship with your auditors into a partnership because the relationship will grow (along with the audit invoice).?
Grow and develop the relationship with your auditors into a partnership by educating them on what is important to you and using their inputs to improve your accounting processes.? Auditors come in different shapes and sizes, some more eager than others and some more experienced than others.??
Certain accounting issues are common in startups and are often red-flagged by auditors. They include:?
Make sure you have a good grasp of these issues as it is important to work through them with your auditing team early on. Oftentimes, the junior staff may not have the expertise to identify potential issues in these areas, so make sure that the audit partner or managers are involved early on and that they are guiding their team on how they should be reviewing your documentation.
You don't want to risk important questions popping up towards the end of the process and delaying the release of your audit report.? Ideally, you should be discussing and resolving your complex accounting issues as you are onboarding your auditing team.?
Now as you get started, these are some key items that can cause some frustration with auditors so address them ahead of time to make the process more smooth.?
Absence of Comprehensive System Descriptions:
To facilitate the audit process, provide clear and detailed system descriptions outlining its accounting processes. Documentation helps auditors to comprehend the processes independently, reducing the need for extensive client interaction solely for process clarification. Well-structured system descriptions can expedite the audit by minimizing the back-and-forth inquiries with the accounting team.
Using the Accounting Software Appropriately
Finance teams don't like to spend money yet investing in reputable accounting software simplifies the audit process. Software equipped with audit-trail functionality and robust transaction tracking capabilities assists auditors in verifying data accuracy.
Cloud-based accounting solutions offer remote access to financial records, enabling auditors to navigate financial statements and underlying documents.? We typically provide a guest or auditor log in to make things easier. ? Attachments of supporting documents to transactions further enhance the self-service model for auditors.
Manual intercompany reconciliation can be time-consuming and impede the monthly close process.We had a lot of difficulty looking through spreadsheets. Automating intercompany reconciliation through software solutions streamlines the process, enhances accuracy, and provides real-time data for decision-making.? For example, use intercompany reconciliation automation tools designed for multi-entity companies to ensure accurate and efficient reconciliation of intercompany transactions.
Be it Netsuite, Quickbooks, Intaact or something else with international subsidiaries and branches, have it all documented.? When it comes to the flow of customer acquisition, I typically like to outline it for the auditors as follows:?
Repetitive Manual Workarounds:
The presence of repetitive, standardized processes can streamline the audit process. However, an excessive number of manual overrides, exceptions, and workarounds can complicate matters and raise red flags.? Auditors then require additional transaction walkthroughs to ensure that these processes don't adversely impact the accuracy of accounting. Digitization of records is essential, as it improves readability and facilitates efficient auditing by uncovering errors before they become reportable issues.
Responsive Financial Relationships:
Maintaining strong relationships with banks, mortgage firms, and credit issuers ensures swift responses to auditor requests for external confirmation.? This is particularly important when confirming cash balances and other critical elements on the balance sheet. Auditors want to be accurate about the end period cash (not just in your US bank accounts but in total for the whole company).??
Timely notifications to financial service providers regarding upcoming audit requests can expedite the confirmation process, underscoring the importance of proactive communication.
Thorough Preparation and Timely Access to Documents:
A well-prepared and organized approach significantly accelerates the audit process and saves money.? Ensuring that all financial statements, transaction documents, and necessary application access are readily available eliminates unnecessary delays.?
We typically like to provide essential documents in advance, such as board minutes and reconciliations, giving the auditing team ample time to prepare. We have everything reviewed in Dropbox with folders and subfolders so that it’s easy to find.? Files are named by date and information is stored in their respective quarters.
A proactive stance on preparation demonstrates the company's commitment to a smooth and efficient audit.
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Navigating Gray Areas:
Acknowledging the inherent gray areas within financial regulations and interpretations will come up and justifications will be needed. Engaging with auditors to discuss potential gray areas and seeking their opinions beforehand can prevent unnecessary disputes.
Understanding the subjective nature of certain audit aspects enables the company to approach disagreements with a comprehensive perspective, thereby saving time and avoiding conflicts.? If you have an option letter from a prior auditor on revenue recognition for example, by all means have it ready to go.??
Avoiding Neglect and Carelessness:
Neglecting responsibilities or careless oversight can lead to unnecessary losses and complications. Viewing an audit as an opportunity for growth allows auditors to share valuable insights and best practices. Auditors have the benefit of seeing many other companies so use their experience and insights.? Addressing and rectifying issues promptly, rather than allowing waste or neglect to persist, demonstrates the company's commitment to effective internal controls and risk management.
Segregation of Duties:
Maintaining a clear segregation of duties within the company shows that you are taking a serious approach to risk management and internal controls. Ensuring that tasks are distributed among different personnel mitigates the risk of manipulation and fraud. Show the auditors the organizational chart and the segregation.?
Lack of proper segregation of duties can result in increased auditing efforts, particularly in verifying financial integrity and reducing the potential for fraudulent activities.? We have seen internal controls get flagged because of the lack of separation.??
Respecting and Enforcing Internal Controls:
Overrides or neglect of internal controls can lead to extensive audit work, and addressing control-related issues during the audit can lead to inefficiencies and challenges. Utilizing accounting software with built-in controls can help prevent manual errors and inconsistencies.
Not answering the questions or providing Vague answers
Be clear about the timeline, the expectations, and the status of your books. At the first planning meeting with the auditors, communicate your timeline, the status of your accounts, and what data will be available. Regular update meetings about the PBC list should be scheduled weekly.?
Establish clear protocols for communication, who should they email (or not email), and where and how the documents are going to be safely .
Don't be rude. An angry auditor is not a friendly auditor who may be willing to negotiate possible findings should they arise.? Employees who are overly confrontational or try to belittle the internal auditors It is not unusual for employees who are being audited to be somewhat confrontational. To some extent, the tension provides a healthy balance and reminds us to bring our professional skepticism.
If an employee is too confrontational to the point of attempting to belittle an internal auditor, he might be trying to cover up his own shortcomings or misdeeds. When auditees just want to argue about everything, it may be an indication that they are not doing what they are supposed to be doing.
Don't spring any surprises on the auditor. Auditors don't like surprises particularly if they have a potentially significant impact on the audit scope, potential findings, or the audit report.
Don't provide any extraneous, unrequested information. If you are unsure about the information and how it may relate to the audit, but the auditor has not specifically requested it, consult with Internal Audit first and a decision will be made on how to proceed.
Do Build Trust?
Your relationship with your auditors doesn't need to be adversarial. They're not out to get you. Instead, view auditors as collaborators responsible for validating the key facts in your company’s financial history and ensuring you have a clean bill of health financially. Treat them as critical advisors and partners for your company, and work continuously to establish a trusting partnership.
Do Develop the Partnership
“Nobody does due diligence,” says Francine McKenna, a lecturer at the University of Pennsylvania’s Wharton School, who adds that auditors themselves are focused on billings, not uncovering fraud. “Get the client, keep the client, please the client,” she says. It’s a working relationship and you are paying a lot for their services and they are providing a lot for what you pay.??
In part 3, we dive deeper into issues that can get you hung up such as revenue recognition policies Overstating Asset Values or Understating Liabilities and other big red flag items.?