How to prepare for audit.
May 2024.
Golden rules and a steadfast approach, giving your entity the best chance of ensuring a smooth and successful year-end audit of its accounts.
Establish the timeline early.
Aim for the whole timeframe for the audit exercise – that’s planning, fieldwork, completion and sign-off – to be mapped out and clear in everyone’s minds a couple of months before your entity’s financial year-end. That involves getting everyone’s buy-in internally as much as it does your auditor’s agreement.
Ensure that leaders and management know when they’re looking at the accounts and auditor’s management letter, and relevant staff members know not to book time off during key periods.
A proactive Engagement Manager might contact you to arrange a planning meeting a few months before the year-end. If they don’t, make contact and ask for one yourself. An early meeting with your auditors is always a good idea even if there are still uncertainties as to your own internal resourcing or scheduling at the time of speaking. You can gauge expectations early (and assess whether there’s any flexibility in timing and any resources of support available if needed) and at least get provisional dates in the diary.
If dates end up needing to change or there are further developments to update your auditors on which occur up to (or after) the year-end, you can always schedule a brief additional call with your Audit Manager at a later point to keep them abreast of goings-on.
Speaking early is even more useful if there are any elements of the process which will differ from the year before, for example additional disclosure requirements, new auditing standards and testing, new staff in your finance team, new entities in existence or additional regulator compliance.
Set clear expectations.
Go to the audit planning phase prepared, with a clear picture in your mind as to the timeline that will be needed and work best for your organisation, and the level of service and delivery you expect. At a minimum, auditors should be working without exception (unless there is delay in your own provision of information) to the dates set by you for circulating papers to key Board or Committee meetings – usually one or two weeks in advance of convening to allow time for review.
In most cases it is very reasonable to expect your Audit Partner or Manager to attend a Board or Committee meeting, as well as a Clearance meeting with management to discuss the contents of their draft management letter and the accounts before papers are sent formally to Director or Trustee meetings.
Agree which party is responsible for which tasks and when; some audit firms for smaller entities offer support with accounts preparation, input into certain disclosures or a template for the annual report and accounts document (and certainly their own independent auditor’s report), so you should agree a timeframe and format for receipt of those if applicable.
(Note the provision of accounts preparation services alongside audit is becoming increasingly less common and your auditor will always be implementing safeguards – the use of separate team-members for example – to avoid self-review and other perceived threats to their objectivity or independence).
Obtain clarity over deliverables.
A good Audit Manager will provide you with a full list of the information you’ll need to provide at the planning stage of the assurance assignment – often referred to as a list of deliverables, or a PBC (Prepared By Client) list. Obviously there will be some requests which will follow during the course of the work itself after sample selection, however you might be surprised by just how much of the information required you can get to your auditor in advance. This will consist of the usual items such as lead schedules, reconciliations of balance sheet control accounts, schedules supporting key disclosures, support for key income and expenditure items and other information.
There may be additional resources that can be provided, in the form of accounts workbooks, proforma schedules for deriving any trickier journals of performing any reconciliations, templates for going concern assessments or documenting other key judgements – so ask your auditor upfront what tools they can send through to make your life easier.
Be direct and honest if you have concerns about resource, capacity or capability, as your auditor can then plan accordingly. It is better to be upfront about any challenges you might be anticipating than try to overcome the consequences or repercussions further down the line. During my spell as an Audit Manager, there were a number of occasions where I could connect clients to external consultants and members of my network who could help them with their preparation if they were struggling, so it’s worth bearing this in mind and always being open at an early stage.
It’s a good idea to be ready to provide the audit team with read-only access to your accounting system if it’s cloud-based, or at the least a full transaction listing export for the year and post year-end. I’d strongly recommend this approach as it will drastically curtail the volume of queries you’ll receive. (From a best practice point of view, provision of a full set of accounting data facilitates a more thorough inspection, and there are lots of interesting analyses audit teams can produce now using data analytics software, and which they may well be doing for their audit file or internal assurance provisions for you anyway or could share with you separately, incidentally).
To be even more proactive you could produce some high-level analytical review – that’s notes explaining variances in key income and expenditure streams and balance sheet items versus the prior year and budget – that could cut down the volume of queries even more if your auditor is indeed placing some of their reliance on analytical review. Your auditor will still need to corroborate such explanations to supporting evidence to gain the required assurance, though.
Never forget the audit trail.
Ensure accounts and schedules are clear, logical and flow on from one another. Never ‘hard-type’ a key figure in a spreadsheet cell or disclosure without a formula or accompanying explanation.
A golden rule which is obvious but can’t hurt reiterating, which should underpin every element of your organisation’s accounting and record-keeping (even its budgeting and forecasting) and not just period-end procedures, is that there should always be a clear audit trail. The derivation of any transaction, balance, journal entry, mechanism or assumption should always be observable and traceable by a third-party back to underlying support, ideally purely from your workings alone, and without the need for your steer or guidance.
Your accounts should be driven by formulae which link back directly or indirectly to the closing trial balance, or ETB, generated from the accounting system. This becomes less easy to achieve the larger and more complex your entity gets and there will be inputs from different systems and data outputs. If you can stay as organised as possible though and present each constituent of the accounts in a manner which facilitates straight forward and efficient review, not only will your audit team thank you (avoiding inefficiencies and unwelcome additional fees), you or your finance team will have an easier time explaining your accounts which will solidify their own understanding also.
Plan your approach in key areas.
Each of the areas below warrants a whole article in itself but I’ve highlighted just three areas auditors are required to ask around and perform work over. Be ready to discuss them at the planning meeting or at least have a plan of action:
Related party transactions. You will always be asked whether your senior leadership team and those charged with governance have submitted recent declarations of interest and whether you are confident your entity has a reliable and complete record of the identity of its related parties. It’s notoriously tricky to maintain a full and up-to-date record sometimes (sluggish responses from Directors or Trustees being one potential challenge) but it’s an easy ‘management letter point’ (control deficiency for the auditor to highlight in their findings report) should there be gaps in your processes here. The overriding point is – any transactions between your entity and its ‘related parties’ are always disclosable in the accounts, regardless of quantum. If you don’t know if there were any such transactions or what they were, you have a serious problem. Note this includes amounts paid to Directors or Trustees in remuneration or travel or other expenses, including the cost of indemnity insurance paid by the entity on their behalf.
Accounting estimates. ISA 540 (that’s the International Auditing Standard which addresses required procedures around estimated values in accounts) mandates that auditors are ‘professional sceptical’ and they robustly scrutinise the basis of any figures that are estimated in your accounts. That includes any estimated liabilities (predicted court settlements, dilapidations costs, retentions etc.), the depreciation of fixed assets, goodwill valuations, allocations of expenditure or income across different categories (and allocations across unrestricted, restricted and endowed funds in the case of charities), and more. Be ready for enquiry in those areas and have your methodology for quantifying said estimates laid out in schedules or memorandums, so that they are clearly logical and defensible and can stand up to scrutiny.
Going concern. ISA570 (the relevant Auditing Standard here) requires auditors to be robust in their review of your assessment that your entity will remain solvent, meeting its liabilities as they fall due, for a period of twelve months from the date of signature of the accounts. That means that, unless clearly, undeniably solvent and in impeccable financial health (or winding up) your entity needs to prepare budgets and forecasts or at least a paper documenting its assessment, which prove the going concern assumption for twelve months from the date of planned signature of the accounts. For example, an entity with a 31 March 2024 year-end whose accounts will be signed-off by the Board in August, will need budgets and forecasts covering up to August 2025 at the earliest, not just to March 2025 (the end of the financial year). Expect a good audit team to quiz you on the assumptions underlying such forecasts, as they’ll be documenting why they think they’re reasonable as part of their own assessment.
Collaborate and stay positive.
Audits are all about efficiency. Remember your audit team are human and have an extensive number of demands on their time. Proactive communication and spirited engagement from both parties are key ingredients in a successful process.
Contrary to the seemingly constant negative press coverage in the UK which might suggest otherwise, the audit profession is full of sharp, exceptionally conscientious and well-meaning scrutineers, who are committed to ensuring the best, compliant accounts for your entity and to upholding standards of good governance across your sector.
If you’re struggling to put the finishing touches to preparation and the audit team are snapping at your heels – minutes to review, journals to look over and transaction listings to pick samples from, are all your friends when it comes to keeping auditors at bay temporarily.
At the end of the day however remember your auditors are there to help, you are their customer, and checking your accounts are their business. Keep your auditors up-to-date on an ongoing basis, seek help and counsel readily, and the process may be less burdensome as a result.