The audit/review annual report is a report card on how well your company’s financial department is performing. The goal of the audit/review process is to have no documented audit issues or comments. Having audit issues may have an adverse affect on obtaining bank loans or private equity.
So what do you need to do to have a clean audit report?
Start by taking last year’s audit report and remedy all the audit deficiencies. Obtain the audit checklist from the audit manager to understand what documents will be required to be submitted by management. Address any audit concerns early with the audit firm. In addition to completing the audit checklist items, management should complete the following prior to the auditor’s arrival:
ü GAAP structured Chart of Accounts and financial statements
ü Balance Sheet reconciliations and supporting backup
ü Cash Flow Statement and Analysis
ü Financial Ratio Analysis
ü Clearly defined explanations related to Quarter over Quarter material dollar and percentage variances
ü Clearly defined explanations related to Year over Year material dollar and percentage variances
ü Documented footnotes
ü Internal control procedures
ü Accounting manual and accounting policy changes that were implemented during the course of the year
Failure to be prepared prior to the audit team’s arrival will increase the cost of the audit, extend or delay completion of the audit, and demonstrates management’s ineffectiveness. In addition, audit teams are usually booked in advance, so if the company is not prepared appropriately than the audit team might have to come back at a later time. This could impact the release date of the audit and therefore put the company in non-compliance with the bank or other loan covenants.
While the company’s accounting department completes the above tasks, it may also be necessary to choose a new audit/review firm or potentially replace its existing firm for the next fiscal year.
How to Choose an Audit/Review Firm
The first step which should be completed 2 quarters prior to the end of the company’s fiscal year should be to draft and send out an Audit/Review and Tax Return Request for Proposal (RFP). Combining the audit/review and tax work should give you a better pricing package than separating these two tasks. Send out the RFP to 3 CPA firms within close proximities to your corporate headquarters. If your company has operations in another state it will probably make sense to either find CPA firms that cover your geographical area or hire a CPA firm for the corporate headquarters and have them find another CPA firm to handle the Audit/Review requirements for the other state(s). Make sure the CPA firm has in-depth knowledge of your industry. The RFP responses submitted by the CPA firms should be compared on an “Apples to Apples” basis. Request the pricing to be locked in for 2 or 3 years. Also, understand what is included in the proposed rate and what work will be an additional charge. Obtain bios of the key audit and tax staff professionals dedicated to your company. Know up front if your firm will be paying for new inexperienced audit staff, in which case, your company is being used as a training opportunity. Once you have narrowed your choice to one potential CPA firm, meet with the Audit Manager. Include the company Accounting Manager, since they will be working closely with the Audit and Tax Manager and need to be have a good working relationship. When speaking with the Audit Manager, understand their role, staffing on the engagement, preliminary work needed, how information/documents will be exchanged, security of documents, timeline of engagement, audit committee participation, etc. When you meet with the Tax Manager, determine if they simply process your company’s taxes or more importantly evaluate ways to maximize net income by minimizing taxes owed.
For companies that are audited at the end of their fiscal year, it is sometimes worthwhile to have the auditors do their preliminary test work at the end of 9 months and finish the audit once management has completed its fiscal year.