BE PREPARED FOR YOUR ANNUAL AUDIT

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Myrtle Newman
5 years ago
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Advanced preparation for your annual audit will reduce stress on your accounting staff, encourage a positive relationship with your external auditors, and ensure positive audit outcomes.

1 Advanced preparation for your annual audit will reduce stress on your accounting staff, encourage a positive relationship with your external auditors, and ensure positive audit outcomes. Well organized information can reduce the amount of time auditors are onsite and therefore, reduce cost to you. Don t wait until the last minute to prepare financial information and documentation in response to the auditor s requests! The following top ten items requested by auditors can be established as processes and procedures though-out the year and greatly simplify the audit process. Financial Accounting Policies and Procedures Manual Your auditor will look not only at your financial results and documentation but also at your policies and processes for ensuring accuracy. An Accounting Policies and Procedures Manual provides a blueprint for how your organization maintains sound accounting and business practices. Such a manual presents not only what your policies are but also your processes for adhering to those policies. A well written manual can give auditors a sense of confidence in your financial management. Kim Narcisso President Acumen Business Services Kim.Narcisso@gmail.com (202) Internal Controls Your auditor will also focus on the internal controls within the financial management arena. Internal controls are those safeguards which provide your auditor with confidence that the risk of fraud or inaccurate

2 recordkeeping is low. For example, if your organization sends out invoices to members, a strong internal control would assign different staff members to prepare those invoices and subsequently record the payment of those invoices. Before an annual audit, spend time thinking about whether your processes reduce, to the extent possible, risk of fraud or error. Bank Reconciliations Bank reconciliations should always be completed on a monthly basis. Very busy staff sometimes fall behind on this task. Because delays in reconciliations can result in increased errors, auditors look to see that they are completed regularly, on a timely basis and independently reviewed by a supervisor. Bank and other errors can be easily missed if there are significant delays in reconciling your bank accounts. Credit Card Reconciliations If your organization has company credit cards, you probably already know what a challenge it can be to ensure that credit card charges are accurately accounted for and that the receipts are collected for each charge in a timely manner. Reconciliation of credit card charges is not a task that can be deferred. The longer the time between a charge and receiving the receipt for that charge, the greater likelihood that the receipt will be lost or the rationale for the charge will be forgotten. Fixed Asset Schedules A Fixed Asset Schedule is a complete list of all fixed assets held by the organization. The total value 2

3 presented on that list equals the amount shown on your Balance Sheet. The Fixed Assets Schedule must be updated for all items purchased, sold or otherwise disposed. Additionally, if an item is a fixed asset, it has a useful life beyond one year and is therefore depreciated based on that useful life. Your fixed asset schedule must be updated for that depreciation. Keeping your Fixed Asset Schedule up-to-date each time an activity such as a purchase occurs makes this important audit schedule ready to go! Investment Schedules Investment Schedules present the balances in all of your cash, short term bonds or CDs and equity investments such as mutual funds or individual stocks. The auditors will be looking for a schedule of interest income, dividend income, short term and long term capital gains, and realized and unrealized gains or losses for each investment item. Preparation of these schedules can be especially challenging because all investments must be presented at their market value at the end of the year, which is unlikely to be exactly the same as the amount you invested. Reach out to your bankers and investment managers for their help in preparing the schedule. Contracts and long-term liabilities From a financial accounting standpoint, contracts and long term liabilities represent obligations to pay for services in the future. For example, if you are purchasing a large piece of equipment over time, the total amount that is owed after the current year balances are paid is reported as a long-term liability. To be well prepared for the audit, make sure that all of the term and conditions 3

4 of your contracts are up-to-date, and review these contracts for the value of future payments. Accounts Receivables Your auditors will be expecting an Accounts Receivable Aging Schedule. This is a schedule that presents all of the amounts owed to your business at the end of the year and are to be paid in the short term. Each invoice or amount owed is listed along with the date of the invoice. If your organization has unpaid invoices that are not current perhaps more than 90 days old be prepared to ensure that the invoice will be paid or consider whether that invoice could be a bad debt and therefore eliminated from your revenue. Auditors will also typically review cash receipts in the subsequent year to further validate your outstanding receivables. Accounts Payable Accounts payable are those amounts owed to your vendors for goods and services received prior to year end. Note that many of these invoices will be received after year end and may even be dated in the new year. These will still need to recorded in the prior year. For example, you may not receive your invoice for telephone service in December until January. However, you are obligated to pay that expense and record it in the year the services were received. Therefore, it is treated as an account payable. Statement of Activities Last on this list but certainly not least, the auditors will examine your statements of activities also called your Profit and Loss Statement. In addition to taking an overall assessment of your current year results, they also 4

5 typically compare all revenues and expenses to the previous year s figures. Large differences and unusual items will require reasonable explanation. Knowing that these ten items will be of key interest to your auditors allows you to be prepared in advance to ensure that the audit process is smooth and successful. Note there will be other schedules an documents you will be asked to provide. When your auditors express an opinion that the financial results you present are accurate and your processes are effective, it provides your funders and your Board of Directors confidence in the management of your organization. 5

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