Article: How to Prepare for an Audit


	Lynn Westergard

How to Prepare for an Audit

When a lender requires audited financial statements in your loan package, how much the audit will cost and how long it will take depend partially on you

Say the word "audit," and most people automatically think of "IRS." But, as many business borrowers know, an audit of their company’s financial statements is a vital and predictable condition for satisfying a potential lender or buyer or an absentee owner.

In that context, an audit is a process through which a CPA renders an opinion regarding whether your company’s financial statements accurately represent (a) its financial condition at a given point in time and (b) the result of its operations during a specified period.

While there’s no denying the expense and inconvenience that audits represent, there are three critical steps that you can take to reduce costs and minimize the disruption to your business:

Select the right audit firm.
Develop a cooperative relationship with the firm you select.
Get your records in order.

Selecting an audit firm. Here are some things to keep in mind as you choose an auditor:

First, even though an audit must be performed by a CPA, not all CPAs are equipped to perform an audit. Whether by choice, by lack of expertise or by lack of resources, many CPAs and accounting firms simply don’t offer audit services.

Also, don’t pick an auditor out of the Yellow Pages; there are more reliable sources of referral. Your current CPA or accounting firm may be able to perform the audit. If they can’t, they should be able to recommend an auditing firm that can take care of you. Perhaps the lender or other party who is requiring the audit can refer you to someone (but don’t settle for just one recommendation; ask them for two or three). Your attorney may also be able to introduce you to a qualified auditor.

Other requirements. Once you’re satisfied that your prospective auditing firm is generally qualified, consider whether they meet other important requirements. These should include the following:

The firm — and the people assigned to your audit — should be able to demonstrate experience with your industry and with companies of your size.

They should be able to provide positive references from other audit clients who will attest to the firm’s competence, responsiveness and timeliness.

They should be familiar with the lender requiring the audit and be able to confirm, first-hand, exactly what type of information the lender is seeking. (Perhaps an audit isn’t necessary, and a less expensive and less time-consuming review or compilation will suffice.)

Last, you should be satisfied that the personalities and work habits of the people assigned to your audit will be compatible with your staff, so as to minimize the trauma and disruption that a bad match can create.

Developing a cooperative relationship. Unlike an IRS audit, the process of auditing your financial statements should not be an adversarial one. If your staff and the auditors can work together smoothly, you will save money, the audit will be completed more quickly, and the transaction that created the need for the audit can move forward.

Here’s what you can do to help:

Explain to your people the purpose of the audit and the importance of it proceeding quickly and efficiently. Urge them to cooperate fully with the auditors.
Select an individual with authority to be the primary contact with the auditors. This will minimize duplications and omissions and promote consistency and coordination.
Provide a suitable work place for the auditors to use when they are working on site.
Before the auditors begin their work, arrange a meeting in which they and your people can get acquainted and develop rapport. This meeting should also include a discussion of timelines, the information that the auditors will need, and who will be responsible for what and by what date.
Ask the auditors to provide you with a list of schedules or work papers they will need from your records. Thoroughness at this step will maximize efficiency and hold down the audit costs.

Bringing your records up to date. Have everything ready for your auditors to review on the day they start their work. Providing information in a piece-meal fashion will only slow down the process. Needed information will vary from audit to audit, but you should count on providing the following:

General ledger, up to date through the end of the period covered by the audit
Trial balance
All bank statements, accounts receivable, inventory and other subsidiary accounts reconciled to the general ledger
Schedule of aged accounts receivable
Schedule of priced inventories
Schedule of fixed assets and depreciation taken on them
Schedule of prepaid expenses
Schedules of loans, trade payables and other liabilities reconciled with the lenders’ and creditors’ records
Schedules of all other accrued liabilities (for example, accrued vacation and sick time for all employees)
Corporate minute book and stock certificate book
Lease agreements, loan covenants and notes of all lenders

In addition, all original source documentation, such as canceled checks, bank statements, vendors’ invoices, sales agreements, insurance policies, etc., should be available to the auditors.

Conclusion. Your goals at all stages of the audit process — from selecting the audit firm to updating of your financial records — should be to achieve a quick result at the lowest possible cost. Achieving those goals depends to a large extent on how prepared you and your company are, with respect to both attitude and preparation.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.