The Audit From the Inside

C PAs in business and industry, whether they work for small companies or huge conglomerates, sooner or later encounter the external auditors. By carefully preparing for the annual audit, we have been able to spend less time with our auditors, save on audit fees and also end up with an efficiently run audit. In addition, we’ve found that by working smoothly with our auditors, the audit becomes a valuable service, not an onerous annual event. This article lists techniques and procedures that will help your company’s internal accounting staff experience a well-run, cost-efficient audit year after year. It is mainly for controllers, chief financial officers or others who are in charge of the audit at the client end, but any CPA in business and industry will find the tips and techniques useful.

1. Planning As the Cornerstone

We call our auditor and set the date for the preliminary planning and fieldwork. For any company, this date should fall about three months before your yearend, as soon as possible after the relevant financial statements are completed so the information is still fresh to you and your staff. We inform the auditors of the date of the statement on which they will be doing the preliminary fieldwork. For example, if your fiscal yearend is December 31, you should use your September 30 statements. If you can finish up those statements by October 20, schedule the audit fieldwork to begin on October 27. At that point, ask the auditors to send you an audit schedule telling you when each stage of the audit will occur and listing all of the schedules, reports, minutes and other information they would like available for planning and the preliminary fieldwork.

At my company, interim audit needs include, for example, a listing of all additions and disposals of property, plant and equipment for the year January 1 through the date of the interim procedures and an expected price increase percentage for the inventory items purchased throughout the year.

During the week after the September 30 financial statements are released and before the auditors are due, you and your staff should gather all the data needed for the audit. If you do not get the audit schedule by October 20, ask the auditors to fax it to you immediately.

2. Rallying the Troops

As soon as we set the date for our preliminary audit, I send a memo to all of the staff who will be involved in the audit. I have them mark their calendars accordingly and tell them to make themselves available to the auditors during those dates. I explain they may have to work late during this period. Next, I follow up with a copy of the audit schedule: Each item needed for the audit is marked with the name of the responsible staff member and a due date—usually the last working day before the audit is to begin. When they arrive on the premises, I give this annotated copy of the audit schedule to the auditors. I make sure to go over each line item the day before the audit is to begin to ensure that each person on my staff has completed his or her assigned tasks.

Some CPA firms use a software program, such as Accountants Trial Balance (ATB), which allows you to key in the trial balance. You can give it to the auditors on a disk or by e-mail. This saves your company money because it saves the auditor time. Most auditors have spreadsheets that can accept these files; Windows 95 programs have made such transfers especially simple.

Right before the audit’s start date, I have a brief meeting with all staff members who will be working with the auditors. I explain that audit requests get first priority; scheduling conflicts should be reported to me. I tell them to refer any questions they can’t answer to me: As the audit coordinator, I run the audit for the company. Usually, the chief financial officer appoints the coordinator if there is no controller to direct the audit. Some companies have a general accounting manager or financial accounting manager who may be appropriate for the job. The audit coordinator should know every aspect of the audit and be able to answer all the external auditor’s questions about internal controls, financial statements, company policy and procedures and any systems used by the company.

3. Arrival of the Auditors for the Preliminary

The day before the preliminary audit is scheduled to start, I designate a room where the auditors can work. I have all of the materials the auditors requested in the preliminary audit schedule in this room. I include a completed financial package for the period they are auditing.

I have gotten the time the auditors need to do the preliminary fieldwork for my company down to about five working days. (This period will vary by company, since larger samples may be needed.) The sooner you answer the questions or furnish that extra schedule, the sooner the auditors can complete their fieldwork. Again, this saves the auditor time and your company money.

During the course of the audit fieldwork, the audit coordinator should have frequent informal “chats” with the audit senior or manager. I ask about the progress of the fieldwork, if they have had any problems with staff availability, if they have everything they need and whether they ran into any problems. For example, did the auditors get the names and addresses of the company’s lawyers in order to send out the audit inquiries? Did they get all of the requested invoices? Were their any discrepancies between the general ledger and the backup provided?

Remember, the auditors are there to help you identify problems in your internal controls, accounting procedures, accounting methods and other areas where there may be a weakness in your system. They can be regarded as a tool to assist you to become better in your performance for the company. Don’t feel threatened by the auditors or be afraid to argue a point or to give your point of view. Accounting often requires judgment. Convince them that your logic was sound. Once, for example, the auditors thought the allowance for bad debts at my company was too low. I was able to provide historical data that supported my number.

As soon as the preliminary fieldwork is done, have the audit senior or manager explain any problems or weaknesses that the audit team came across. After all, the purpose of an audit is to validate your work. This will give you time to make any needed corrections before the actual yearend audit. Also, feel free to give the auditors feedback about how they performed during the audit. This helps them assess their performance as well. For example, if a member of the audit team keeps asking the same questions over and over, mention it to the audit senior. This wastes your time and prolongs the fieldwork.

4. The Real Thing

If you have a December 31 yearend, you should set up a date with your auditors in late December or early January. At our company, we usually begin the audit in the second week in February and end in the third week. Fieldwork (the amount of time the auditors have to spend at my company) on my yearend audits is down to 10 days. Of course, this will vary by company size, but the goal is always to reduce it as much as possible.

Call the auditors to get the audit schedule for the yearend audit as soon as possible. Repeat the procedures for the preliminary audit. Of course, there are usually a lot more audit schedules for the yearend audit, so allow yourself two weeks between the completion of the preliminary yearend financial statements and the start date of the audit. (I never call my financial statements “final” until after the audit has been completed.) Use the same types of informal “chats” during the yearend audit to determine the audit progress. You want to keep the audit timely. Stick to the audit schedule for the time you have allowed for fieldwork. In my case, that’s 10 days. Be prepared, so you don’t hold up the auditors.

When the auditors complete the fieldwork on the yearend audit, ask them for the adjusted final trial balance. This enables you to compare numbers and ensure that you have all the client and audit adjustments. Then prepare the final financial statement package for December 31 and release it by the end of February to management. The auditor’s audit letter and condensed statements are not usually released to our company until March, when the auditors meet with management to discuss the audit and present their concerns in their “management letter.” For example, don’t be afraid to tell the auditors that you believe you have appropriate internal controls in place for accounts payable. If your system is logical, it should be acceptable to your management and your auditors.

In the meantime, I am able to close my December ledger and start preparing January statements for management. By the time I get the auditors’ December 31 audited statements, I am ready to start my February statements. By April, I am back to my pre-audit schedule with my monthly release dates and can look forward to several free months before thinking about next year’s audit.

Keys For Success

Four key points help the corporate CPA ensure a successful audit:

• Be available.
• Be cooperative.
• Be straightforward.
• Be prepared.

Your next audit will be a win-win situation—for both the CPA firm and your company—and everyone will come out less stressed and happier with the results and the fees.