In order for an audit to run smoothly it is essential for all parties to plan adequately. There are 5 areas a CFO should consider when preparing for an audit:
- Risk assessment
- New applicable accounting standards effective for the year end
- Prior years management letter
- Audit file
1. Risk Assessment
Management should complete a risk assessment of the company for both financial and business risks. This assessment should be reviewed and updated annually if required.
The CFO should in particular identify areas that are at risk of material misstatements or fraudulent activities and ensure that relevant safeguards and internal controls are implemented. This assessment should be disclosed to the auditor prior to the audit commencement.
2. New accounting standards
Each year AASB releases new and amended accounting standards. It is management’s responsibility to review the new standards which are effective at the year end and determine their impact on the financial statements in terms of accounting treatment and disclosure.
If the new standard results in an adjustment the CFO must quantify the effect on the financial statements and accordingly allow for adjustments if required.
If additional disclosures are required in the financial statements the CFO should compile all the relevant information for the auditor prior to the audit commencing.
3. Prior years management letter
The CFO should review the prior year’s management report to review the errors and problems reported in the previous year and should ensure that any recommendations made were implemented during the year.
Audit adjustments made in the prior year should be reviewed to ensure the same errors do not arise again.
It is vital for a CFO to allow adequate time for cut-off to ensure that all relevant and material transactions are captured in the correct accounting period. This will also ensure that minimum audit adjustments are required during the audit.
The CFO should set realistic deadlines/cut-off dates for the accounting staff by reviewing historical cut-off dates and determining how adequate these dates were. If the number of audit adjustments in the prior year were high this would suggest that management may need to extend their cut-off period.
5. Audit File
Once cut-off has been completed and the CFO is confident that all material transactions have been captured, all balance sheet items should be reconciled. These reconciliations should be reviewed and authorised by the CFO ensuring that evidence of this authorisation is clearly documented on the reconciliations.
It is advisable to provide a soft copy of the trail balance / general ledger followed by an audit file to the auditors on the first day of the audit. Original third party documentation to back up the balance sheet reconciliations should be placed on the audit file for the auditor to copy if required.
Implementing the above points in the months leading up to the audit will help ensure that the CFO is prepared for the audit and that it is completed in an efficient manner, aiding both parties in meeting their deadlines. It is highly recommended that a meeting with the auditors be held prior to the balance date to discuss the above matters, management’s timetable and deadlines and any significant audit or accounting issues arising.