Preparing for a Financial Statement Audit

The objective of a financial statement audit is to provide assurance regarding the quantitative and qualitative aspects of a business or organization. Most organizations understand that financial statement audits happen – and for a myriad of reasons. Some go through the audit process in order to be compliant with their loan covenants, if the organization reaches a certain dollar threshold in relation to revenue or contributions, or because their funding sources require it. Additionally, some organizations may have government-issued grants that require an audit for compliance. A financial statement audit will add credibility to the reported financial position of the organization or business.

Whatever the driving factor behind an audit, it’s important to go into the process prepared with everything needed to expedite the process. Here is a checklist of what you should have ready when preparing for a financial statement audit:

• Document all changes to internal control procedures/fiscal policies
  • Identify and communicate all significant changes in business operations and/or changes in accounting methods from the previous fiscal year to auditors (including personnel changes that would affect the audit)
  • All significant accounts must be reconciled; this should include (but is not limited to) the following:
    • Ensure net assets or retained earnings properly rolls forward from the prior year (meaning net assets or retained earnings should be equal to the previous year’s ending balance, plus the prior year net income/loss)
    • Ensure cash is reconciled (agree bank statement balance as of year-end to balance on the general ledger at year-end)
    • Ensure AR aging ties to the general ledger
    • Inventory: Ensure reports tie to the general ledger
    • Investments
    • Ensure AP aging ties to the general ledger
    • Deferred revenue
    • Payroll – reconcile the quarterly payroll reports to the general ledger (for wages and payroll taxes)
    • Accrued payroll
    • Accrued vacation, if applicable
  • Prepare supporting documentation for any significant reconciling items
  • Create and provide roll forward schedule for debt, showing the beginning balances in each note, plus additional borrowings, less repayments, to arrive at the ending balance per the trial balance/general ledger
  • Develop a schedule for future maturities on long-term debt that extends over the next five years

• Compliance schedules for covenants, if any

• Create and provide fixed asset roll forward schedule showing the beginning balance in each asset class, plus additions, less disposals, to arrive at the ending balance per the trial balance/general ledger

• Outline fixed assets additions as well as disposals that occurred throughout the year
  • Will need the dates in service for all new additions
  • For any assets sold, will require the amount of proceeds received
• Put together a list of donor-restricted contributions for the year under audit
• Compile supporting documentation/agreements for all significant grants received during the year
• Aggregate all new agreements as well as any amendments to existing agreements entered into during the year; this may include lease agreements, operating agreements, and debt agreements
• Confirm capitalization policy is being followed
• Gather and compile all board of directors meeting minutes for review
• Have the fiscal year budget to actual ready for review
• Revenue analysis comparing the prior year to the current year
• Expense analysis comparing the prior year to the current year
• Create an outline of rent expense that shows reconciliation to the terms of the lease agreements
• Prepare a schedule of future minimum lease payments that covers the next five years
• Show details of any legal fees paid, with the name and address of all attorneys used throughout the year
• Provide auditors with internal financial statements
• Auditor will also need the following items during fieldwork:
  • Subsequent cash receipts and subsequent cash disbursements listing
  • Journal entry listing for the fiscal year, through the date of fieldwork
• Provide auditors with trial balance for the fiscal year under audit prior to the start date of fieldwork

Of course, this is just a preliminary overview of what you’ll need in order to be prepared for a financial statement audit. If you have any questions, please contact Leone, McDonnell & Roberts for more information.