Audit preparation involves preparing for independent audit teams to review processes and receipts, looking for unauthorized transactions and preventing fraud and errors. Companies provide questionnaires or audit listings to assist with the process, including accounts payable and receivable schedules, bank reconciliations, and fixed asset lists. Audit committees coordinate and review the process, but challenges include changes to account numbers and timely preparation of information.
Audits come in all shapes and forms. Regardless of type, however, audits are conducted by the independent audit team, reviewing processes and receipts, looking for unauthorized transactions and trying to prevent fraud and errors. Audit preparation is the process of preparing for this review and is generally related to audits of public accountant (CPA) firms. These are audits performed at least once a year to assure investors, banks and other interested parties that a company’s financial statements are presented fairly, without major distortions or errors.
Auditors follow audit programs, and audit preparation is generally recurrent, with similar items from previous years. Companies that need to be audited, such as public companies, are often provided with questionnaires or audit listings requesting schedules and other pertinent information to assist with the audit process and preparation. These schedules are commonly known as “customer-prepared” (PBC) documentation.
Audit team members use PBCs to analyze financial statements and test the numbers. The aim is to use audit preparation documentation to make the audit process faster and less expensive. The better the documentation, the smoother the audit should be.
An accounts payable schedule is usually part of the audit preparation, containing a detailed list of debtors, long-term and short-term, and how much each owes. List totals must agree with what the company presents in its financial statements. If a company shows $1,000 in dollars as current accounts payable and $5,000 in long-term notes payable, for example, those exact amounts must agree with the accounts payable schedules.
Another timeline that is often part of audit preparation is an accounts receivable list. This list shows who the business owes and how much it owes, similar to accounts payable. The idea is the same: the accounts receivable schedule must agree with the financial statements in totals.
Bank reconciliations are popular PBCs and are usually required for the last month of the fiscal year and the following month. Bank reconciliation describes the differences between the banks’ cash balance and the accounting books, which the company shows in its financial statements for cash. Other items popular in audit preparations include a list of fixed assets, depreciation, investment listings, and bank confirmation letters, in which banks confirm cash and investment balances with auditors.
Many companies, especially corporations and large companies, set up audit committees to coordinate and review the audit preparation and process. The audit committee is usually made up of board members who have an interest in the financial well-being of the business. These members may have a background in finance or accounting.
Audit preparation challenges are changes to account numbers due to errors or adjustments made after preparing the PBCs. When this happens, schedules and documentation must also change. Another audit preparation challenge is getting all the appropriate information prepared in a timely manner. This problem can be alleviated by using financial software that provides good reporting, eliminating the need to compile separate lists for many items.
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