Whether the request comes from an independent auditor, a lender, a government agency or a potential buyer, the first weeks of an audit are mostly about documents. The better organized you are before it starts, the shorter, cheaper and less stressful it tends to be. This checklist covers what most reviewers ask for and how to get it ready.
First, understand the request
Read the engagement letter or request list carefully. Note:
- The period covered. Usually a fiscal year, sometimes several.
- The scope. A full financial statement audit, a review of specific accounts, a payroll or sales tax audit, or a lender’s due diligence all ask for different things.
- The deadline for each item.
- Who your contact is, and how they want to receive files.
If anything on the list is unclear, ask before you start gathering. It saves rework later.
Get the books closed and reconciled
Auditors start from your accounting records, so those need to be complete for the whole period.
- Bank and credit card reconciliations for every account, every month, matching your books to the statements. Unreconciled items are the most common source of delays.
- Accounts receivable aging showing who owes you what and for how long, matched to the balance in your books.
- Accounts payable aging showing what you owe, matched the same way.
- Payroll records that match your payroll tax filings for each quarter.
- Loan statements showing balances at year end, matched to your books, plus copies of the loan agreements.
- Fixed asset list with purchase dates, costs and depreciation.
- Inventory counts, if you carry inventory, with how the count was done and valued.
Fix what you can find before the auditor finds it. If a balance does not reconcile and you cannot resolve it, write down what you know. A documented open question is far better than an unexplained difference.
Gather supporting documents
Expect to be asked for evidence behind a sample of transactions. Have these organized by month or by account:
- Sales invoices and customer contracts
- Vendor invoices and receipts for expenses
- Signed leases, loan agreements and major contracts
- Payroll registers and employee records
- Tax returns and correspondence with tax authorities
- Board or owner meeting minutes, if you keep them
- Card processing statements and merchant deposit reports
Use a consistent folder structure and file names that include the date and vendor or customer. If documents are scattered across email and paper, scanning and filing them now saves hours of searching while the auditor waits.
Review your internal controls
Auditors look at how transactions are approved and recorded, not only at the numbers. Common questions include:
- Who can approve a payment, and who can actually send it? Ideally these are different people.
- Who records transactions, and does anyone else review them?
- Who can add a new vendor or change bank details?
- Who receives and reviews the bank statements?
- How are cash and checks handled when they come in?
In a small business, one person often does several of these. That is normal, but it helps to show some form of review, such as the owner checking the bank statement each month and initialing it. Write down how each process works today, even if it is informal.
Prepare a short summary
Before the auditor arrives, prepare a one or two page summary covering significant events during the year (a new location, a large contract, a lawsuit, a new loan), any changes in accounting methods or software, known issues and how you addressed them, and a list of who to contact for which topic. This answers many first-day questions in advance and shows you are organized.
During the audit
Keep a log of every request and the date you answered it. Answer questions with documents rather than explanations where you can. If you do not know an answer, say so and follow up, rather than guessing.
Get help where it makes sense
Preparing for an audit is different from performing one. The audit itself is done by an independent licensed CPA or by the agency that requested it. Preparation, on the other hand, is work you can do yourself or with outside help.
Our financial review and audit preparation service reviews your books, records and controls, helps you organize what the request list asks for, and gives you a readiness memo for your auditor. Evolvetec Inc. is not a CPA firm and does not perform audits or attestation work.