By: Kathleen M. Clayton, CPA of HBK CPAs & Consultants
Whether this is your first audit, and you have no clue what to expect or you’ve been involved in the process for years, there are always ways to make the process more efficient.
Rule #1 – Plan ahead
When should you start planning for your annual audit? The answer is really, as soon as last year’s audit is done. So, you’re a bit behind already, right? Let’s get started.
First, who should be involved?
Typically, the Board of Directors or the Audit Committee starts the process by hiring the independent auditor and executing an audit engagement letter. Other services, such as tax preparation may also be included in the audit engagement letter. The Board may choose to meet with the auditor prior to the audit fieldwork to establish a relationship, open the communication process, and set the tone for the relationship with the audit firm. Communicate all internal and external deadline with the auditor. When is the audit draft to be presented, when is the final audit due? Will the audit be needed for grant or lending deadlines? If the auditor will also be preparing tax and compliance filings, know those deadlines and the expectations of meeting those or if extensions will be requested.
Once contracted, the accounting/finance director usually meets with the auditor and determines exactly what they expect and when and how information should be communicated. Typically, a “Document Request” list is provided well in advance of audit fieldwork. Most auditors now work with electronic documents and have a secure portal system to transfer audit information. If you are still a “paper only” shop, let the auditor know this as well. Ask who will be on the audit and tax teams for the engagement, so you know the new team members who may be asking for information.
The “auditee”, i.e. YOU, should determine who will most likely be involved in the audit process. No, it’s not just the accounting/finance staff. Besides the Board or its Audit Committee, the CEO, COO, program directors, development staff and all accounting/finance staff will most likely participate in the audit process. Each of these parties needs to know the timing of the audit and what is expected of them.
Certain professionals will also be contacted such as your banker, investment manager, attorney, payroll service, billing service and insurance agent. You may want to let them know your audit is beginning and identify the firm who may contact them regarding the audit.
Rule #2 – Be ready
Try to provide all requested documents on the auditor’s timeline. It will allow the auditor to plan and document preliminary procedures for your engagement. Be honest, if you cannot make a deadline, communicate with the auditor. NEVER allow the fieldwork to begin if you are not completely ready but know that audit teams are scheduled months in advance, so rescheduling may be difficult.
If possible, make a private space available for the audit team to work. They will need workspace and WIFI access if available. Let them know the logistics of your organization. What are the working hours? Do they have to deal with security? Is parking available? How should the audit team reach other staff members they might need to question? How would you like to handle audit questions, email or come on in and chat?
Try to respond to inquiries and additional document requests as soon as possible. If you have any difficult with any of the audit team, discuss your issues with the team manager or partner, immediately. Once the fieldwork is done, obtain a list of “open items” needed to complete the engagement and reiterate expected timelines. Depending on the progress of the engagement, the auditor may be in the position to give you proposed adjustments for your books and records and a preliminary final accounting. Respond to the open items and last inquiries as soon as you can. The ability to meet deadlines is resting with you at this point. At this point, the Audit Committee may request a “check in” with the auditor.
Management should be given the opportunity to review audit adjustments, and findings and present additional information if needed. Management should also review a draft of all reports, tax returns and communications to be presented to the Audit Committee and Board. By this time, there should be no “surprises” for anyone involved in the process. Good communication is key throughout the audit.
Invite the auditor to make their presentations to the Committee or Board in person. This will allow the Committee and Board is further their relationship with the auditor and potentially ask private questions. Board members will appreciate the audit presentation, particularly if they are new to the board.
Once the audit and tax returns are approved and finalized, debrief with the auditor. Make sure your books and records agree to the final audit. Ask: What when right this year? What can we do better this year?
Rule #3 – Stay in touch
Make the auditor a trusted advisor. They want to hear from you throughout the year, particularly if you are involved in anything with audit or tax significance, such as:
- Starting or closing a program or service
- Obtaining a new grant or large new contract
- Starting a new fundraising appeal
- Entering into new debt, or long-term leases
- Converting to new software
- Changes in key personnel
- Unusual transactions
- Pending litigation
- Fraud or theft
It’s always better to solicit advice on handling these items as soon as possible so the impact to the audit is managed properly.
Rule #4 – Celebrate completing the audit
Close the year and treat yourself and your team members. You’ll need them again next year.
Kathleen Clayton has over 36 years of experience in providing auditing, accounting, tax and consulting services to privately held businesses and not-for-profit organizations. She specializes in preparing tax exempt status applications, consulting on charitable regulations and providing outsourced management and accounting services to numerous organizations. She routinely consults with organizations that receive federal and state funding. Kathleen is a member of the New Jersey Society of Certified Public Accountants (NJSCPA), the American Institute of Certified Public Accountants (AICPA), and the AICPA Not-for-Profit Section.