What Is the Financial Audit Process?
The financial audit process is an independent examination of a company’s financial statements, supporting documentation, and related accounting processes. Its purpose is to determine whether the financial statements are presented fairly and whether the underlying records appropriately support the reported amounts. A typical financial audit process includes:- Planning and risk assessment
- Gaining an understanding of internal controls
- Testing financial transactions and account balances
- Evaluating supporting documentation
- Issuing the audit opinion
How Poor Records Disrupt the Financial Audit Process
One of the most common causes of delays in the financial audit process is incomplete or disorganized documentation. When auditors cannot easily access the records supporting financial transactions, they must perform additional procedures to obtain sufficient evidence. Common recordkeeping issues that make audits difficult include:- Missing or incomplete support for key transactions, such as invoices, contracts, and approvals
- Schedules that do not reconcile to the general ledger
- Lack of documentation for accounting estimates and judgments
- Important agreements, including leases, loans, and major contracts, scattered across emails and shared drives
What This Feels Like During the Audit
- Multiple rounds of follow-up requests from auditors for the same items
- Audit fieldwork taking far longer than planned
- Finance and operations staff pulled away from daily responsibilities to hunt for documents
- Growing frustration on both sides as deadlines slip
How Weak Internal Controls Make Everything Harder
Audits are not just about numbers; they are also about the processes and controls behind those numbers. When controls are weak or undocumented, audits are usually more time-consuming and more costly. Some of the most common control issues we see include too many people handling different parts of the same transaction, journal entries and reconciliations without independent review, undocumented processes and procedures in key accounting areas, and too much reliance on spreadsheets without version control and review. As a result:- Auditors may not be able to rely on controls and may need to increase detailed testing
- Sample sizes may grow, which leads to more document requests and more questions
- Control deficiencies may trigger added procedures and formal communication with your board or those charged with governance
The Ripple Effects of an Inefficient Financial Audit
The impact of an inefficient audit goes beyond the fee. Delays in financial reporting can affect bank reporting deadlines, bonding capacity, and investor relations. They can also increase stress levels for employees during year-end and force senior management to spend more time on the audit and less on strategic priorities. In extreme cases, audit delays and issues can damage organizational credibility. Simply put, being unprepared and having weak controls can turn what should be an efficient and painless process into a costly and painful one.How to Prepare for the Financial Audit Process and Control Costs: 5 Steps
The good news is that all of this is avoidable. With better preparation, better records, and better controls, your organization can reduce audit stress, improve audit timelines, and better control audit fees.1. Plan Early and Set Clear Expectations
A successful financial audit process begins long before year-end. A planning session with your auditors can help in identifying new transactions, financing structures, system changes, or other developments that may affect the audit process. It is beneficial to review the 'Prepared by Client' list early, assign responsibility for each item, and monitor progress before the audit process begins. A step that can greatly improve the process is to designate an internal audit coordinator. Having one internal point person for auditor communication can make the process much smoother.2. Upgrade Your Record Keeping and Documentation
Documentation is one of the largest contributors to an efficient audit. Support for recurring entries and more complex accounting areas should be centralized so that all calculations, assumptions, and approvals are maintained in one location. Key documents like leases, loan agreements, contracts, and minutes of board meetings should also be centralized. It is also important to reconcile your accounts regularly, rather than waiting for year-end. Monthly or quarterly reconciliations for key balance sheet accounts can help you identify problems before they get out of hand and document all of your reconciling items before year-end.
3. Strengthen Internal Controls in Practical Ways
It’s not necessary to have a large finance department to ensure effective internal control. Sometimes, simple changes can be effective. For example, if segregation of duties cannot be achieved, compensating controls such as owner review and approval can be effective. Also, the review and approval process should be documented to provide an audit trail. The key areas to focus on include:- Independent review of reconciliations and journal entries
- Documentation of accounting policies including, revenue recognition, capitalization, estimates, and cut-off procedures
- Conducting internal self-checks regularly to ensure the effectiveness of internal controls
4. Communicate Proactively With Your Auditors
Communication is key to preventing costly surprises. For example, if your organization is experiencing new debt, equity financing, acquisitions, systems changes, significant contracts, and restructuring activities, it is essential to communicate with auditors in advance. Timely communication with the auditors will have a positive impact on the “no-surprise” audit approach.
5. Use the Audit to Add Value, Not Just Compliance
When your organization is audit-ready, the auditors can use their time more productively discussing the results with you. This creates the opportunity to have more beneficial conversations with the auditors on the key issues, trends, and opportunities for process improvements and potential control enhancements. This process can lead to:- Timely and more consistent financial reporting
- Increased stakeholder confidence
- Control over the audit process, cost, and time
