What Is the Financial Audit Process?
The financial audit process is an independent review of a company’s financial statements, supporting documentation, and related accounting processes. Auditors evaluate whether the financial statements are fairly presented and whether the underlying records support the reported numbers.
A typical financial audit process includes:
- Planning and risk assessment
- Reviewing internal controls
- Testing financial transactions and 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 processes and controls around those numbers. If controls are weak or undocumented, the audit is usually more time-consuming and more costly. Some of the most common issues we see with controls include too many people being responsible for too many pieces of a given transaction, journal entries and reconciliations without independent reviews, undocumented processes and procedures in key accounting areas, and too much reliance on spreadsheets without version control and reviews. 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 pain of an inefficient audit goes beyond just the cost. Delays in financial reporting can impact bank reporting, bonding, or investor relations. It can also mean increased stress levels during the year-end for employees. It can mean senior management spends more time dealing with the audit and less time on strategic activities. In extreme circumstances, it can impact credibility. Simply put, being unprepared and having poor 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 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 reconciliings before year-end.
3. Strengthen Internal Controls in Practical Ways
It’s not necessary to have a big finance department to ensure effective internal control. Sometimes, simple changes can be effective. For example, if the segregation of duties cannot be fully achieved, compensating controls such as review and approval can be effective. Also, the review and approval process should be documented in the same way to ensure an audit trail. The key areas to pay attention to are:- Independent review of reconciliation and journal entries
- Documentation of revenue recognition, capitalization, estimates, and cut-off procedures
- Conducting internal self-checks regularly to ensure the effectiveness of internal control
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. This way, auditors will have time to discuss with you how these events may impact the audit and what documentation will be required.
It is always helpful to ask questions throughout the year instead of waiting until the audit process starts. This will help prevent costly accounting questions and adjustments and make the audit process more predictable.
5. Use the Audit to Add Value, Not Just Comply
When your organization is audit-ready, the auditors can use their time more productively discussing the results with you instead of looking for information. 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 lender, investor, and board confidence
- Control over the audit process, cost, and time
