For many organizations, an annual audit can feel like an overwhelming process. Whether you are a nonprofit organization or government-funded entity, preparing for an audit requires time, coordination, and attention to detail. As an audit manager, one of my primary responsibilities is helping organizations navigate the audit process efficiently while ensuring financial information is reasonably accurate and reliable.
Considering the uniqueness of every organization, there are several common practices that can significantly improve the audit experience and reduce the amount of time spent responding to auditor requests.
Why Financial Statements Audits Matter
A financial statement audit provides board members, donors, lenders, grantors, and management with confidence that an organization’s financial statements are fairly presented. Beyond compliance requirements, audits often help identify opportunities to strengthen internal controls, improve financial transaction processing, and enhance the organization’s financial reporting.
Auditors will evaluate financial records, supporting documentation, and internal controls to gain assurance that reported financial information is reasonably complete and accurate. How organized and accurate the information provided by the organization’s finance team and management can have a significant impact on the audit process and can affect efficiencies along the way.
Key Areas to Focus on With an Audit
1. Maintain Strong Documentation
Supporting documentation is essential for proper daily financial operations and audit procedures. Transactions should be supported by a variety of documentation including invoices, contracts, agreements, payroll documents, and other support that can substantiate transactions recorded in the general ledger.
Not properly maintaining supporting documentation can delay the audit and create unnecessary uncertainty regarding selected financial transactions made during the audit. Some of these transactions can be found to be material to the audit engagement.
Recommendation: Implement an organized and centralized filing system that allows documents to be easily retrieved when needed. If not done so, organizations should have an electronic copy for supporting files as this would be easier to send to auditors upon request.
2. Review of Significant Transactions Throughout the Year
Organizations often experience unique transactions such as capital purchases, debt arrangements, federal or state grant awards, operating or finance leases, or complex fundraising events.
Delaying review of these complex transactions can lead to significant corrections recommended by the auditor. This is due to the organization’s limited time to evaluate these transactions, resulting in their improper recording.
Recommendation: Discussions should be made between management and the internal finance team as they occur to ensure they are recorded appropriately, supported by proper documentation, and agreed upon by both groups.
3. Monitor Internal Controls
Having proper internal controls will help safeguard assets and ensure reliable financial reporting. Internal controls include segregation of duties, password protected controls over financial systems, and proper approval of purchase orders just to name a few.
Having strong internal controls helps reduce the risk of fraud and errors. As auditors, we assess an organization’s internal control and plan our audit procedures accordingly.
Recommendation: Organizations should review control procedures on a periodic basis to ensure they are effective and being properly performed.
4. Understanding Requests for the Audit Work
Organizations should understand the audit requests during the process. Depending on the scope of the audit, requests can vary and so communication between the organization and auditor is critical. Having a planning meeting between both parties can help alleviate these stresses where an organization has an opportunity to ask questions to the auditor and so will be better prepared when requests begin to be communicated. Meetings throughout the audit can also help organizations communicate any questions or concerns on certain requests and help understand the purpose of the request.
Recommendation: Auditors and key personnel in the organization should have frequent communication before, during, and after the audit work has been completed.
Final Thoughts
An audit should not be top-of-mind only during the timing of the audit. The most successful audits are the results of organizations making a commitment to excellent financial management practices maintained throughout the year.
By focusing on documentation and making sure it is well organized, reviewing internal controls on a regular basis, communication regularly with auditors, organizations can experience a much smoother audit process while strengthening the overall quality of their financial reporting.
By: Eric Cruz, CPA, Audit Manager in Rochester, NY