As a business leader, time is often of the essence. Whether you need to implement quickly or want to free up your employees for other projects, it can be difficult to make the decision to invest additional time and resources into an already labor-intensive project like an audit. However, that extra investment into preparing for the audit will end up saving you time and money in the long run.
What does a true reconciled balance sheet look like?
While your accounting team may be providing reconciled balance sheets, it may be worthwhile to take a closer look at the depth of the content, particularly if this hasn’t been done in a while. In addition to a recap of the general ledger, reconciled balance sheets should include what the account is for, what makes up the balance and any external documents to support these numbers. This type of information can be very beneficial during an audit, and having it on-hand will prevent your accounting team from backtracking to identify and reconcile any missing items.
Ask Questions to Uncover Errors Early
Even if you don’t have the time or resources to review your accounts on a weekly or monthly basis, it’s important to thoroughly analyze all records, processes and accounts during audit preparation. As in the following example, this can uncover significant errors and issues in your financials. Recently, I was working as a Consulting CFO with a health care client that was preparing for their first audit, among several other accounting first, such as a producing a legitimate budget. Upon investigation, I noticed a sizable amount of activity around sales and use tax. Being new to the engagement, I wondered why this type of company would have a large sales tax payment each month since most of what they do would be tax exempt. I asked how these reports were being generated and why there was so much tax due each month. For the past five years, the preparer had been using instructions, which were now out-of-date and were written by someone he never met. Even though no one knew the original accountant who wrote the instructions, no one questioned the process. Unfortunately for the health care client, the amount of overpayment was around $350,000 for the four years that could be amended. “That’s the way we have always done it” can sometimes be expensive.
Another advantage of audit preparation is staff training. Depending on the size of the accounting department, you may be able to cross audit. Ask the person who handles fixed assets to review the bank reconciliations and the treasurer to look at deferred lease payments. The adage, “you cannot review what you do,” comes into play quickly. For anyone with extensive experience working with excel, you know the difficulty of catching your own mistakes. You need a fresh set of eyes. While the goal of the cross auditing is to catch mistakes before you present the financials to the auditors, the process also allows your employees to develop and improve their skills in various areas.
While it takes additional time and resources, audit preparation has a wealth—literally—of benefits. By reconciling your balances sheets and analyzing your financial processes early on, your business will be better prepared to address questions from auditors and fix underlying issues. Not only will this save your team a significant amount of time fixing errors during audit season, but you may uncover processes or mistakes that are costing you unnecessary money. So sleep soundly this audit season knowing you are fully prepared and confident in the accuracy of your accounts.