BEST AUDIT EVER: FOUR GUIDELINES
TechCXO partners are fond of saying credible numbers lead to credible management.
Audits may not be sexy but a smooth annual audit shows your board, lenders and auditors that you have your financial processes and systems in place, which builds confidence. These four guidelines will help you extend that confidence.
1. Control Your List – Auditors want the world in terms of information. That’s the nature of the job. Often, they’ll ask for things that aren’t material to your business, which creates busy work for you. For example, if you’re a $10 million company, you don’t want auditors asking to review $1,500 contracts. You can take control of your Prepared by Client Schedules (PBCs) by discussing what is material and what isn’t. Also, part of your fees should include preliminary work. Compare the work done the year previous to see what can be started early.
2. No Surprises — Busy Season is Busy Season. Your auditors have zero flexibility this time of year and delays will cost you money. An audit for a regional firm may cost about $200 per hour. At 300 hours for an audit, that’s $60,000. Make all the pre-closing entries you can ahead of time. Even if you don’t have numbers for all 12 months, you have 11 month’s worth. Start working on audit schedules now. If you can’t close your books on time, you can’t complete your schedules and your audit field work is delayed – that will cost you. Have your Prepared by Client Schedules done; and more importantly, have internal management’s
review of PCBs done, before the auditors show up to avoid surprises.
3. Hard Close – Year-end means additional entries. A company may buy property all year long and never enter into a fixed asset ledger. All of a sudden those two dozen computers purchased throughout the year are “hand grenaded” into depreciation entries. Build in some buffer time for these year-end tie-ups. Make sure sub ledgers tie and reconciliations are in order. This is a good time to establish a robust monthly closing process.
4. Expensing Options – FAS 123R requires companies to expense options. That means you have to create a value for your options which results in operating expenses. Make sure you understand your pricing model, how it is computed and you have reviewed it internally. Your auditors need to buy off on variables such as volatility and risk and it all needs to be supported – complicated audit, preferred stock, stock options accounting, be sure to allow time. Get valuation done every year as part of the audit.