Companies often perceive audits of financial statements as stressful, overwhelming and time-consuming–but it doesn't have to be that way. Fostering a collaborative relationship between a company’s management and the audit firm will lead to an effective and efficient first-year audit.
Planning and Timing of the Audit
Proper communication with the auditor is important throughout all phases of the audit, but is especially crucial during the planning process. In this phase, the auditor and company set internal deadlines and expectations and discuss the type of documentation that the auditor will need. Obtaining the requested documentation should be a high priority, as well as ensuring that the deadlines are attainable given other responsibilities of the company’s staff. The timing of the audit fieldwork should be scheduled to allow sufficient time for a wrap-up and unforeseen circumstances.
The company’s books should be closed and internally reviewed by management before the auditor arrives to ensure that the statements reasonably reflect the results of the operations for the period under audit.
Inventory counts by the company and observation of these counts by the auditor should be scheduled during the planning process. Preparation ahead of time is important, as the auditor may need to observe the inventory counts at different locations. These locations could be company owned, or else owned and operated by third parties at public warehouses.
Implementation and documentation of a company’s internal controls is oftentimes a pain point. The company should understand this and have documentation of its control environment in order to avoid delays of the audit.
Both the auditor and the company can work together to ensure that necessary financial statements are delivered prior to the deadline.
What to Expect
In addition to its day-to-day responsibilities, the company’s accounting team should be prepared to dedicate a significant portion of time for audit preparation. Because this is the first audit, preparing documents will be more time consuming and complicated than in subsequent audits. Documentation of internal control processes (i.e. financial statement preparation and review, payroll, disbursement and collection cycle processes) and accounting policies (i.e. overhead and capitalization of inventories, revenue recognition, significant estimates) should be ready prior to the start of the audit.
All documentation that affects the financial statements from inception to date should be available. During the first-year audit, the auditor may select transactions that date back to a company's inception, because many financial statements from the current year relate to transactions that occurred prior to the year under audit.
Management must consider whether the accounting team is adequately staffed, or whether they have the technical expertise to prepare the documentation required for the audit.
If the accounting team is not adequately staffed, management may need to consider hiring additional full-time staff, or else having an outside consultant facilitate the audit.
Hire Full Time Employees - Pros and Cons
- Increasing the size of the accounting team and hiring the right personnel will position the company to meet the demands of the audit and keep pace with the company’s growth.
- The employer has control over the how and when the employees perform their tasks.
- After going through the first year audit, the accounting team will gain experience and be more prepared for the following audits.
- Finding talented individuals with expertise in the natural food products industry can be challenging, and developing this skillset can be time consuming.
- The associated costs with hiring employees, their salaries and fringe benefits oftentimes exceed the fees paid to consultants.
Hire Consultants - Pros and Cons
- Consultants have expertise and experience in the areas that the company may lack internally.
- Consultants can be hired on a short-term basis, especially when there is not enough time for full time employees to develop a skillset.
- Consultants can be dropped on short notice if there is a change in business circumstances.
- While consultants have the expertise and may be hired on a short-term basis, the knowledge gained and experience of going through the first year audit will generally not be transferred to the accounting team.
- The consultants typically have control over the how and when the tasks are completed.