Top Five Things You Need to Prepare
A financial audit is a verification that the amount in the financial statements, the presentation of the financial statements, and the accounting policies are fairly stated in all material respects in accordance with International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs). There are a host of benefits associated with these audits.
An Audit firms’ objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or error and to issue an auditor’s report that includes their opinion. This provides shareholders and investors with reasonable assurance of an accurate reflection of the company’s financial situation.
The actual process of preparing for an external audit can appear daunting for business owners. Aegis’ external Audit Manager, Vernetta Guischard, shares her best tips to help business owners prepare for an external audit.
Have the important financial statements of the business in a statutory format.
Vernetta shares that, unlike larger businesses that have dedicated accounting personnel, small to medium-sized businesses do not. In this case, she suggests using accounting software so that external auditors can simply pull these statements from the system.
These documents include:
- Statement of Financial Position
- Statement of Comprehensive Income
- Other reports
Have Internal Controls
The accounting department of small to medium businesses usually consists of one to three individuals, most times inclusive of the owner. In these cases, Guischard recommends having these important financial documents ‘authorized by’ and signed by the business owner.
Another form of control is having bank reconciliations. A bank reconciliation is a process of matching the balances in an entity’s accounting records for a cash account to the corresponding information on a bank statement (Accountingtools, 2021). This ideally should be conducted monthly.
Schedule a Planning Meeting
Business owners know more about their business than auditors do. Having a planning meeting is important to ensure that we gain an understanding of the business to determine the risk in the business and the materiality of transactions. Business owners are asked questions such as:
‘Are there any significant events that happened within the financial year to date, that may affect the financial statements?’
This is to provide external auditors with more knowledge about the business to facilitate a risk-based approach to the audit. The planning meeting is mandatory as based on this meeting the auditors will determine the scope of their work which is crucial if one wants an efficient audit. Time spent on planning an audit can vary from a low of 7% or less to a high of 25%, the greater the risk the higher the planning time. It is better to spend time getting it right and your cost will be better managed.
Develop proper record keeping
External auditors have their audit tests to perform. For example, if testing accounts receivables, the business owner would need to provide the accounts receivable sub-ledger. This report is an individual listing of companies or persons that owe the business money.
Business owners also need to have all the necessary documents on hand for auditors to effectively perform their audits. She encourages managers to have a strong system for record-keeping.
Have a clear understanding of the responsibilities of the Auditor and the responsibilities of Management.
When you get an auditor you have to understand their responsibilities and your role as well. We provide a standard document that they must print on their letterhead and sign by their directors and included some of it included in their audited financial statements.
This is a statement that outlines what management is responsible for (referred to as a Representation Letter). This letter ensures that management takes responsibility for representing to the auditors that they have told us everything they think we ought to know about the business that may not be apparent from records.
Representation letters are given to them at the end of the audit (this is not included in the financial statements) – and returned to the auditor.
Engagement letters, Statement of Management Responsibilities, and some other documents explicitly state the responsibilities of management. The engagement letter, for example, also states the responsibilities of the audit firm.
When performing audits/conducting audit testing, we verify that the information in the unaudited statutory financial statements is reasonably “true and fair”. We verify management’s assertions/financial statement assertions.
Planning and preparing for an external audit may seem tedious, but as Vernetta shares, it is important for building trust with financial institutions such as banks. Because an external audit is provided by an independent source, your stakeholders will feel more comfortable dealing with your business.
If you need any audit support for your business, you can email Vernetta at firstname.lastname@example.org or call us today at 625-6473