Preparing for an Audit: Best practices for SMEs

Fred Norman, Head of Audit, Harold Sharp

Fred Norman, Head of Audit at Harold Sharp, discusses the importance of preparation when it comes to getting the most out of your audit.

For many growing businesses, the requirement to be audited can feel like an unexpected consequence of success, often overlooked amid expanding teams and rising sales. For companies facing this requirement for the first time, an audit can be both time-consuming and costly. However, by taking a few key steps, you can streamline the process and make it much more manageable.  

Prepare for the audit planning meeting

The audit covers not just the financial information, but also seeks to gain an understanding of your perspective on the business and wider risk environment. For some management teams this might be an area which does not form part of the regular Board discussions. 

Before you meet your auditors for the first time, consider:

  • What are the key revenue streams for your business? It is important that the auditors have a good understanding of how these operate as this is usually the area of greatest sampling.
  • What are the largest business risks, how do you monitor these and how could they impact your financial statements? Audit has a specific focus on fraud risk, both internal and external, so consider your exposures to fraud and your responses.
  • Are there any off-balance sheet arrangements or post balance sheet events that need disclosing? These often come from teams outside of accounts so checking with other relevant department heads can save time later in the audit.

Perform effective balance sheet reconciliations

While you may have a standard month-end process, it is worth considering if this is sufficient for the year-end balance sheet position. Ensure that you have performed a robust year-end bank reconciliation and keep clear records of how any discrepancies were resolved. 

Performing a self-review of post year-end invoices and bank statements can help identify any cut-off errors which may be identified as part of the audit and result in adjustments to the year-end accounts or further sampling. 

A key area of work is often bad debt provisioning, so performing a review and clear down of year-end trade debtors can reduce the number of queries.

Bring together key documents

There are a number of standard requests that can be expected in any audit. Ensure that these are readily available, for instance:

  • Copies of lease agreements
  • Board minutes for the year 
  • A list of all banking counterparties (confirm your authorities are in position in advance of the confirmation process typical in all audits)
  • Financing or loan agreements 
  • Details of any employee share schemes

Audits can identify areas of accounting complexity in the review of existing contracts and agreements, particular those involving long term financing or share arrangements. These can result in “late breaking” issues which delay accounts sign off or require prior period adjustments, adding time to the audit process. The sooner your audit team can review these documents the less chance of delays in the approval of the accounts. 

Perform a going concern assessment

While your business may have an ongoing budgeting process, the requirements for auditing going concern are likely to mean additional work may be required to satisfy your auditors. 

A going concern assessment is required to cover 12 months from the date of signing the financial statements, therefore you may need to extend your yearly budget to ensure that it provides a sufficient assessment for audit purposes. 

If the business relies significantly on third parties for its continued trading, either as key customers or for financing arrangements, consider if there are risks that these will cease within this 12 month period. This could include building loan covenants into your assessment (or seeking waivers if these have been breached during the period in advance of the audit commencing).

The earlier you seek advice, the longer you will have to prepare for your audit. At Harold Sharp, our Audit Team has extensive experience of collaborating with SMEs throughout the audit process and going beyond compliance to utilise the audit as a tool to better your business. To find out how we can support you, contact Fred Norman or call 0161 905 1616.

 

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