Audit readiness begins well before the audit period ends. Or so it should.
But now it is January and maybe the auditors have just started calling with their first round of document requests, anxious to get the ball rolling while you are still closing the year. The pressure is on, but there are a few steps to take that will help focus your efforts and get you through the audit rush as painlessly as possible.
1. What are your biggest risk areas?
This does not have to be a full-blown formal risk assessment; focus on areas with the most significant inherent risk, as well as those with significant audit risk.
Aside from challenges unique to your business and industry, you can expect that auditors will enhance testing around key risk areas such as revenue recognition policies, complex accounting estimates, and related party transactions, as well as current hot topics like cryptocurrency and segment reporting, where applicable to your business. Additional areas to consider include:
- Reliability of the opening balance sheet. If this is a first-year audit, the auditor needs to gain comfort over those numbers as it is the basis for your year-end balance sheet (coupled with the current period activity),
- Significant transactions or other major changes to the business will always be an audit focus. Make sure all your third-party experts are engaged and have been provided with robust documentation on which to base their work. Do not hesitate to pull the third party in to answer questions as the audit progresses. If these significant changes result in the adoption of new accounting policies for the company, document these clearly in accounting memos. The more forthcoming and clear about your decisions and the reasons for making them, the less back and forth you will need to help the auditor understand your perspective.
- Areas on which the auditor has focused in prior years. Perhaps prior year audits uncovered errors in certain areas; be sure you understand what happened and have taken steps to address the process deficiencies. Other key focus areas may be those where accounting policies were changed or enhanced from the prior year, or where transactions have evolved in complexity. It is helpful to prepare accounting policy memos to which the auditor can refer so you are peppered with fewer questions throughout their process.
Questions to consider
- Which are the highest-risk areas in accounting for your business?
- Are you comfortable that accounting in these areas is complete, accurate, and timely and that the risks have been appropriately mitigated?
2. Document Key Processes and Related Internal Controls
Your finance and accounting organization should have clear documentation about the policies and procedures that they follow every day. Regardless of whether the company is undergoing an audit, it is good practice to have these items recorded to train employees and use as reference guides.
As you review the process documentation, highlight the controls over the process that ensure errors are caught and fixed, and that discourage people from misappropriating company assets. Think existence, timing, completeness, valuation, ownership, and presentation, as these are the assertions that auditors validate in their tests for material misstatements.1
In addition, ensure clear approval hierarchies have been established with a delegation of authority policy, and review procedures around key judgments made by management and high-risk areas have been documented.
Keep in mind that an audit performed under PCAOB standards will require a deeper understanding of the transactional controls around key business processes, and the auditors may walk through individual transactions to gain comfort that those controls have been implemented in practice. Be sure to maintain documentation of the processes and controls being performed, such as signatory evidence of the review process management has performed or minutes of meetings where key decisions were made.
Furthermore, if you rely heavily on a third-party service organization for key inputs to your business, obtain their Security Operations Center (SOC) I report to ensure you are comfortable with their controls over the accuracy and completeness of the information you receive. Auditors will expect that your processes for verifying the data you rely upon are considered and account for any potential weaknesses at the third-party service organization.
Questions to consider
- Has your team clearly documented their processes and the control activities around those processes?
- Have the risks you identified been mitigated by the control activities in place, or are further checks and balances needed to avoid material errors or fraudulent activity?
3. Organized and Clear Support Documentation for Key Transactions
Responding to audit inquiries and providing documentation of key management decision points is the most time-consuming aspect of a financial statement audit. The best way to facilitate this is to be organized. Key steps to reduce the stress of the audit process on your organization include:
- Designate an individual responsible for the management of the audit to ensure the timeliness of management responses and communications with the auditor. This should be an individual with enough knowledge about the company accounting issues to be able to identify all the parties that will need to be involved in the discussions, foresee potential roadblocks to audit completion, bring together the correct parties to resolve issues (which may include third party experts) and manage the audit to completion.
- Prepare audit support documentation in advance, including technical accounting position papers, supporting schedules for complex transactions, reconciliations for all significant accounts, and detailed footnote documentation.
- Ensure transactional support documentation as well as contractual agreements is maintained centrally and organized to minimize the search time in responding to auditor requests. Key contracts impacting the financial reporting will always need to be provided, so having this available upfront will make the subsequent requests easier. Remember the key risk areas you identified? Use those as a guide for anticipating auditor requests. And do not forget that certain audit processes, such as estimates and accruals, will require a review of post-audit period documentation as well.
- Deposit all requested information into a single location for auditor access. Inevitably the audit team will be confused by what you are providing and why, often making multiple requests for the same information. The better you can track what you have provided, when it was shared, and to which request(s) the documents responded, the easier it will be for both parties.
Questions to consider
- Is supporting documentation for transactions easily accessible and well organized to be able to quickly respond to auditor requests?
- Have you prepared technical accounting memos to explain to the auditor any key accounting policy decisions made by management?
So… are you audit-ready?
There are numerous steps to preparing for a smooth audit process. The process can be very time-consuming and disruptive to your team’s daily responsibilities. If you are operating with a lean team (as many private companies do) or if you already have numerous projects underway, consider hiring some additional support to alleviate the burden on your team. Ankura can help in assessing the risks, documenting processes and controls, and setting you up for a successful audit process that you can model for years to come.
[1] Statement of Accountant Standard (SAS) No. 31, ‘Evidential Matter’
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© Copyright 2025. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
