Steps for Preparing for an External Audit (+ Free Audit Checklist)

Steps for Preparing for an External Audit (+ Free Audit Checklist)

Proper preparation is essential for a successful audit outcome.

Follow along with this free Audit Checklist - Download Now

Preparing for an audit can be daunting, with many organizations not knowing where to start. But understanding the steps and preparing ahead of time is key to ensuring a smooth audit process. In this blog post, we will cover:
  1. Types of Audits
  2. Public vs Private Company Audits
  3. Types of Reporting Standards
  4. Audit Process
  5. Preparing for an Audit
  6. External Audit Checklist
  7. Get Ready for your Audit with our Help

Types of Audit

There are several types of audits that organizations may need to undergo, including external audits, internal audits, and government audits.

External Audits

These audits are conducted by an independent auditing firm. The purpose of such an audit is to provide assurance to shareholders, creditors, and other stakeholders that an organization's financial statements are accurate and reliable. Public companies are often required by law to have an annual external audit, while private organizations usually choose to have one in order to ensure the integrity of their financial statements and maintain the trust of their stakeholders.

Internal Audits

Internal audits are conducted by an organization's own employees or an internal audit team. The purpose of internal auditing is to examine the effectiveness of a company's internal control systems and processes and to identify any areas for improvement. Internal audits are not a legal requirement but are considered a good governance practice prior to engaging an external auditing firm. Our clients routinely engage our Accounting Advisory and Management team as internal auditors prior to engaging external auditors. When clients hire us for an internal audit and retain us as liaisons to external auditors, they save time and internal resources in completing an external audit.

Government Audits

Government audits are conducted by government agencies such as the Internal Revenue Service (IRS) and other regulatory bodies. The purpose of a government audit is to ensure that an organization is in compliance with laws and regulations and to identify any potential issues. Government audits may be triggered by a variety of factors, such as the filing of a tax return, a complaint from an employee or other party, or random selection by the government agency.

Public vs. Private Company Audits

The key differences between audits for private vs. public companies are:

Governing Standard

To ensure that public companies are held to the highest accountability standards, they must adhere to rigorous audit requirements established by the Public Company Accounting Oversight Board. On the other hand, audits for private firms are managed according to guidelines issued by the Auditing Standards Board of the American Institute of CPAs.

Audit Mandate

Public companies are obligated, by law, to obtain yearly audits, while private businesses do not face the same requirement since their ownership is restricted and their stocks are not available for general public purchase. Furthermore, many privately-owned firms do not issue financial data publicly.

Types of Reporting Standards

Generally Accepted Accounting Principles (GAAP)

Organizations in the U.S. are required to report their financial audits in accordance with Generally Accepted Accounting Principles (GAAP). GAAP is a set of guidelines and rules for financial reporting developed by the Financial Accounting Standards Board (FASB) in the United States.

International Financial Reporting Standards (IFRS)

IFRS, on the other hand, is a set of international accounting standards developed by the International Accounting Standards Board (IASB). International companies are required to report their financials using IFRS.

It is important for an organization to understand which reporting standards apply to them and to ensure that their financial statements are in compliance with those standards. An organization that operates in multiple countries or lists its stock on foreign exchange may need to comply with both GAAP and IFRS. While this can be challenging, an accounting team well-versed in the intricacies of the standards can translate their statements across the two standards.

Audit Process

When it comes to the actual audit process, there are several steps that an organization should be aware of:
  1. Audit Planning: The auditing firm will conduct a preliminary review of the organization's financial statements to determine the scope of the external audit and to identify any areas of risk.
  2. Testing: The auditing firm will conduct tests on a sample of the transactions of the organization to determine if the financial statements are accurate and reliable.
  3. Reporting: The auditing firm will issue a report that includes any findings or recommendations for improvement.
  4. Follow-up: The organization will need to address any issues that were identified in the audit report.

Preparation for an Audit

Preparing for an external audit can be complex and time-consuming, but proper audit preparation is essential to ensure the process goes smoothly. It is important to identify key personnel, ideally from your finance team, who will be involved in the audit in order to prepare documents, answer questions, and provide needed information on a timely basis.

External Audit Checklist

Preparing a due diligence data room well in advance of engaging external auditors is key to ensuring a smooth auditing process. Our accounting team deeply analyzes our clients' unique businesses to compile a custom, comprehensive checklist of items that external auditors look for. We go beyond recommendations and run an analysis on your data room prior to providing access to auditors so that you can minimize costs and time associated with an audit engagement.

Prior to the audit, an organization should assemble documentation for the following categories:

  1. Historical financial statements
  2. Organisational documents, such as Articles of Incorporation and Bylaws
  3. Revenue details, such as contribution margins, gross margins, and KPIs
  4. Employment contracts
  5. Material contracts
  6. Fixed assets
  7. Trade and other receivables
  8. Other current assets
  9. Accounts payables
  10. Borrowings
  11. Cash and cash equivalents
  12. Related party transactions
  13. Capital commitments and contingent liabilities
Knowing what auditors look for can be difficult for companies preparing for an audit for the first time, so we have put together a detailed checklist of items for each category referenced above so that you can get started immediately.

By assembling these documents prior to signing an engagement letter with an auditor, organizations can expedite the process and expect a successful audit outcome.

Get Ready for Your Audit with our Help

Audits can be overwhelming, especially if it's your first external audit. That’s why our accounting team is here to help you prepare and make sure everything goes as smoothly as possible. We help our clients navigate complex reporting processes; from drafting financial statements to conducting internal financial audits. We take ownership of our work and act as a liaison for you to your external auditor so that you can confidently deliver on your reporting obligations on time, every time. Our accounting leadership comes with extensive experience in working with the most renowned global accounting firms and managing and consulting with privately held and publicly traded companies.