Audit readiness is a fundamental aspect of financial management that can make or break a company’s reputation and operations. What does it mean to undergo audit readiness activities and why is it crucial for companies to assess and plan for an audit prior to engaging an auditor? What is involved in audit readiness and how can companies effectively plan to navigate the various complexities involved to ensure a seamless audit?  

In this comprehensive guide, we’ll dive into audit readiness, exploring the significance and the essential steps involved in becoming audit-ready. From understanding the importance of compliance with accounting standards to mitigating risks and enhancing operational efficiency, we help you uncover the multifaceted aspects of being truly “audit-ready”. 

What is audit readiness and why is it important?

Audit readiness is the state of being fully prepared for an audit, typically a financial statement audit, conducted by an independent party such as an external auditor or regulatory agency. Being audit-ready means that an organization has maintained accurate and complete financial records in compliance with US GAAP or IFRS as applicable and complied with relevant laws and regulations. For private companies, this may mean establishing internal controls and processes to ensure transparency and accountability.  

There are several pitfalls we commonly see if companies begin to undergo an audit without adequate preparation including, but not limited to, the following: 

• Costly audit delays: Lengthy and inefficient audit processes can occur as auditors will pause their work and request a revised schedule for when the company has resolved its compliance issues. This causes delays in issuing financial statements and reports, which can impact decision-making and stakeholder confidence. Furthermore, this can result in increased audit and compliance fees. 
• Material Weaknesses: Companies that undergo the audit process with the attitude that the “auditors will fix it” will likely also endure costly audit delays as noted above, lack of support from auditors due to independence issues and material adjustments that may result in material weaknesses that are reporting to those charged with governance. 
• Loss of Trust: Key company executives may face an erosion of trust and credibility with stakeholders including investors, lenders, regulatory authorities and those charged with governance. 
• Inability to raise capital: Often, audit reports are seen as a prerequisite to a company’s ability to raise debt or equity financing. The lack of preparedness may cause irreparable harm to the company’s ability to finance its operations and stay in business. 

What are the phases of audit readiness? 

Being prepared for an audit not only ensures compliance, risk mitigation, cost saving and efficiency but also enhances transparency and trust among stakeholders.  We like to think of audit readiness through four phases: Pre-planning, Planning, Execution and Reporting.  

Pre-Planning 

The pre-planning phase is where a company lays it groundwork for its audit readiness journey. A key decision maker should be able to predict when its first audit requirement may arise by request of users of the financial statements including regulatory bodies, management, board of directors, investors, or creditors through compliance with a key financing transaction.

Understanding the timeline to an audit requirement is key to avoid a situation that would not provide a company sufficient time to prepare. After forecasting a potential audit requirement, here’s what your company should focus on during this phase: 

• Start early: The question of when to begin planning for audit readiness often arises. Ideally, your company will start the process as early as possible. When determining the ideal time to start audit readiness, keep these considerations in mind: 
  • Timing: You want to begin planning well before the period subject to audit to allow ample time for assessment, remediation, and implementation of changes. 
  • Complexity of Operations: If your company has complex accounting issues which could require significant changes to current accounting practices accounting, these changes could require significant investment of time and resources.
  • Regulatory or compliance deadlines: As discussed above, the ability to forecast when an audit deadline may arise is key as a company that is adequately prepared for an audit begins audit readiness well before an actual audit requirement.
    
• Engage an external audit firm: Developing a partnership early with an external audit firm that has expertise in your company’s industry will provide valuable insights and guidance throughout your audit readiness journey. Avoid an audit firm that is willing to start an audit immediately without due diligence on your company’s readiness as this can lead to increased audit fees.
• Get management buy-in: Securing buy-in from your the executive team is essential for allocating resources and prioritizing audit readiness efforts effectively. A successful audit requires an executive team that understands the cost, timeline, complexities and resource requirements for navigating audit readiness and execution of an audit.
• GAAP Assessment: Engage a technical accounting advisor to conduct a thorough assessment of your company’s accounting practices compared to US Generally Accepted Accounting Principles (GAAP). This includes: 
  • Reviewing current accounting practices and documentation. 
  • Discussing key documentation and standard implementation requirements with auditors. 
  • Consulting with GAAP experts to identify areas of improvement and compliance gaps.

During the GAAP assessment, meticulous attention to detail is crucial. This stage involves a deep dive into various aspects of your company’s financial operations to ensure compliance with regulatory standards. Here is an example of key areas of focus for a corporation undergoing its first audit: 

• • Debt and Equity Financing: Understand all equity and debt financing transactions from inception to date to identify complex instruments, valuation requirements and policy requirements 
  • Revenue: Analyze material revenue and contract types and review of a company’s current sophistication in its applicable of  Accounting Standards Codification (“ASC”) Topic 606 – Revenue Recognition. 
  • Leases: Identify lease contracts and assess the company’s compliance with ASC 842 – Leases. 
  • Research and development: Whether you are a technology, life science or other type of start-up company, there will be technical complexities with capitalization and allocation of research and development costs.  
  • Consolidation: Review documentation of functional currency determinations for companies with multiple foreign entities to assess complexities with consolidation process.

A GAAP readiness assessment should provide a roadmap of all the complexities a company needs to address through implementing changes and processes, as well as those likely to require position papers to support an audit. 

Planning 

Upon completion of pre-planning, a company will have the various essential tools required to proceed with planning including an audit timeline, buy-in from key management personnel, external partnerships with auditors and consultants, and a roadmap to address accounting gaps identified during the GAAP readiness assessment.

The planning phase includes activities to undergo between completion of pre-planning to the start of audit fieldwork. The timeline derived will allow a company to adequately schedule an audit. A common mistake we see in practice is audit fieldwork is scheduled without consideration of how much time a company realistically requires to be ready for an audit. Here’s a closer look at the key components of the planning phase: 

• Documenting internal control processes: One of the primary objectives during the planning phase is to document the company’s internal control processes comprehensively. Some of the key financial process that you should document include: 
  • Cash in-flows and out-flows 
  • Revenue recognition and accounts receivable 
  • Procure to pay 
  • Financial reporting and month-end close 
  • Payroll 
  • Other relevant cycles for industry specific requirements 

While auditors will often determine inability to rely on internal controls for a company undergoing its first audit, a requirement still exists that the auditor document their understanding of the company’s key process and procedures. Furthermore, an exercise of documenting internal control processes and procedures typically leads to identification of gaps and areas for improvement in line with best practices and efficiencies. 

• Adjusting accounting records to GAAP: During this phase, accounting records are meticulously reviewed and adjusted to align with GAAP requirements. This may include reconciling accounts, performing period cut-off analyses, making necessary journal entries, and ensuring consistency in accounting treatments across various transactions. 

• Addressing technical accounting issues: The planning phase provides you with an opportunity to resolve the technical accounting issues that were identified previously during a GAAP assessment. You should leverage in-house expertise or seek external guidance to navigate intricate accounting standards. The critical reason to start planning as early as possible is due to the fact that complex standards with high volumes of activity may require significant time and resources to remedy, such as implementing a GAAP compliant revenue recognition policy or capitalizing internal-use software. 

• Systems Evaluation: It is highly recommended that a company undergoes an assessment of their current systems that support accounting and finance. This is typically the time a company would graduate from QuickBooks as it lacks significantly in functionality and internal controls. Similarly, if a company has a more robust enterprise resource planning (“ERP”) software, this is the time to evaluate whether its functionality is being utilized to its maximum potential to increase automation and efficiency. An ERP system can be key in storing accounting artifacts that will enable efficient document retrieval during the execution phase of the audit. 

What are the key elements of executing a successful audit readiness plan? 

After a diligent planning process a company should feel confident to invite its external auditors to begin fieldwork. The next phase of the audit process is execution. Here are the key elements to consider to successfully execute an audit plan: 

Assign an Internal Resource(s) to Own the Process

Depending on the size and complexity of the Company, it could be an individual or team of individuals to manage the audit process. These resources should possess a comprehensive understanding of your organization’s operations, compliance requirements, and have experience in undergoing external audits.

By appointing a resource or team to take ownership, accountability is established and the coordination of tasks becomes more streamlined. This individual acts as the primary point of contact for audit-related activities, facilitating communication and ensuring that your deadlines are met. A company should carefully plan its resource requirements as the new compliance requirements may require resources to be pulled away from key operating and strategic initiatives.  

Develop an Efficient System of Document Retrieval

Establishing an efficient system for document management is paramount. This includes logically organizing files, implementing document control procedures, and leveraging technology solutions. By maintaining a well-organized repository of records, your audit team can easily access the information they need, reducing the likelihood of delays or discrepancies. 

Hold the Auditors Accountable

You must set clear expectations, request regular updates on the audit progress, and address any concerns or discrepancies promptly. By maintaining open communication and actively participating in the audit process, you can ensure that auditors adhere to established protocols and conduct a thorough and fair assessment.

Auditors are under significant pressure to meet various client deadlines and with this pressure they will look for any excuse to deprioritize certain engagements if it is determined that the company is not ready. This can be utilized to the advantage of those companies that are prepared for the audit and meet the set out requested requirements. Be sure to provide documentation timely and then hold the auditors accountable to the deadlines they committed to during the engagement negotiation process. 

Have a Consulting Firm on Speed Dial

Despite meticulous preparation, audits can sometimes unearth complex issues or unfamiliar challenges. In such instances, having a consulting firm readily available is invaluable. At BPM, we specialize in providing guidance and support throughout the audit process from planning through execution. By establishing a partnership in advance, you will have access to proactive advice and assistance, enabling you to navigate potential audit pitfalls with confidence. 

How to navigate financial reporting for your audit readiness plan

The phases of an audit have beneficial overlap with proper planning. While the audited financial statements are seen to many as the “product” that a company is purchasing to be delivered upon completion of the audit, management is responsible for its financial statements, not the audit firm. We recommend that companies begin drafting their financial statements early in the execution phase of the audit. Starting the reporting process early allows for the timely identification of potential issues, including accounting policies that are not yet written or built out as well as presentation issues in order to conform to GAAP and industry standards for comparability.

How BPM LLP Can Get You Audit Ready? 

At BPM LLP, we understand the importance of meeting audit deadlines. Our audit readiness consultants have extensive experience in successful execution of audits as our team is comprised of former auditors. We are able to proactively assist companies manage their risk so that financial reporting and accounting are not limiting factors to a successful audit. Our dedicated team works closely with our clients to develop tailored audit readiness plans, leveraging best practices, industry insights, and advanced technology solutions. 

Contact us today to learn how we can support your business objectives.