Preparing for a company audit
Your 20 minute guide to a hassle free audit
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Planning and preparation
Fixed Assets
Inventories
Bank
Debtors
Turnover
Cost of Sales
Administrative expenses
Finance expenses
Tax
Share Capital and Reserves
Cash Flow Statement
An
unoccupied auditor is more likely to make life difficult than an occupied
one. By making sure the auditor has
everything they need to see in one place as soon as they walk in door,
disruption and cost can be kept to a minimum.
Auditors
will need all the information set out here to be able to give an audit
opinion. If business owners do not
find the information for auditors, auditors are left with no choice but to
charge a fee for finding the information themselves.
Auditors
prepare standard files for each company they audit. This document briefly explains the key information they will
need to complete their files, so they can finish the audit and get out of the
way as quickly as possible.
The
first thing the auditor will want to see is a set of financial
statements. If auditors have to
prepare financial statements, they charge expensive rates and are more likely
to find issues that take up management time to resolve. To prepare financial statements, see the home page of this site, or
find a local
accountant. Make sure to get a
few quotes, as prices do vary.
Send
financial statements and a supporting trial balance to
the auditors before they visit the premises.
Ask them to prepare a list of likely questions they will have when
they arrive, and use that to prepare a file of information they will need to
answer their questions.
Once
they have reviewed the first draft of the financial statements, request a
planning meeting with the auditor to discuss any special work they will
require so that it can be done before site work commences.
The
auditor will look at the largest numbers on the income
statement and balance
sheet. They will want to make
sure they can verify that each material number which can affect investment
decisions based on financial statemetns has been correctly stated. They will also want all information that
is required to prepare the statutory notes that
financial statements are required to show. Free
online examples of financial statements with statutory notes under International Accounting Standards, along
with summary rules for preparing them are available on the web.
Prepare
a lever arch file and file dividers for the auditor. Create a separate file section for each
heading on your balance
sheet. Also create a section for
the income
statement, cash
flow statement and notes to the accounts.
A
box will be required for some additional information that the auditor will
want to see. They will also need a
comfortable room to sit in with a large supply of tea and coffee. The more comfortable the audit team is,
the less likely they are to leave the room and snoop around, although they
are inclined to do so regardless.
What
follows are suggestions for information to include in each section of the
file. The list is not comprehensive
and must be tailored to the particular circumstances of each business.
Prepare
a fixed asset register for all fixed
assets. This can be a
spreadsheet, book or file. It must
include information about each asset the company has ever purchased,
especially during the year being audited.
(i)
Date of purchase
(ii)
Cost, accumulated depreciation and net book value
(iii)
Supplier
(iv)
Type of finance used to buy the asset (cash, loans, lease contract)
(v)
Net, gross and VAT amounts
(vi)
Depreciation rates used to deducted depreciation from each asset for
each year of the asset’s economic life
(vii)
The bank statement that shows where the asset or finance was paid
(viii)
The location of the asset
(ix)
The condition of the asset
(x)
How long the asset is likely to be used
(xi)
When it will be replaced
(xii)
How much the asset can be sold for when it is no longer used by the
business
At
the front of the fixed asset section of the file, include a summary of all
fixed asset movement in the year. The
summary should look something like this:
Cost
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Land & Buildings
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Motor Vehicles
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Office Equipment
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Opening balance
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Additions
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Disposals
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Closing balance
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Depreciation
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Opening balance
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Depreciation on additions
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Depreciation on disposals
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Closing balance
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Net book value current year
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Net book value prior year
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Behind
the summary, include a detailed summary and copies of all invoices for
additions in the year. Then include a
detailed summary and proof of disposals in the year.
The
auditor may want to physically see some of the larger assets to ensure they
are still in working condition.
Revalued
assets
- Include a copy of
the valuation certificate, and details of the person who conducted the
valuation, such as name, qualifications and contact details.
- Prepare a
reconciliation of the revaluation reserve, stating the opening balance,
listing movements in the year and stating closing balances at the
balance sheet date.
Investments
- Include a summary
of all new investments for the year (such as properties and shares in
companies).
- Make copies of all
contracts and certificates of registration, revealing rights and
obligations affecting investments.
This will determine whether investments are accounted for as
trade investments, joint ventures or associated companies.
- Include copies of
remittances of all income from investments such as interest and
dividends as the auditor will want to ensure that income from
investments stated in the accounts is complete.
- If available,
include proof of valuation of variable value investments at the balance
sheet date. Auditors will need
to know if values of investments have been impaired (decreased in
value).
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- A summary of stock
values should differentiate between stock, work in progress and finished
goods. Prepare an explanation
with evidence such as invoices, of what bases of stock values have been
used.
- Auditors will
calculate the average number of days it takes for inventory to turn over
(inventories/cost of sales x 365 days) for both the current and prior
financial years and will require an explanation of a major fluctuation
(such as discontinued stock lines).
They may use this to determine if any inventories should not be included in the balance
sheet. Do the calculation and
prepare an analysis for the auditor.
- Latest selling
prices of stock in the balance sheet, to ensure they are above cost.
- A box with stock
sheets from the physical count of stock should be made available to the
auditor. The auditor will pick a few items and verify the calculations
of the values. They will cast
the sheets and check the transfer of values from the sheets to the
accounts.
- Auditors will
search for old unused stock and request that stock with no reasonable
prospect of being sold should be written off (deducted from the total
value of stock). Auditors will
be aware of using the stock value to boost poor profits and look for
ways where this could have caused the financial statements to become
misleading.
- A summary of all
bank accounts agreed to the total cash and bank on the balance sheet.
- All bank
reconciliation statements.
- Copies of the bank
statements showing the balance used for the reconciliation
statements. Auditors will trace
all outstanding amounts on the reconciliation statements to the bank
statements after the balance sheet date and request explanations for
those that have not been presented at the bank for payment. Therefore, include bank statements
after the balance sheet date in the box.
- Provide a debtors’
aged analysis in the box or file.
- Put receipt books
and bank statements for the period between the balance sheet date and
the audit date in the box as the auditor would want to check that
debtors are being paid after the balance sheet date.
- The auditor will
request a review of the aged analysis for debt that will not be
paid. They may request a letter
from the client to promise that the debt will be paid and a note of the
reason why it has not been paid for debt older than 90 days (depending
on the significance of the amount owed).
- Auditors will
calculate the average number of days it takes for debtors to pay (debtors/sales x 365 days) for both
the current and prior financial years and will require an explanation
for a major fluctuation (such as one large debtor that may be due this
year which was not there last year).
They may use this to determine if any debtors should not be
included in the balance sheet.
Do the calculation and prepare an analysis for the auditor.
- Provide a list of
prepaid expenses showing how each one was calculated and supporting
invoices as evidence of validity.
- Auditors will
calculate the average number of days it takes for the business to pay
creditors (creditors/credit purchases x 365 days) for both the current
and prior financial years and will require an explanation for a major
fluctuation (such as one large debtor that may be due this year which
was not there last year). They
may use this to determine if any creditors should not be included in the
balance sheet. Do the
calculation and prepare an analysis for the auditor.
- List of accrued
expenses, calculations of accruals, and copies of invoices showing
relevance to the period ending at the balance sheet date
- List of long term
loans, showing how much will be paid in one year, two to five years and
more than five years.
- Provide copies of
correspondence from lawyers and other third parties to support provision
for losses that have not yet occurred;
explain the full circumstances of provisions to auditors at the
planning meeting to discuss what audit documents will be required
- Copies of all loan
agreements and statements will be required and a summary analysis of
opening balances, amounts paid, interest allocated to the income
statement and closing balance
- When accounting
for leases, check with the auditor if in their opinion the lease is a
finance lease or an operating lease. They will require the lease
contracts to make their judgement.
Finance leases are used to finance assets owned by the company at
some point during the lease term (sometimes only at the end) and are
treated like other loans as a liability in the balance sheet, whilst
operating leases are used to rent equipment not owned by the company and
are treated as a cost in the income statement; The auditor will need to assess whether the correct
treatment has been used, which can have a significant impact on profits
and tax provisions, therefore it pays to get the treatment right from
the start.
- Details of
commitments to buy significant assets.
- Directors’
remuneration.
- A summary of
payroll costs and numbers of employees
- Other notes
included in the accounts for the prior year
- A list of sales
invoices for the auditor to scrutinise and pick samples from to
test. Auditors will perform a
walk through test to ensure that sales are correctly recorded from the
moment the order is taken to when payment is received.
- Copies of sales
invoices, filed in a format that is easy to find from the list above
- Break down sales
trends as much as possible, such as month on month or customer totals
year on year. Auditors will
perform analytical procedures to ensure that they can identify reasons
for sales trends such as an increased number of customers, new contracts
of sale or customers lost.
Cost of sales
- Cost of sales is
usually too cumbersome to analyse in detail. The auditor will most likely try to break it down by month
and compare monthly trends to the prior year by drawing a table. If there are large fluctuations the
auditor will look for reasons, such as a downturn in sales in the same
month. By doing these analyses
internally and providing the auditor with commentary, it saves on time
and frustration of trying to find explanations in a hurry.
- The auditor will
also analyse the trend of gross profit and look for explanations of
increases or decreases in gross profit which he will want to verify.
- Auditors will
perform a walk through test to ensure that expenses and wages are
correctly recorded form the moment the expense originates to when the
payment is made.
- The auditor may
compare supplier turnover with the prior year and try to compare this
with other trends such as sales to understand why it may have increased
or decreased.
- Wages and payroll
will be compared with returns to Inland Revenue and payroll annual
summaries, so it is useful to have these ready.
Administrative
expenses
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Auditors will require a list of administrative expenses for the
current financial year to compare to the prior financial year. They will require explanations for
significant fluctuations on a line-by-line comparison.
o If audit
and tax services are combined, auditors will collect copies of tax sensitive
invoices and analyse tax sensitive accounts. Request an indication of likely
analyses the auditor may require and prepare them before they arrive.
o Anything
new, large or small compared with prior years will be analysed, so it may be
helpful to do an internal analysis and to provide some explanations at the
planning meeting.
Finance
expenses
o Interest
paid and received needs to be stated separately on the income
statement and cash
flow statement, and is usually verified to the source documents (such as
investment and loan statements)
Tax
o Auditors
expect an estimation of tax to be included in the accounts. Include a detailed calculation of the
provision in the file. Include a copy
of the previous year’s assessment from the Revenue Office and details of how
this was paid in the file. The
payment will be traced to the bank statements.
o The
accounts require a note that reconciles the amount of tax that would have
been charged if the tax rate had been applied to the profits shown in the
accounts before any adjustments to calculate taxable profits, to the actual
amount of tax that has been charged.
It can be time-consuming to reconcile, therefore an internal attempt
may be a valuable exercise.
o Provide
auditors with a copy of the latest annual return to Companies House.
o If any
changes in shareholding or directorship have occurred, ensure that they are
reflected in the Directors’ Report', the balance sheet and in a note to the
accounts, and provide copies of registration documents to the auditor.
o Analyse
each reserve on a summary page, including opening balance, movement for the
year analysed by type, and closing balance.
Cash Flow Statement
o Auditors
are required to verify that the amounts included in the cash
flow statement are actual cash movements and that they have been included
under the correct headings in the statement
o Include
analysis of amounts included in the headings on a summary page
o Include
any copies that may support the amounts in the summary
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