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For many of us, it is time to start planning our audits as we approach the end of the calendar year. At first, this can seem to be a daunting and stressful time. However, there are several steps that you and your organization can take during your financial closing process to alleviate some stress. Proper planning will make the audit process more efficient by avoiding some of the most common audit adjustments. Remember that your auditor is your partner in getting through the process and working towards your organization’s success. Good communication early is the key to success.
Before providing the trial balance to the auditors, take some time to perform a review of the information. A key process in any internal control structure is to review the trial balance after all closing entries have been posted. First, ensure that all accounts combined, properly balance to zero. This may sound obvious, but some systems when faced with duplicate account numbers may automatically omit one of the duplicate accounts. The omitted balance has the effect of a “one-sided” entry, causing the trial balance to be out of balance. A quick check with an Excel formula can easily identify any issues in this regard. A designated individual within the organization, who is knowledgeable of its operations, should review each of the account balances to ensure that they make sense. Step back and consider the organization’s operations from the past year on a macro-level. What is the big picture? What major occurrences had an effect on the organization and do the account balances convey the impact? Compare the account balances to those of the year before. Is there anything that looks unusual in the comparison or are there accounts that relate to each other differently than expected? Once unusual balances and trends have been identified, they should be investigated for proper resolution or explanation. As part of this process, it is important to ensure that each balance sheet and key account on the trial balance are properly reconciled. Visit the supporting schedule for each account and reconcile the balance to the trial balance. This is particularly true regarding accounts receivable and accounts payable. Check to make sure that the respective aging reports properly reconcile to the account balances on the trial balance. While assessing the agings, look at all amounts aged greater than 90 days and consider the reason why these amounts have not yet been settled. On the receivable side, the auditor will likely ask about a potential reserve for significantly aged amounts. On the payable side, consider if there are any lagging vendor invoices, for the fiscal year, that have yet to be recorded. When reviewing account relationships, consider the impact of any ratios or covenants required as part of your debt agreements, as this sensitive area could have a notable impact on the financial reporting.
Reconciling each key account on the trial balance offers an excellent opportunity to identify and remove any improper accounts. Many organizations use QuickBooks as their financial reporting package. By default, QuickBooks sets up an account called “Ask my accountant”. This can be both a blessing and a curse. The downside is that when an issue is identified during the year, it is tempting to record any variances to this account and forget about them, creating a larger issue to deal with later. The good news is that any open issues are recorded in a central location for easy identification. As previously mentioned, open communication with the auditor is key in resolving complex matters in a satisfactory manner. To avoid any issues later, it is best to communicate with your auditor throughout the year as unusual items emerge. Have an open dialogue to discuss a strategy and ensure you are both on the same page regarding treatment. This dialogue with the auditor should also involve any upcoming accounting pronouncements and their impact on your organization’s accounting policies and financial statement disclosures.
Another important aspect of the trial balance to review involves the net assets of the organization. The beginning of the fiscal year's net asset balance should match the prior year ending net asset balance from the audited financial statements. If there is a variance, it is likely due to an audit adjustment from the prior year not being recorded or being recorded improperly. To find the variance, ask the auditor for your audited trial balance from the prior fiscal year. Generate the prior fiscal year trial balance from within your general ledger system and compare all “balance sheet accounts” with those on the audited trial balance. The total variance across all accounts should reconcile any variance within total net assets. Be mindful of any donor restrictions involving net assets. A tracking spreadsheet should be updated throughout the fiscal year to summarize the restricted amounts received from donors and the spending of such amounts for their intended purpose. Many non-profit organizations have adopted a policy to treat donor-restricted funds received and spent within the same fiscal year as revenue without donor restrictions. Consider your organization’s policy and review the restriction release activity for the year to ensure consistent treatment.
With these simple strategies, organizations can easily avoid some of the common audit adjustments seen in the audit process. The main themes involve proper reconciliation of all accounts and having open and timely discussions with the auditor before the start of fieldwork. Consider the auditor a resource for consultation throughout the year as opposed to a once a year visitor. Work together toward the common goal of financial statement accuracy and a smooth audit process. Your organization has completed a journey during the fiscal year that involves many challenges and accomplishments. It is important that your financial statements accurately tell that story.
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This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.