The Audit Process – A Best Practices Approach
By Justin Nepo, Partner, Assurance Services
It happens every year; the client and auditor have this fairy-tale dream that this will be the year that the perfect audit is going to occur. The auditor dreams that the client is going to provide the best set of analyses and reconciliations ever prepared, which will be received before fieldwork begins; there will be no audit adjustments or questions; and the audit will be issued weeks ahead of schedule and under budget. The client dreams that the books and records are in perfect order; everything is reconciled and agreed to the general ledger; no adjustments will be needed; no questions will be asked by the auditor; and the audit report will be issued weeks ahead of schedule.
Unfortunately, in many instances, the fairly-tale never becomes reality. The client is generally not completely ready; there are usually new issues to address; the auditor requests more and more information; accounts are truly not reconciled; there is insufficient communication on both sides; and no one invokes any deadlines until it is too late. Once the audit is completed, both the client and auditor may feel frustrated due to (1) the level of effort necessary to complete the audit, (2) the stress of just meeting the deadline, and (3) addressing the excess costs. All the while, both are thinking that there has to be a better way. Sound familiar?
There is a better way and the audit process doesn’t need to be as stressful as you may think. The main reason for a poor audit experience is the result of a lack of planning, accountability and communication. All of these activities start early in the audit process and should actually start on the heels of the prior audit.
Soon after the audit is completed, the auditor and client should plan to meet to discuss the results of the prior audit, the issues encountered, and how the process can be improved the following year. This meeting shouldn’t be a blame-game but a cooperative effort to improve the process. You should leave the meeting with a conceptual plan of the process going forward, which includes timing of the work to be performed, who will be accountable for the various schedules and analyses (also the auditor should be inquiring about other documentation that may make the audit more effective), and the timing of the interim and year-end work.
A couple of months later, the auditor and client should meet again to follow-up on how the year is shaping up and any new issues or concerns and to solidify the responsibility and timing of the entire audit process including interim testing procedures. Since not every client has a fully staffed finance department, there should also be a candid discussion on what schedules the client can truly prepare and what schedules/reconciliations will need to be prepared by the auditor. The auditor should provide feedback to the client as to what they are expecting in terms of a completed schedule or analysis, and, if possible, provide examples. It is important for the client to be realistic in what they can and cannot provide. Typically, if the client waits until fieldwork to reveal that schedules will not be provided or will only be partially complete, it will generally be more costly and cause delays in completing the audit as opposed to addressing these issues much earlier in the process, ideally before interim work begins.
Interim fieldwork also presents another opportunity for the client and auditor to meet and discuss what has happened during the year and to further establish responsibilities and timing for the year-end fieldwork. This is the time that accountability of both the client and auditor is finalized (i.e. when is the client going to provide the information requested, when the auditor will provide feedback on that information, etc.)
In my experience, what appears to be most effective in establishing accountability and communication during an audit is a schedule which includes (1) the information requested of the client, (2) the date it was requested, and (3) the expected date to be received (input from the client on this is key). This schedule becomes the document request list and will include all information requested by the auditor, including requests for supporting documentation for sample sizes, questions on account variances, follow-up questions, etc. As information is provided, it gets color coded so that it is easy to determine the status (i.e. open, resolved, or partially resolved). Separate tabs can be used for the account, the type of request, or whatever you find that makes the most sense. It is important the client and auditor discuss reasonable delivery expectations of additional requests for information.
The discussion of when information will be ready is extremely important as this will help the auditor determine scheduling and staffing needs. Scheduling is usually done several months in advance, and re-scheduling during fieldwork becomes very difficult since staff has already been scheduled to address other client deadlines that must be honored. Therefore, it is critical that both the client and auditor meet the deadlines that you agreed to prior to the start of fieldwork.
We have found that when the client and auditor are both held accountable for completing certain tasks timely and there is constant communication, the audit process runs smoothly. Additionally, in situations where delays occur due to the client’s inability to meet deadlines or to provide the requested information, the discussion of additional fees becomes a much easier conversation because the client was involved and aware throughout the entire process. Auditors can have these conversations with the client in real time versus waiting until well after the audit has been issued.
If your audits aren’t running as efficient as you think they should be, look to implement one or several of the suggestions above, and your dream of a perfect audit may become a reality.