Rounding Third Base: Effectively Managing the Review Phase of an Audit

Rounding Third Base: Effectively Managing the Review Phase of an Audit

CPAs & Advisors

Ali Barnes
Ali Barnes CPA, CGFM Managing Principal CPAs & Advisors

Print Friendly, PDF & Email

You’ve answered hundreds of questions, pulled countless documents, and are sliding toward home plate for this year’s audit. You’re almost done! Reviewing draft reports and providing feedback is one of the last steps to wrapping up the audit and resuming business as usual. Following are tips to aid in this crucial audit step:

1. Review the proposed journal entries. Throughout the audit, if adjustments were needed, these were likely brought to your attention by the auditor once discovered. At the end of the audit, a comprehensive list of all adjustments should be provided. If one is not, ask for it or confirm that no adjustments were made. Review the journal entries to verify you agree with the amounts, accounts and why the entry is being recorded. The journal entries should be recorded in your general ledger once you agree with them. Be sure to follow your internal process for posting journal entries and retain appropriate supporting documentation for the journal entries. If the organization uses a tool to document how to prepare for year-end, update this tool as necessary to prevent similar adjustments from being missed in future years.

2. Compare your trial balance to the auditor’s trial balance. Once the proposed journal entries have been recorded, compare ending balances in your trial balance to the final trial balance generated by the auditor. There are times when they won’t match. Sometimes this is acceptable; other times, further investigation and resolution are required. Here are a few examples of differences that can occur:

    1. The auditor posts a journal entry to reclassify amounts as part of the financial statement preparation process, but the organization does not maintain that level of detail in the general ledger. This may be the case when classifying amounts as short-term versus long-term on the balance sheet.
    2. A journal entry was made on your general ledger that was never provided to the auditor. Review the journal entry to confirm it was, in fact, necessary. Then, provide the auditor with the journal entry and have further discussions to ensure they agree with posting the adjustment.

3. Review how the trial balance accounts are grouped and mapped to the financial statements. Suppose the auditor is preparing the financial statements. In that case, they should provide you with a grouping schedule that delineates which trial balance accounts are combined to equal lines on the financial statements. Review the grouping of accounts and be sure to understand why certain accounts are grouped. If a grouping doesn’t make sense, or you identify an obvious error, bring this up with the auditor.

4. Read the footnotes. The footnotes contain an explanation of the organization’s accounting policies and seek to enhance the reader’s understanding of the amounts presented in the financial statements. The footnotes should accurately reflect the accounting policies the organization uses. Additional information related to certain transactions, such as collectability of receivables, long-term debt terms, and revenue recognition practices, to name a few, need to reflect the specific circumstances of your organization.

5. Consider completeness of the information presented. This is the final “gut check” as to whether the materials are complete. Consider if the big-ticket financial transactions are included and make sense. If new debt was issued, was it properly presented? If a construction project was underway, were amounts properly capitalized? If a significant event happened after fiscal year-end, is the situation disclosed? Does the bottom line make sense?

At the end of the audit, management must attest to certain representations and take responsibility for the financial statements and all that is contained within them. Throughout the process above, if you notice errors, have questions, or don’t understand something, speak up. Issuing complete and accurate financial statements is the home run that results from collaboration and collective understanding among all members of the audit team.

Want To Learn More?

Connect with one of our professionals today.