How to prepare your startup for financial audits in just a few steps

The success of your year-end financial audit depends on the steps scale-ups take many months before. Whatever actions your finance team takes throughout the year, always ask this critical question: “Is my company audit done?”

Audit readiness does more than make your auditors happy. It simplifies the entire audit process, speeds up the turnaround time and reduces the cost of your audit. It even helps beyond the audit itself. Internally, ongoing audit readiness helps you compare your financial results to projects in a manner consistent with the audited financial statements. This enables key management to gain a more accurate and timely insight into the company’s operating results.

With the current labor shortage and high turnover, audit readiness is becoming increasingly important: it can keep your audits running smoothly even if someone on the team leaves. Externally, it keeps you ready for lenders and investors, who review your books before providing capital, and for potential buyers if you want to sell the business.

Follow these eight steps to ensure your financial data is audit-ready. The effort you put in throughout the year helps ensure that the audit runs smoothly for both you and your auditors at the end of the year.

Eight steps for scale-ups to become audit ready

1. Know what the accountant’s job is – and what isn’t

An accountant’s job is to examine the books of accounts, not to perform them. By the time the auditor sits down with your books to sign off on their reliability, the records and operations should be as clean as possible.

Accountants are intervening less and less in the accounting function. Lenders, the public, regulators and accountants themselves are pushing for greater independence, especially for publicly traded companies. The burden of proof shifts to organizations, which must prepare their financial records before the audit.

2. Position your finance team for success

The talent shortage that many organizations face can pose a particular risk to the finance function. Burnout and stress can lead to cutbacks in internal controls, which can then affect the reliability of the financial statements.

Errors happen in financial reporting, but keeping them to a minimum will get your books in the best possible shape for an audit. Help your team improve the quality of their work by giving them the support they need. Only give them the responsibilities that are appropriate to their level of knowledge and experience. And for teams that are overworked, consider hiring an experienced employee who can relieve some of the workload, both internally and externally. BDOs IFRS & Corporate Reporting team can help you with this.

3. Close the books monthly

A big part of staying audit-ready isn’t waiting until the last minute. Reconcile all your financial figures each month and build them up in the balance sheet. If you follow the process through the end of the year, your basic accounting entries and ledgers will remain up to date. You won’t have to struggle to clean up your financial records, and your accountant will thank you.

4. Document all journal entries

You may have experienced this scenario: your auditor starts the audit and then asks your finance team to explain an entry. Members of the team are unable to provide the context and now the team must search for supporting documentation. To avoid this, create the audit trail when booking the booking, record it clearly for the auditor to understand, and indicate any corrections for the auditor to follow.

There are tools that can help. Most accounting software, such as Xero, QuickBooks, Microsoft Dynamics 365 Business Central, and Netsuite, allow you to easily attach supporting documentation, making this process easier.

In addition, the new audit standard is ASA 315 Identifying and assessing the risks of material misstatement, effective for all audits for entities whose fiscal year ends after December 15, 2022, require a thorough dive of the company’s internal controls, including an assessment of what could go wrong. Leaders can be proactive and support the audit by periodically reviewing and documenting their financial operations, internal controls and processes.

5. Ask tough questions as they arise

Not all accounting issues are created equal. While internal teams may be able to handle day-to-day inputs, they often struggle to capture complex transactions. Examples include:

  • Buy a business,
  • Share-based payments
  • Complex financial instruments
  • Choosing an accounting standard for your usual transactions.

It is worth answering these questions by contacting our IFRS & Corporate Reporting team. Your team can communicate how they think the event will affect the financial statements. We can assist management on the technical aspects and make recommendations to adjust the team’s approach.

6. Choose the right accounting tool and use its full power

Harness the full power of accounting tools. As your organization grows, the internal control weaknesses inherent in spreadsheets will drive you to adopt more sophisticated accounting technology. Whether it’s an out-of-the-box accounting software or an advanced custom solution, make sure you’re taking advantage of its full functionality. These tools help you make business decisions beyond financial reporting. Applications include inventory management, accounts payable, and cash flow forecasting. Keep them in mind as your finance function evolves through its digital transformation.

It is important to note that if a digital transformation strategy is adopted, appropriate documentation on the system implementation, including approvals, may be required. It is recommended to use an external consultant to ensure the integrity of the data transfer.

7. Prepare for upcoming sustainability reporting standards

Sustainability and Environmental, social and governance (ESG) reporting. is currently top-of-mind for financial leaders. As climate risks increase and governments adopt new policies and regulations, companies are expected to provide more and better financial reporting, including adding ESG information. Globally accepted reporting standards are being developed and will be made mandatory in the near future, adding more year-end reporting considerations.

8. Reuse knowledge from year to year

Every year is a new year, with new annual reporting obligations. That said, build the lessons you learn from one year into the financial operations of the next. By reusing knowledge and best practices, you can strengthen your team and create a culture of learning and continuous improvement.

Due to the high turnover we are currently seeing, it may be more difficult for your team to maintain continuity. You can document auditor findings, create an internal SharePoint database of all support provided during the year, and conduct feedback discussions. This will provide anyone who comes to future audits with details of what happened before they arrived. And, most importantly, your financial records are becoming more audit-ready from year to year.