A successful financial statement audit No miracles required
ECLUB NEWS |
While much attention is being paid to the holiday season, another season is also quickly approaching for many private clubs. Unfortunately, this one involves more crunching of numbers than holiday treats. 'Tis the season for the annual financial statement audit.
In order to make it a joyous audit season—or at least one with fewer headaches—clubs can consider the simple recommendations outlined in this article.
It is crucial to close the year as quickly and accurately as possible. To accomplish this, clubs are advised to establish a written timetable that should:
- Communicate internally
- Ensure cutoff for purchasing and accounts payable
- Include reconciliation of all balance sheet accounts with supporting documentation for reconciling items
- Incorporate the production and review of internal management financial statements
To stay on the path, clubs should agree in writing with their auditors as to the specific timetable for audit completion. As part of that process, clubs and auditors should consider:
- Audit planning in advance of fieldwork
- Pre-audit meetings with the board (and/or finance or audit committee if applicable)
- The delivery of the auditor wish list (to be described below)
- Closing of the year as discussed above
- Fieldwork performed by the audit team
- Delivery of draft auditor reports
- Timing for response or changes to those audit drafts
- Preparation and execution of the representation letter
- The final release of the financial statement
The aforementioned auditor wish list is prepared by the external auditors and should ideally be provided to the club at least one month before audit fieldwork is initiated. It is recommended that clubs review this wish list upon receipt independently as well as with their auditors to ensure a common understanding. Clubs should not feel that they are in this alone; they should receive—even without making a request—templates for the information they are being requested to provide.
Communication is of the upmost importance all year round but especially during audit season. Before the external auditors arrive on the grounds, clubs should be sure to tell all members of their staff, not just those working in the accounting office, when the auditors are coming. It is much more efficient if members of management make themselves available when the auditors are present. Additionally, department heads should make sure they understand the reasons that underlie any profit and loss variances from the previous year’s results and budget.
Should clubs find themselves pressed for time in their audit preparation efforts, they should focus on significant accounts, such as fixed assets, debt, loan covenants, receivables, estimates (for example allowance for doubtful accounts) and equity. In the worst case scenario, clubs should contact their service provider and inquire about rescheduling the audit. While rescheduling the audit might be seen as a nuisance, a slight delay is often better than being unprepared and ultimately less efficient.
External auditors are required by professional standards to test journal entries, especially those recorded at year-end. Therefore, clubs should ensure that journal entries stand-alone (detailed support attached) and utilize standardized journal entry documentation.
It is important to be prepared to provide documentation as the auditors will require evidence of transactions. "Trust but verify," as the adage goes. As a general rule, the bigger a transaction, the more likely the auditor will want to see surrounding evidence. In addition, evidence is generally stronger when there is distance between it and the controller. Audit evidence can appear in the form of documents (e.g., account reconciliations, purchase invoices, bank statements, lease agreements and executed contracts), board minutes, third party confirmations, inquiry plus corroboration or physical inspection of assets.
Clubs will want to consider how to handle proposed audit adjustments and agree in principal with their auditors on how they want these adjustments handled. Does the club want to book all proposed audit adjustments? Or pass on all proposed audit adjustments? Discuss every audit adjustment as they arise? Accumulate and discuss all proposed audit adjustments at the end of fieldwork? As a general best practice, clubs should consider discussing adjustments as they arise.
As a final area of recommendation, clubs should pay careful attention to financial statement footnotes. To start, read last year’s footnotes and identify necessary changes. Also consider needed additions for new transactions that have arisen during the year. Lastly, discuss with the auditors whether all of the past footnotes are necessary and consider deleting the immaterial disclosures.
While a financial statement audit is less exciting than a gift wrapped in a bow, following these steps will help clubs progress through the season and celebrate how smooth the process can be. While the audit does not yield the same pleasure as a much longed for gift, clubs should remember its true purpose and find their gift in the additional peace of mind an effective and efficient financial statement audit offers them and their many stakeholders.