Preparing for Your First Audit – Steps to Follow for Consumer Products Companies

Although an independent financial statement audit may not gain the day-to-day attention of management the same way as growing revenue or projecting cash flows; for many, there will come a time when an audit becomes a vital part of the company’s lifecycle. Whether it be seeking a bank loan, meeting regulatory requirements, or preparing for sale or initial public offering, all avenues lead to CPA-audited, reviewed or compiled annual financial statements. Following the below process will help ease the stress of any company facing its first audit.

1. Determine Who Will Be Responsible

Prior to preparing for your audit or even engaging a CPA firm for that matter, a company should first designate who will be overseeing the audit process. This individual should have the necessary accounting skills, knowledge, and experience to be responsible for the services which the CPA firm is engaged to perform. This individual is often the Company’s CFO, Controller, Accounting Manager, or an individual significantly involved in the day-to-day accounting function of the company. As navigating an audit from a company perspective is a time-consuming process, companies should plan to utilize accounting managers, senior accountants, or outsourced consultants who have a strong knowledge of generally accepted accounting principles (“GAAP”) in order to successfully navigate the audit process in an efficient manner.

2. Establish Expectations and an Open Line of Communication With Your Auditor

Communication can make or break an audit. Make it a priority to answer all emails and phone calls from your auditor in a timely manner. Auditors can only work as quickly as the requested information is provided. Delays in providing account schedules, requesting underlying support, or answering auditor inquiries will lead to delays in the audit timeline. When first engaging a CPA firm to perform a year-end audit, establish the following timeline:

  • When will the fiscal year-end trial balance and financial reporting package be finalized and made available?
  • When will audit fieldwork commence?
  • When will audit selections and inquiries occur and when is the deadline for responses?
  • What is the required due date for the financial statement deliverable?

3. Organize Records

Prior to any audit procedures commencing, your auditors will request a slew of continuing file documents including but not limited to the following:

  • Certificate of incorporation
  • Operating agreements
  • W-9
  • Prior tax returns
  • Current debt and lease agreements
  • Stock-related agreements
  • Listing of related parties
  • Service Agreements with customers or vendors

A company should create a zip folder or centralized location to organize these continuing file documents prior to the commencement of your audit will save a significant amount of time and stress allowing you to shift your focus away from administrative requests.

4. Get Familiar With Generally Accepted Accounting Principles (“GAAP”)

Management is responsible for the preparation and fair presentation of the financial statements in accordance with GAAP. If not previously researched, management will need to make themselves familiar with the following:

  • Revenue recognition (ASC 606)
  • Leases (ASC 842)
  • Inventory valuation (FIFO, LIFO, etc.)
  • Stock-based compensation (Options, warrants, convertible notes)

Failure to allocate time to research complex issues or justify significant accounting estimates can lead to substantial delays in the audit process or warrant material adjustments to the financial statements.

5. Document Your Existing Processes

As part of the audit process of a private company, the auditor is required to document their understanding of entity-level controls (including IT general controls), controls over Financial Close and Reporting, and activity-level controls on significant transaction cycles. Documenting key controls and segregation of duties as it relates to the following significant transaction cycles would be a good place to start:

  • Revenue and accounts receivable
  • Accounts payable
  • Inventory
  • Payroll
  • Month-end or fiscal year-end closing process

6. Navigate Your ERP System for Core Audit Reports

As the audit process commences, your CPA firm will request various core audit reports that can be generated from your ERP system. These reports include but are not limited to the following:

  • Accounts receivable aging report
  • Accounts payable aging report
  • Perpetual inventory report
  • Property plant & equipment roll-forward
  • Debt roll-forward
  • General Ledger Report

Members of the company should get familiar with running key audit reports and maintaining reconciling schedules outside of the general ledger will be advantageous to help the audit process run smoothly.

7. Pre-Audit Your Most Recent Month-End Close

The final step before engaging a CPA firm to perform your first audit is to perform your own pre-audit procedures during your most recent month-end close. This will encompass generating core audit reports and schedules mentioned in step 6 and ensuring they agree to the amounts noted in your trial balance. Addressing any significant variances in the financial close process will save both yourself and your auditor time upon procedures commencing. Additionally, be prepared to explain to your auditor significant trends seen in your company throughout the year. A few questions the responsible party at your Company should be able to answer include, but are not limited to, the following:

  • Provide explanations or analysis related to year-over-year account variances.
  • How did external industry factors affect your company in the current year (i.e., COVID-19, global supply chain, etc.)?
  • Did the company experience any major losses in customers or vendors?
  • Are any past due accounts receivable uncollectible?
  • Are there any events subsequent to the fiscal year-end that are significant enough to warrant a subsequent event disclosure?

A financial statement audit allows creditors, investors, and management to evaluate a company’s financial health and earnings potential with the confidence that the financial results of the company are reasonably stated using applicable GAAP standards in the eyes of a CPA firm. Following the simple steps noted above can significantly reduce the stress and time commitment of those involved. Communication is key. Establishing an open line of communication and setting expectations with your CPA will lead to an effective and efficient audit process.

Contact Us

For more information on this topic, please contact a member of Withum’s Consumer Products Services Team.