What to Expect From Your First Financial Statement Audit

Maybe your company has grown past a size threshold. Maybe a bank has made an audit a condition of a loan, or new investors want independent assurance. Whatever the trigger, a first audit raises a lot of questions. Knowing what happens at each stage, and what the auditors will ask for, takes most of the stress out of the process.

What an audit is, and what it is not

A financial statement audit is an independent examination that ends in an opinion on whether your financial statements present a true and fair view under the applicable reporting framework. It provides reasonable assurance, not absolute assurance. Auditors do not check every transaction, and an audit is not designed to catch every fraud. They focus their work on the areas where a material misstatement is most likely.

Stage 1: Planning and risk assessment

The audit begins with the auditors getting to know your business: how it makes money, the systems it uses, its key controls and any significant events during the year. From this they identify the higher-risk areas and design their testing. You usually receive a list of requested documents, often called a “PBC” (prepared by client) list, together with a timetable.

Stage 2: Interim work and controls testing

For some audits, the team visits before year-end to understand and test internal controls, such as how payments are approved or how duties are divided between staff. Strong controls can reduce the amount of detailed testing needed later.

Stage 3: Year-end fieldwork

After year-end, the auditors test the balances and transactions in your financial statements. Typical procedures include:

• Confirming bank balances directly with your bank
• Tracing a sample of sales and purchases to invoices and contracts
• Attending or reviewing inventory counts
• Testing receivables and payables for existence and completeness
• Reviewing estimates such as provisions and asset valuations
• Looking for significant transactions after year-end

The biggest factor in how long an audit takes is how well prepared the records are on day one.

Stage 4: Completion and reporting

Once testing is complete, the auditors discuss any proposed adjustments with management, obtain written representations and issue their audit report. Many firms also provide a management letter with observations and recommendations on your controls and processes. It is often one of the most useful outputs of the whole exercise.

How to prepare for your first audit

1. Reconcile everything. Bank, receivables, payables, payroll and fixed-asset registers should all agree to the general ledger.
2. Organize your documents. Contracts, loan agreements, board minutes, invoices and payroll records should be easy to find.
3. Review opening balances. In a first audit, auditors also need comfort over the balances brought forward from the prior year.
4. Name one point of contact. A single person coordinating requests keeps the process moving.
5. Start early. Agree the timetable and the PBC list well before year-end so there are no surprises.

Getting support

If you are facing your first audit, our audit and assurance team can explain what your organization needs, and our audit-readiness support helps you prepare the schedules and reconciliations in advance. Clean, current bookkeeping through the year makes every audit faster and less expensive.