February 8, 2018
By André Nel
There’s no way around it: audits are more complex for manufacturers — period! To help mitigate the time and expense of a financial statement audit, manufacturers must make sure that they are prepared with key information before the auditors ever arrive at their factories or warehouses.
Communication during the audit process is essential, and one of the primary tools used is a PBC (provided by client) list that serves as a guide and checklist for what the auditors need prior to the start of audit fieldwork.
If you don’t receive a PBC from your audit team, ask for one at least a month before the audit is scheduled to occur. Preparing for an audit takes time and effort, so you want to make sure that you do not leave it until the last minute.
Important Areas of Documentation
In order to prepare for an efficient audit, and with as little stress as possible, focus on the areas described below. These areas need both attention and documentation to help the auditors do their job effectively and efficiently. (Keep in mind that this is by no means a comprehensive list.)
Changes in policies or controls
The basis for every successful audit is proper planning. Discuss with your auditors well before year-end any changes in accounting policies you have implemented or any significant changes in controls over financial reporting.
Inventory will be one of the main focuses of auditors. You should inform auditors when you plan to do the year-end inventory observation. Make sure you have a detailed inventory list just before the actual physical inventory check — this will help auditors ensure that all of your documentation is accurate. Make sure detailed inventory listings agree with the general ledger as of the end of the fiscal year (including things like Finished Goods, Raw Materials and Work in Process). You should also make sure that the listing includes quantity, cost per unit and extended cost. Identify all inventory allowances, including obsolete, damaged or excess inventory.
Revenue and Accounts Receivable
When it comes to revenue, it’s essential for manufacturers to provide the auditors with a list of accounts receivable as soon as possible after the year-end close so that they can make their selection of transactions for confirmation. A signed confirmation reduces the effort by both the auditors and your staff significantly.You should also review the accounts receivable for collectability to determine the allowance for bad debts. Also, review the revenue recognition policy to ensure that you have recorded allowances for returns and warranties.
You will also want to prepare a roll-forward of fixed assets by category, construction in process (CIP) and accumulated depreciation by category before fieldwork and keep supporting documents for significant additions ready to provide to the auditors.
When you prepare a list of accrued expenses for your auditor, make sure you include payroll accrual support such as final payroll documents, including vacations, bonuses, payroll periods not matching the financial year end and healthcare and workers’ compensation IBNR (incurred but not reported) reports You will also want to be sure that you properly accrue raw material received but not billed.
As manufacturers, you most likely make use of outside finance for working capital and equipment. Prepare a debt roll-forward schedule and provide supporting documentation for changes in your debt structure such as new agreements or amendments You will also want to provide the auditors with support for compliance (or not) you’re your debt covenants.
Other Tips for Audit Preparation
In addition to preparing adequate documentation before auditors arrive, you should take the following helpful steps:
Designate Someone to Be the Audit Contact
While gathering proper documentation for the audit might require input from people across different departments, one crucial step for manufacturers is to designate someone at the company to be the contact for the auditor. This person can be the controller, CFO or someone else who has a significant hand in the financial operations of the company. This person can help manage deadlines, let everyone know what needs to be contributed and make sure that everything is prepared and handed over in a timely manner. This person should review all the information before handing it over to the auditors.
Treat Your Auditor Like a Business Partner
Don’t treat your auditor like an enemy if you want your audit to go well. Instead, act like he is a trusted business partner who’s helping ensure that everything at your company is functioning well. Auditors will make themselves available to help you if they feel you respect them, and this can help make the process more bearable for both sides.
Consider Hiring Help
If the audit feels too overwhelming to manage in-house, consider hiring accounting experts to help you with the process. When your team is swamped with hands-on work (and they’re making money), it can be a very cost-effective move.
Being audited as a manufacturer can feel stressful and overwhelming. Not only will there be an in-depth look at your finances and operations, but audits can also be expensive — which can put some stress on your bottom line. Luckily, however, with adequate preparation, proper documentation and a little know-how about the process, you can ensure that your audit happens with little strife for you or the auditor — and that it goes well so you can continue to focus on running your business.
If you are in the manufacturing industry and are concerned about an upcoming financial audit, contact the experienced accountants at Goldin Peiser & Peiser!
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.