Audits come in all shapes and forms. Regardless of the type, however, audits are conducted by independent audit staff reviewing processes and receipts, looking for unauthorized transactions and trying to avoid fraud and mistakes. Audit preparation is the process of readying for such a review, and is often related to audits by Certified Public Accountant (CPA) firms. These are audits performed at least once a year to assure investors, banks, and other stakeholders that a company's financial statements are fairly presented with no major misstatements or errors.
Auditors follow audit programs, and audit preparation is usually recurring, with similar items from prior years. Businesses that need to be audited, such as public companies, usually receive audit questionnaires or listings requesting schedules and other pertinent information to assist in the audit process and preparation. These schedules are commonly known as "prepared by client" (PBC) documentation.
Audit team members utilize PBCs to analyze financial statements and to test the numbers. The point is to use documentation from audit preparation to make the audit process faster and cheaper. The better the documentation, the smoother the audit should be.
An accounts payable schedule is often part of audit preparation, containing a detailed list of debtors, both long term and short term, and how much each is owed. Totals in the list should agree with what the business presents in its financial statement. If a business shows $1,000 US Dollars (USD) as current accounts payable and $5,000 USD as long term notes payable, for example, these exact amounts should agree with the accounts payable schedules.
Another schedule often part of audit preparation is a listing of accounts receivables. This list shows who owes the business and how much they owe, similar to accounts payable. The idea is the same: the schedule of accounts receivable should agree with financial statements in totals.
Bank reconciliations are popular PBCs and often are required for the last month of the fiscal year and the following month. Bank reconciliation describes differences between cash balance per the banks and per the books, what the business shows in its financial statements for cash. Other popular items in audit preparations include a listing of fixed assets, depreciation, investment listings, and bank confirmations letters, where banks confirms cash and investment balances with auditors.
Many businesses, especially corporations and bigger firms, setup audit committees to coordinate and review the audit preparation and process. The audit committee is often made up of board members who have an interest in the financial welfare of the business. These members may have a background in finance or accounting.
Challenges of audit preparation are changes in account numbers due to mistakes or adjustments made after the PBCs have been prepared. When that happens, the schedules and documentation must be changed as well. Another challenge of audit preparation is getting all the proper information prepared on a timely basis. This problem can be minimized by using financial software that provides good reporting, eliminating the need to compile separate lists for many items.