I. Introduction

– Brief overview of what an audit is and why companies undergo audits

– The importance of being prepared and organized for an audit 

– Preview the checklist that will be provided

II. Gather Necessary Documentation

– Financial statements and accounting records

  – Income statements, balance sheets, cash flow statements

  – General ledger, trial balance, accounts receivable/payable

  – Backup documentation for key transactions and balances

– Corporate records

  – Articles of incorporation, bylaws

  – Board minutes and resolutions

  – Shareholder agreements/records

– Contracts and agreements

  – Leases, loan agreements, supplier contracts

  – Licensing, royalty, non-disclosure agreements

– Tax filings and documentation

  – Income tax returns

  – Sales tax records and filings

  – Payroll tax records

– Insurance policies

  – Property, liability, D&O, E&O, workers’ comp

  – Document insured values and coverage details

– Intellectual property records

  – Trademarks, copyrights, patents

  – Licensing or royalty agreements

– Physical inventory count and records

  – Detailed inventory listing and valuation

  – Inventory count procedures and results

  – Cost accounting records

III. Organize Accounting Systems and Processes

– Bookkeeping system or general ledger organized and up to date

– Reconcile all bank and credit card accounts

– Review accounts receivable/payable details and sub-ledgers

– Ensure payroll records and tax filings are current

– Set up process to track hours worked during audit

IV. Gather Human Resource Information 

– Employee rosters and personnel files

  – Employment agreements, offer letters

  – Pay rates, last payroll records

  – Performance reviews, disciplinary records

– Employee handbook and HR policies

– Job descriptions for all positions

– Organizational chart

V. Review Information Technology Systems

– Document IT systems, software and hardware used

– List all integrations between software programs 

– Review IT policies and procedures (access controls, data security, backups, disaster recovery)

– Gather cybersecurity protocols and history

VI. Prepare Main Contacts 

– Identify main liaisons for auditors

– Gather contact details for management team

– Alert employees most affected about timing and potential requests

VII. Ready Facilities for Audit Work

– Designate workspace for auditors 

– Ensure internet connectivity and access to systems

– Plan for rooms for private meetings and interviews

– Arrange for physical records access or transport

VIII. Develop Efficient Response Process

– Assign project manager to coordinate requests

– Set internal deadlines for auditor requests

– Create shared drive for auditor requests and company responses

– Implement layered review process for responses

IX. Anticipate Potential Issues in Advance

– Review prior year audits and issues raised

– Consult management on potential red flag areas  

– Research industry standards for policies and procedures

– Run self-audit on key risk areas

X. Maintaining Positive Relations throughout Audit

– Set tone of transparency, cooperation for team

– Provide frequent status updates to auditors 

– Raise any pressing company issues promptly

– Be responsive but don’t feel rushed into ill-advised responses

– Maintain composure during stressful interactions

XI. Conclusion

– Summary of key steps covered in the checklist

– Benefits of thorough audit preparation

– Commit to ongoing improvements even after audit completion

Introduction

If you operate a business or organization of any substantial size, undergoing periodic audits is likely an unavoidable reality. While the prospect of having your financial statements, compliance practices, and operational controls scrutinized in detail may be daunting, audits don’t need to be feared if you are properly prepared.

Being organized and thorough in your audit preparation demonstrates that your company has nothing to hide and values operating with transparency and integrity. It also helps the auditing process go smoothly so your team can avoid becoming overwhelmed scrambling to gather information and provide answers under pressure.

To help your organization get fully prepared for your next audit, we’ve put together this comprehensive checklist of steps to take before the auditors arrive. Downloading and completing this audit preparation checklist well in advance of your scheduled audit will help ensure you leave a positive and compliant impression on the auditing team.

Gather Necessary Documentation

Financial Records – Auditors will request to review financial statements and records to assess accuracy and compliance with accounting standards. Be prepared to provide income statements, balance sheets, cash flow statements, and all supporting documents for at least the past three years. Have your general ledger, trial balance reports, accounts receivable and payable sub-ledgers, and detailed records on major transactions or balances available for inspection. 

Corporate Records – In addition to financial records, auditors often review corporate legal records and documents during audits, especially in private companies. Assemble current versions of your articles of incorporation, bylaws, board minutes and resolutions, shareholder/ownership agreements, and any other official company governance documents.

Contracts and Agreements – Formal agreements help validate that transactions are properly recorded, so auditors frequently request copies of material contracts like customer agreements, supplier terms, leases, and financing arrangements. Also compile licensing and royalty agreements, non-disclosure agreements with vendors or partners, and any other legally binding commitments made by the company.  

Tax Documentation – Tax filing records help auditors cross-check figures that also appear in your financial statements. Prepare complete copies of income tax returns filed for at least the last three years, including supporting schedules as applicable. Also gather sales tax records, payroll tax filings, and documentation of tax payments made each year. 

Insurance Policies – Keep current copies of all active insurance policies handy, like general liability, D&O, E&O, property/casualty, workers’ compensation policies. Auditors will look for proof of adequate coverage and may inquire about how insured values were determined.

Intellectual Property – Any trademarks, copyrights, patents, or proprietary technologies a company owns should be documented via registrations or licensing agreements. Auditors often request this information to validate that IP assets are properly accounted for. 

Inventory Records – For companies that stock inventory, detailed inventory count records will be required, including your procedures for conducting counts. Provide auditors with your latest physical inventory listings, inventory valuation methodology, inventory turnover analytics, and data on inventory shrinkage or obsolescence.

Organize Accounting Systems and Processes 

Bookkeeping Updated – Your bookkeeping system or general ledger should be completely up to date with no transactions left to record for the periods to be audited. Auditors will look for gaps in journal entries or discrepancies in ledgers.

Bank Reconciliations – All company bank and credit card accounts should be fully reconciled through the latest statements available. Auditors will frequently select random accounts to review reconciliations firsthand.

A/R and A/P Details – Provide auditors with the supporting details behind your accounts receivable and accounts payable balances. Being able to produce clear aging reports and transaction sub-ledgers for A/R and A/P demonstrates strong financial oversight.

Payroll Taxes Current – Get ahead on payroll tax payments and filings so everything is current as of the dates to be audited. Payroll tax liabilities in arrears could prompt auditor concerns.

Track Audit Time – Set up a system for tracking hours worked during the audit by your team so the company is able to recoup some of the audit preparation costs. This could involve task codes in your timekeeping system.

Gather Human Resource Information

HR Files and Rosters – Auditors often review employee personnel files, recruiting and termination processes, and compliance with labor regulations. Prepare current HR rosters showing all active employees and status details. Have personnel files, offer letters, employment agreements, and other identity verification records ready for random sampling.

Policies and Handbooks – Your company’s employee handbook, plus any supplemental HR policies on compensation, time off, workplace conduct, etc. should be up to date and consistent with actual practices.

Job Descriptions – Written job descriptions are useful for auditors to understand segregation of duties and controls over sensitive transactions. Compile current job description documents for all employee functions and levels within the company.  

Organizational Chart – A visual corporate organization chart assists auditors with identifying chains of command and decision-making authority across departments. 

Review Information Technology Systems

Document Systems in Use – Catalog software platforms, applications, databases, and other technology systems used across your company’s business operations. Note which software programs integrate or share data with each other. 

IT Policies and Procedures – Documented IT policies and system controls will be reviewed to assess data access, data security, backup and recovery procedures. Provide auditors with IT manuals and guidelines regarding system access, data confidentiality, and cybersecurity controls.

Cybersecurity Review – Be prepared to share your cybersecurity incident response plan and summary reports of past security breaches or ransomware attacks if applicable. Knowing historical threats can drive further auditor scrutiny.

Prepare Main Contacts 

Identify Audit Liaisons – Designate specific employees to serve as the main liaisons and primary contacts for audit requests and inquiries. This helps avoid confusion and makes responses more efficient.

Inform Leadership – Ensure top executives and department leaders are aware of the timing and extent of upcoming audit activities. Auditors may wish to schedule short interviews with management during the audit.  

Alert Affected Staff – Give advanced notice about the audit to employees whose job functions are likely to be most affected. Let them know support will be provided to help them prepare.

Ready Facilities for Audit Work 

Designate Workspace – Set up appropriate work areas for auditors to conduct fieldwork onsite if needed. These spaces should allow some degree of privacy and access to systems.

Provide Connectivity – Confirm that wireless internet access and passwords to business systems will be available to auditors as required to complete assigned tasks and extracts.

Secure Meeting Space – Designate private conference rooms or offices where confidential interviews and discussions can be held with various members of your staff throughout the audit.   

Arrange for Records Access – Determine if paper records or files need to be transported to auditor work areas, or schedule times and procedures for auditors to access secured physical records storage onsite. 

Develop Efficient Response Process  

Assign Project Manager – Designate an internal project manager to oversee the company’s audit preparation and coordinate responses to auditor inquiries in a timely fashion.

Set Internal Deadlines – To avoid a backlog, set internal deadlines for assigned staff to gather requested items and draft responses ahead of the official auditor deadlines. This allows time for review.

Centralize Information Sharing – Set up a shared digital drive or intranet portal to store auditor requests, draft responses, and final submissions to keep everything coordinated.

Implement Review Layers – Require that a second set of eyes reviews substantive responses to auditors before submission to ensure quality and consistency.

Anticipate Potential Issues in Advance

Review Prior Audits – Look back at previous internal or external audits to identify areas that prompted concerns, deficiencies, or quality improvement suggestions. Anticipate follow-up questions. 

Consult Management – Ask managers to report out on potential trouble spots that auditors may flag within their departments, based on operational challenges or unusual transactions. 

Research Industry Standards – Take time to research common policies, procedures, ratios, KPIs within your industry to avoid being caught off guard by auditor questions about your practices.

Self-Audit Key Areas – Consider performing mini self-audits in historically problematic areas to identify and address gaps proactively in advance of the real audit.

Maintain Positive Relations throughout Audit 

Set Tone of Cooperation – Executive leadership should clearly communicate the expectation that all staff will cooperate fully with auditors and provide helpful, truthful responses.

Provide Status Updates – Keep auditors and leadership apprised of expected timelines for fulfilling information requests and resolving open items. 

Flag Issues Promptly – If any concerning discrepancies or problems are identified during the audit preparation, promptly disclose these to the auditors rather than appearing to conceal them.

Mind Response Times – Strive to meet response deadlines, but take the necessary time to pull together full, accurate answers rather than rushing out incomplete data under pressure.

Stay Calm Under Stress – The audit process can be stressful at times. Maintain composure even when pressed for answers, and avoid emotional outbursts that could tarnish the company’s image.

Conclusion

While the audit preparation process may seem daunting, staying organized, thorough, and cool under pressure will lead to the best outcome for your company. Maintaining open communication and helpful, timely responses demonstrates that your business has exemplary compliance practices and controls.

Use this comprehensive audit preparation checklist well in advance of your next scheduled audit to identify required documentation, clear out accounting backlogs, strengthen policies, and efficiently respond to inquiries. The peace of mind of being fully prepared is well worth the effort.

Moving forward, use any feedback from auditors to fill gaps and make ongoing improvements to your financial reporting, recordkeeping, controls and IT systems. Establishing these best practices will ensure your company maintains readiness for the next round of audits and oversight. With preparation, your entire team can feel confident instead of anxious when auditors arrive.