Audits. Just the word probably makes your accounting team cringe. Visions of stern-faced auditors rifling through paperwork for weeks on end. Interrogating your staff about procedures. Nitpicking small expenses and transactions. The whole process just feels so…invasive. 

I get it. Financial audits can be intimidating and outright scary if you don’t know what to expect. But the truth is, audits don’t have to be miserable ordeals. With the right mindset and preparation, you can make it through smoothly and efficiently.

In this post, I’ll give you the inside scoop on how a typical audit goes down. I’ll walk through what auditors are looking for, how the process unfolds, and tips to stay sane along the way. My goal is to demystify audits so you feel informed and in control when your company goes under the microscope.

Here’s what we’ll cover:

– Why companies get singled out for audits in the first place

– What happens when you get the audit notice letter

– Documents auditors will want to review

– The opening meeting to kick things off

– How auditors dig through your finances

– The dreaded on-site field work 

– What goes into the formal audit findings report

– Strategies to make the process smoother

So grab a coffee, settle in, and let’s shine a light on what really happens during a financial audit.

Why You Get Randomly Selected for Audit Fun 

Before we look at what happens during an audit, it helps understand why companies end up in the audit crosshairs to begin with.

For many businesses, it happens out of the blue thanks to random selection. Each year, the IRS and other oversight groups like state tax departments randomly pick companies to audit as part of their enforcement and compliance procedures. 

It’s like getting randomly stopped at airport security for an extra search. You didn’t do anything suspicious, but the roulette wheel chose you. 

So it’s possible to get audited even if you’re doing everything by the books. If the number comes up, it’s audit time.

Of course, some actions raise red flags that increase your audit odds:

* Claiming massive deductions or losses that seem fishy

* Reporting strange spikes in revenues or income

* Operating in a high-fraud industry like construction or restaurants

* Disgruntled employees filing complaints about shady practices

* Having a history of past audit issues

Bottom line though, audits are an inevitable part of doing business at some point. When the notice arrives, don’t panic. It doesn’t mean you’re in trouble. Take a deep breath and get ready to show how squeaky clean your finances are.

Which brings us to…

You’ve Been Selected! The Audit Notification Letter

Your introduction to an upcoming audit usually comes via snail mail. You’ll receive a formal letter from the IRS or auditor explaining they’ll be conducting a review of your company’s financial statements and tax filings. 

The letter will identify what periods and tax years they want to look at. It provides instructions on what documents and data to gather. And gives you advance notice to clear your schedule for the auditors’ visits.

If it’s an IRS audit examining your tax returns, the letter may give a general reason you were selected. For example, verifying deductions claimed or income reported fall within normal ranges for your industry.

If serious issues are suspected, like fraud or tax evasion, the first interaction may be agents showing up on your doorstep unannounced. But that level of audit is pretty rare.

When you get the notice, immediately mark your calendar. Treat it seriously and start pulling together the requested info right away. You’ll have weeks before they arrive on site, so use the lead time to prepare.

Getting caught flat-footed will only make the process more painful when auditors show up raring to dig in.

Oh, which reminds me…

Documents Auditors Will Want to Pick Through

Financial auditors are data nerds at heart. To do their job, they need to pick through and analyze tons of detailed paperwork and records. 

After the audit notice, you’ll receive formal requests listing specific documents and reports they want access to. It may feel like they’re asking for your first born child, but try to pull everything together to keep things moving.

Some of the lovely paperwork auditors will request includes:

* Bank and credit card statements to trace cash flows

* Invoices and sales records to verify income 

* Receipts for big expenses like equipment purchases

* Payroll records and personnel files

* Inventory records and purchase orders

* Tax returns and filings (of course!)

* Contracts and leases 

* Financial policies and procedures

* Previous year’s audit reports

* Minutes from Board of Directors meetings

* Depreciation schedules

* Debt agreements

* Pretty much anything accounting and finance related

I know. It’s a ton of stuff to dig up. Don’t let it overwhelm you. Assign some staff to start pulling two years of statements, filings, and reports together into a nice organized package for auditors. 

The better you prep, the faster their on-site work goes.

Speaking of on-site…

Kicking Off the Audit Fun with a Conference

Before auditors descend on your office and tear through everything, they’ll want to hold an entrance conference meeting. This gives both sides a chance to get on the same page before field work begins.

Typical agenda items include:

• Reviewing the scope and objectives for the audit

• Making a detailed schedule and plan for the process

• Identifying high risk areas they’ll focus on 

• Getting introductions and contact info between your team and the auditors

• Giving auditors a briefing on your accounting systems and financials

This opening meeting is your chance to get any big questions answered. Make sure you understand what they’re looking at and why. Ask for clarification if the scope seems fuzzy.

You also want to use the time to establish clear expectations and communication protocols. Having a point person to coordinate requests can smooth interactions during field work.

Think of it like planning a major project between your company and an outside vendor. Better to align early rather than battling confusion down the line.

After the opening meeting, the real audit fun begins…

Brace Yourself for Field Work Time

You’ve prepped the records. You’ve had your kickoff meeting. Now it’s time for auditors to camp out in your office and dig through everything with a fine tooth comb. 

Field work time is not gonna be fun. Plan for a few weeks of auditors scrutinizing records, observing processes, interviewing employees, and tracing sample transactions from start to finish.

You’ll want to prepare a dedicated workspace for the auditors to use as home base while on-site. Make sure they have access to a printer, supplies, internet, and anything else needed to maximize their efficiency. 

The faster you can deliver requested documents and answer questions, the quicker they can complete field work. Dragging your feet only slows things down.

Expect auditors to be laser focused on these types of procedures during field work:

• Vouching figures from the financial statements back to source documents

• Reviewing critical accruals and estimates for reasonableness 

• Checking inventory existence by observing your warehouse

• Evaluating the effectiveness of internal controls

• Identifying variances or exceptions in transaction testing

It’s a tedious and invasive process. But the more you cooperate, the faster they can wrap it up and be on their way.

Be prepared to provide requested samples and explain processes if they have questions. A little patience and professionalism goes a long way.

The Management Letter: Dun Dun Dun

After the auditors complete their field work, they’ll prepare a management letter summarizing their findings. Think of this as your audit report card.

The letter will cover things like:

• Scope of the procedures they performed

• Significant deficiencies or weaknesses noted

• Recommended fixes and improvements 

• Changes from prior audits

• Other concerns or risks observed

Look at the management letter as constructive feedback on how to improve rather than criticism your team screwed up. Use it to brainstorm changes to tighten policies, procedures, and controls.

You’ll go over the findings at the closing conference to make sure you understand and agree with the issues raised. But first, let’s talk about wrapping things up…

Closing Out the Audit

As field work wraps up, auditors will schedule a closing conference to tie a bow on the audit. 

This closing meeting allows you to:

• Discuss and respond to the findings in the management letter

• Present any evidence if you disagree with an issue

• Develop action plans to address deficiencies 

• Set expectations for the final audit communications

Think of the closing conference as a chance finalize any open items before the auditors issue their final report. It also provides closure after the intensive on-site field work wraps up.

This is your opportunity to demonstrate good faith efforts to cooperate and fix problems going forward. The more receptive you are to auditor findings, the easier it will be to resolve issues.

After the closing conference, auditors prepare their final report containing the official audit opinion. Fingers crossed for a clean bill of health!

It All Culminates in the Audit Report 

The final output of all the auditors’ work is an official audit report containing their opinion on your financial statements and controls. 

While it reads like an accounting textbook, the key sections include:

• The auditor’s opinion stating whether your financials are fairly presented or contain errors.

• Descriptions of their procedures and scope of work performed. 

• Any significant deficiencies called out in the management letter.

• An explanation of both the auditor’s and management’s responsibilities.

You want a clean, unmodified audit report with no major weaknesses cited. This demonstrates to outside stakeholders that your financial house is in order.

And if issues do pop up…

How to Address Audit Findings 

What if auditors find major errors or weaknesses in your financial reporting? Try not to freak out. It happens…it’s not the end of the world.

The important thing is to develop a game plan to address deficiencies:

• Do a root cause analysis to understand where the breakdown occurred

• Map out a timeline and action plan to resolve each finding

• Remediate issues by fixing processes, controls, staffing, and technology

• Work cooperatively with auditors to close findings based on progress

• File corrected tax returns if previous ones had misstatements

Don’t get defensive. Look at audit findings as an opportunity to improve. Demonstrate your commitment to fixing problems through actions, not just words.

If fraud exists, you may need to get legal assistance. But in most cases, it comes down to rolling up your sleeves and doing the work to strengthen financial practices. 

Tips for Surviving Your Next Audit

While every audit is unique, you can take steps to make the process less painful:

Thoroughly prepare requested documents and schedules rather than scrambling last minute

Maintain open and frequent communications with the auditors 

Involve IT early to provide needed reports and system access

Give employees a heads up their help will be needed with the auditors

Assign a point person to coordinate auditor requests and data

Make auditor workspace comfy with WiFi, printers, supplies, etc.

Respond quickly if auditors have questions or need docs 

Better yet, maintain tight internal controls and financial discipline at all times. Make the auditors bored from having nothing to find!

The more you minimize business disruptions and demonstrate cooperation, the faster field work goes. That lets everyone get back to business as usual.

You Can Handle the Audit Fun 

And that wraps up our tour through the magical world of financial audits!

While the process can feel invasive and stressful, knowledge is power. Now you know what to expect, from first notification to final report.

Audits don’t need to be feared or dreaded. They’re just part of the business game. With the right perspective and preparation, your company can get through smoothly and efficiently. 

So put your game face on, stock up on coffee, and embrace the next audit as an opportunity to show what your team is made of. You’ve got this!