Internal and External Audit Preparation

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Audit is a word that is associated by most professionals with fear and frustration and let me say that is simply human nature. We all know that we did a good job over the year, but are somehow not 100% sure that we hadn’t miss something or maybe we misinterpreted something. That is why we as professionals expect the audit report just like we expected the exam results as students. Did we pass? Did we fail? How accurate was our work?

Well, there is a big gap between the human perception of an audit and the functional perspective of this process. Auditors don’t seek responsible individuals, they don’t apply penalties and for sure auditors don’t make personal performance appraisals. The scope of the audits that involve the finance department is divided based on the customers of the audit report – internal and external. I will deal next with both.

The internal audit – Are we on the right track?

One of the main purposes of the internal audit is to give management a reasonable assurance that internal controls work and that the company is on the right track to achieve its objectives. You may wonder why so many controls and checks as long as everybody is doing their job and all employees are responsible for their own area. Well that works well in theory but practice proves it different – humans are prone for error and bias and the scope of the internal control system is to diminish these risks.

You can think about internal audit this way – controls have a role of setting the path towards reaching the company’s strategic objectives, however knowing the way does not implicitly mean that one will not make a detour or try to be creative and make its own path. However interesting or appealing that may seem – making your own rules may not be in the company’s best interest. You may be well intentioned in your actions but you may also miss the big picture.

The main question comes next – how do we deal with the internal audit process? Well, it is probably the time to think about all of those administrative issues that you did not consider before – Are all my records in place? Are they correctly labeled? If I were a third party, would I find the information I need in my records without outside help? This will make your life easier as the workload will not increase significantly during the audit period. Also it may be time for you to consider a mindset change – work together with the auditors to improve the processes and controls – you are the subject matter expert and the flaws in the system are known by you inside out. Take advantage of the auditor’s opinion and view to improve your job. You must understand that internal auditors are on the same team as you are, working towards achieving the company’s goals, so act like a good team-player!

The external audit – Are we showing an accurate picture?

The annual financial statements show the company’s picture of financial status and past performance and provide the best starting point for the shareholders and outside public to assess the health and future prospect of the company. The financial (external) auditors are the independent third party that assesses the true, fair view and proper presentation of the financial statements. Having an external audit review is a statutory obligation for listed companies and also for companies exceeding a certain size. However, the shareholders of a company can ask for an external audit even if that is not required by the statute – the scope of this voluntary assessment is both to feel comfortable that the information provided by the company to them is accurate and reliable and to show outside users of the financial statements that the company is going the extra mile to prove its transparency.

I consider it is vitally important to understand the position of the financial auditors before I go any further. They are independent outside professionals or companies which provide an assurance to the shareholders and outside users of financial statements. It goes unsaid that no one can give an assurance before it makes a proper assessment of the financial reporting system in place and the outputs of this system. That is the reason why the external auditors first need to understand if the company has the right system of internal controls in place (here they can use as a starting point the internal audit set up and reports) and if the system is operating effectively. External auditors base their audit opinion both on the strength of the internal control system and on the true, fair view and proper presentation of the financial statements.

How do we deal with an external audit? – Preparing for an external audit is an extra task we must deal with on top of our current tasks. Previously I tried to explain the importance of this review for the company’s shareholders and the outside public. The scope of that was to make you understand that this process is extremely important both for the owners of the company and any potential investor, finance provider, employee or how I name it more generally, the outside public. Put yourself in the shoes of those directly interested in the company – wouldn’t you like to get that comfort that the information you get is accurate and double checked?

To make everyone’s life easier during the external audit process, a little preparation work is required. Planning is important therefore a meeting with the auditors in advance will help you understand exactly what the information they are looking for is and how you can prepare as much as possible before the auditors arrive on site. Remember, auditors are also finance professionals, understand all the priorities your department has and will definitely schedule their visit in a less busy period of the month.

Apart from preparing the information required by the auditors in advance, you and your team need to prepare yourselves also personally for this. Stay open minded and help the auditors with as much information as possible during the audit. Any issues encountered in your work are grounds for improving it and the auditor’s criticism is purely constructive. It is extremely easy to take criticism personally but it shows professionalism if you learn from your past mistakes. Expect to have errors in your books as we are all humans and be able to find solutions for those errors. I personally consider that the worst problem after an audit is not having errors or misstatements in the financial set, but having the same errors also in the next year or even years.

As you can see, I tried in this post to give some common sense advice on your perspective of the internal as well as external audit. I did not go into details on what to prepare for each audit as that is certainly provided in a list by the actual auditors before the process starts. The point of this article is to prepare you, the finance professional and human, for an audit process.

Please feel free to drop off any comments below, feel free to be the auditor of my post!

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