Preparing for an external audit

What audit preparation means

Preparing for an external audit means closing the books properly, reconciling every balance sheet account, and assembling the schedules and evidence the auditor will ask for before fieldwork starts. It matters because audit time is spent where the client is unprepared: a clean prepared-by-client (PBC) package shortens fieldwork, reduces fee overruns and cuts the number of late adjustments.

The auditor's requests are not arbitrary. Each one tests an assertion: that assets exist, that liabilities are complete, that transactions are in the right period, that balances are valued correctly. If you know which assertion a request serves, you can prepare evidence that answers it first time. Our guide on how a financial statement audit works explains the auditor's side of the process; this guide is the finance team's side.

The assertions behind every request

Most PBC items map to one or two assertions. Keeping this map in mind is the fastest way to judge whether a schedule is good enough: a receivables listing that does not show invoice dates cannot support cut-off, and a fixed asset register without purchase invoices cannot support existence or cost.

• Existence and occurrence: the asset is real and the transaction happened; evidence is counts, confirmations, delivery notes
• Completeness: everything that should be recorded is; evidence is post-year-end payments, supplier statements, sequence checks
• Cut-off: transactions sit in the right period; evidence is the last dispatch and receipt documents either side of year end
• Accuracy and valuation: amounts are right and assets are not overstated; evidence is ageing, net realisable value tests, impairment models
• Rights and obligations: the entity owns the asset or owes the liability; evidence is title documents, contracts, loan agreements
• Classification and presentation: amounts are in the right account and disclosed as the framework requires

A year-end timeline for a December year end

The dates below assume a mid-sized company with a 31 December year end and statutory filing some months later. Shift them to your own year end; the sequence matters more than the dates.

• September to October: agree the engagement letter, timetable and PBC list; discuss new transactions, standards and systems
• November: interim visit; walkthroughs and controls testing; resolve last year's management letter points
• Early December: issue stock count instructions; agree cut-off procedures; line up confirmations for banks, customers and lenders
• 31 December: stock count with the auditor attending; record the last dispatch and goods received note numbers
• Working days 1 to 10: hard close, accruals, reconciliations, draft trial balance
• Working days 10 to 20: finalise PBC schedules, lead schedules and judgement papers; draft financial statements
• Weeks 4 to 8: fieldwork, then a clearance meeting to agree adjustments
• Signing: management representation letter, approval by the board, auditor's report dated

The PBC list, area by area

Auditors' request lists vary, but the core is stable. Deliver each item with the trial balance account codes it supports, the preparer and reviewer initials, and a clear link to the source. A schedule that does not agree to the trial balance is not finished.

• Trial balance and draft statements: final trial balance with prior-year audited comparatives and a mapping of accounts to statement lines
• Cash: bank reconciliations for every account at year end, bank statements, and the bank confirmation authority
• Receivables: aged listing agreed to the control account, credit notes after year end, the expected credit loss calculation
• Inventory: count sheets and summary, valuation by item, slow-moving and net realisable value analysis, goods in transit
• Fixed assets: register reconciled to the ledger, additions and disposals with invoices, depreciation recalculation, impairment review
• Payables and accruals: aged payables, supplier statement reconciliations, accruals with support, list of payments after year end
• Tax, payroll and equity: VAT and payroll control reconciliations, tax computation, share capital and dividend minutes
• Contracts and legal: loan agreements and covenant calculations, leases, significant sales contracts, board minutes, lawyers' letters

Lead schedules and tick-marks

A lead schedule summarises one statement line: the accounts that make it up, the prior-year audited balance, the current-year balance, the variance in amount and percentage, and an explanation for every significant movement, with references to the supporting schedules. Auditors build their own, but a client-prepared lead schedule that agrees to the trial balance saves days and shows the auditor where to look.

Take trade and other receivables. The components below total EUR 1,848,000 against EUR 1,544,000 last year, an increase of EUR 304,000 or 19.7%. A good explanation is quantified: of the EUR 320,000 increase in gross receivables, EUR 180,000 is two December invoices to one customer collected on 8 January, and the remaining EUR 140,000 is broadly in line with revenue growth of 9%. The provision rose by EUR 16,000, in line with the larger balance.

Tick-marks record what was checked. Keep a legend on every schedule, for example: T agreed to trial balance, F footed, CF cross-footed, PY agreed to prior-year audited statements, S agreed to supporting schedule. An auditor who sees the client's own tick-marks and legend can re-perform the checks in minutes.

• Trade receivables: current year 1,840,000; prior year 1,520,000
• Allowance for expected credit losses: current year (92,000); prior year (76,000)
• Prepayments: current year 64,000; prior year 58,000
• Other receivables: current year 36,000; prior year 42,000
• Total: current year 1,848,000; prior year 1,544,000; variance 304,000 (19.7%)

Reconciliations and cut-off: where most audit adjustments come from

Every balance sheet account should have a reconciliation to independent evidence, prepared and reviewed before the auditor arrives. The ones auditors rely on most are bank, receivables and payables sub-ledgers to their control accounts, supplier statements for the largest suppliers, inventory to the count, the fixed asset register to the ledger, and the VAT and payroll control accounts. Our guides on bank reconciliation and balance sheet reconciliation cover the method; here the point is timing and evidence.

Cut-off errors are one of the most frequent sources of audit adjustments in trading businesses. Record the last dispatch note and goods received note numbers at the count, review invoices and credit notes issued in the first weeks of the new year, and run a search for unrecorded liabilities: invoices received and payments made after year end that relate to goods or services received before it. Accrue what belongs to the year. Then lock the period, so the audited numbers cannot drift while the audit is in progress; the month-end close checklist guide explains the locking discipline.

What auditors will extract from your ERP

Auditors increasingly ask for data rather than reports. Expect requests for the full general ledger detail for the year (every journal line with account, amount, date, user, posting timestamp, source and description), the trial balance with opening balances, movements and closing balances, sub-ledger listings and ageing, and user access lists. Journal data feeds the journal entry testing required by ISA 240, and access lists support the auditor's work on IT general controls.

Because this is information produced by the entity, the auditor must test that it is complete and accurate before relying on it. Make that easy: show that the journal population rolls forward from opening to closing trial balance, that the ageing report totals agree to the control account, and that no journals are missing from the sequence. Also expect questions on who can post manual journals, who can reopen periods and who can change supplier bank details. Our guide on journal entry testing and fraud red flags explains what auditors do with the data.

Judgement papers: estimates the auditor will challenge

Estimates attract the most audit time because ISA 540 (Revised) requires the auditor to test the method, the data and the assumptions, and to look for management bias. Prepare a short memo for each one: the policy, the method, the data used, the key assumptions with their source, a sensitivity, and how last year's estimate compared with the outcome. That last point is exactly what the auditor's retrospective review will test. Our guides on IFRS 9 expected credit losses and on provisions and contingent liabilities work through two of the most challenged estimates.

• Expected credit losses under IFRS 9: provision matrix by age bucket, historical loss rates and forward-looking adjustment
• Inventory write-downs under IAS 2: slow-moving analysis and post-year-end selling prices
• Impairment under IAS 36: indicators, cash-generating units, forecasts and discount rate
• Provisions under IAS 37: legal cases, warranties and restructuring, with the evidence for each
• Going concern: cash flow forecast covering at least twelve months from the reporting date, with covenant headroom
• Revenue under IFRS 15 and leases under IFRS 16: significant new contracts analysed against the standard
• Subsequent events under IAS 10: a log of events after year end, reviewed up to the signing date

Why audits overrun, and how to prevent it

Fee overruns and late sign-offs have predictable causes. Most are within the finance team's control, and the cheapest fix is a pre-audit review in which someone senior checks the PBC package as if they were the auditor.

• Schedules that do not agree to the final trial balance, or a trial balance that changes after fieldwork starts
• Unreconciled differences carried forward from month to month
• Missing support for large manual journals and year-end adjustments
• Estimates prepared without a documented method, or changed without explanation
• Key staff on leave during fieldwork, with no one else able to answer
• Late discovery of new contracts, acquisitions or disputes that need technical accounting work
• Prior-year management letter points left unresolved

Preparing the audit file in Skyline Nexus ERP

In Skyline Nexus ERP, the Audit Pack (Excel) in Fiscal Authority > Reports produces one workbook with a sheet per report, covering the Chart of Accounts, Trial Balance, Balance Sheet, Profit & Loss, Journal Entries, Journal Lines, General Ledger, Sales, Purchases, Expenses, Payroll, Payments & Receipts, Customer Dues (AR), Supplier Dues (AP), VAT Summary (GL) and Day Book. That covers much of a PBC list's ledger data in one download. The selector works on calendar years, so for a non-calendar year end run the individual reports by date range.

The Trial Balance's Opening / Movement / Closing view gives the roll-forward the auditor tests, AR Aging and AP Aging reports give ageing by contact, and Treasury bank reconciliations can be printed for the cash PBC items. The Audit Trail records who created, approved, posted or reversed each accounting entry, with old and new values.

Locking protects the numbers under audit. A fiscal period can be closed or locked so postings into it are refused, and the Close Fiscal Year action is refused while any journal or voucher in the year is not posted or cancelled, which forces unfinished drafts to be dealt with before the books are handed over.