What is a financial audit? Unlike IRS or sales tax audits, which are considered tax controversy issues, financial statement audits (also called audited financials) are a review of your financial records, usually requested by your bank, board of directors, investors or grantors. It provides a detailed look into the financial soundness of your operations, including your ability to prevent and quickly detect fraud.
If you operate a business, nonprofit, HOA or other organization, and you ‘ve been told you need an audit, you probably have a lot of questions. We’re about to answer them for you.
In this article, we’ll provide:
- An audit readiness checklist that includes the most common documents your auditor will likely request
- How long an audit takes
- How to avoid delays
- What to do before you sign an engagement letter with a CPA audit firm
First, Determine Whether You Need an Audit, a Review or a Compilation
Audits are an assurance service, but there are several other types of assurance services available, not just audits.
Reviews and compilations are not as comprehensive as audits, but they are also assurance services, and may still be enough to meet your requirements.
Three Reasons to Choose a Compilation or Review Instead of an Audit
- Compilations and reviews cost less than audits. There is no benefit to overpaying for an audit if you don’t need one.
- Audits require 4-8 times the prep work that a compilation does. If a compilation or review is enough to satisfy your bank or your state's nonprofit threshold (or whoever requested the audit from you,) you don't need to prepare for an audit at all.
- Someone may ask you for an audit, when what you really need is an assurance service. Compilations and reviews are less expensive, less time-consuming assurance services. In many cases, a compilation or review is all you need. Ask the person requesting an audit to put the request in writing before you start your audit preparation.
Do You Need a PCAOB Audit?
Most private companies and nonprofits don’t need a Public Company Accounting Oversight Board (PCAOB) audit. But you may need an audit completed by a PCAOB-registered CPA audit firm.
PCAOB audits are usually performed for SEC-registered public companies and broker-dealers. If someone says you need a "PCAOB audit," you may just need a financial statement audit completed by a CPA audit firm registered with the PCAOB, not the PCAOB audit standard itself. The difference between these two audit types can save you thousands of dollars.
Your Audit Preparation Timeline: How Long Do Audits Take?
Most financial statement audits take 6-8 weeks to complete for small or mid-sized businesses or nonprofits. But the exact timeframe depends on you — how quickly you respond to requests from your auditor, and how clean your books are.
That’s where solid audit preparation can save you a lot of time and money. Your audit doesn’t begin until your books are clean, even if that means having a bookkeeper clean them up before your auditor begins their work.
Why Some Audits Close in 2 Weeks and Others Take 3 Months
Sometimes, we can tell during the pre-audit process that your audit might take longer to complete, even if your business is relatively small.
Delays happen if:
- Your books aren’t up-to-date. All of your bank, credit card and loan accounts need to be reconciled before your audit begins. You also need a clean trial balance, and your supporting documentation should be organized by transaction. The audit can’t start until your books are clean.
- It takes a long time for you to locate financial records, or respond to our follow-up requests. This can delay your audit report by days, or even weeks.
With proper audit preparation, you’ll start the audit with clean books. If you respond quickly to your auditor’s requests, your audit could go quickly. I’ve closed audits in as little as 2 weeks for clients who are prepared and responsive. But without good audit prep and timely responses, audits can drag on for 3 months, even for smaller companies.
When to Start Preparing for Your Audit — Based on Your Deadline
Audit preparedness begins with knowing your deadline and working backwards from that due date.
- Start with your deadline.
- Count back about 2 weeks. That’s how long it takes for your audit report to be prepared once fieldwork is done. Fieldwork takes 4–8 weeks.
- Be realistic about the state of your books. Are they complete? Have you reconciled all of your credit card, bank and loan accounts? If not, you may need bookkeeping cleanup time ranging from 2 weeks to 2 months.
- If your bookkeeping involves a box of receipts and/or unreconciled statements, expect the cleanup phase to take longer. You can’t start your audit with messy books. That could lead to a negative opinion on your audit, and reflect poorly on your organization. We don’t want that for you. We won’t start your audit until your books are ready.
Practical rule: if your audit deadline is in 90 days, and your books are NOT current, start your audit preparation this week.
Your Audit Readiness Checklist, Part One: Financial Records
What documents do auditors ask for? Audit terminology can be confusing. If your auditor asks for supporting documentation for material transactions, all they probably need is a record of your purchases.
Example: If you buy a chair for $100, your auditor needs a copy of the invoice or receipt for that.
If your auditor requests “verification documents” for your transactions, they’re asking for invoices, receipts, or other background information you have to show how/why you spent or received money.
If they question a transaction related to an outstanding check or invoice, they need details on that check or invoice — the check or invoice number, the amount, who it’s for, what it’s for, etc. If you ever get a request you don’t understand, don’t hesitate to ask for an example of what’s needed.
The following audit readiness checklist includes the types of financial records auditors request most often. We call these PBC records (Prepared by Client). The sooner you can provide these, the sooner your audit can begin.
Your Financial Statements and Trial Balance
- Your year-end trial balance (locked, so it can’t be changed)
- Your draft financial statements (if you produce your own)
- Your general ledger detail for the time period covered by the audit
- Your audited financials from the year before (if this isn’t your first audit)
Your Bank Statements and Cash Records
- Your bank statements for every bank account you used for every month of the audit period
- Your year-end bank reconciliations (proof you reconciled your monthly statements)
- A list of any outstanding checks you issued that haven’t cleared
Your Revenue and Accounts Receivable Records
- Your sales/revenue details or report
- Your year-end accounts receivable aging report showing unpaid customer balances and outstanding invoices
- Top customer detail (auditors will select a sample of your customers and ask for the underlying invoice and contract for them)
- Sales/grant contracts above the materiality threshold
Your Expenses and Accounts Payable Records
- Your year-end accounts payable aging report showing unpaid vendor invoices
- Vendor invoices for the expenses your auditor selects
- Major contracts (leases, service agreements, and recurring vendor agreements)
- Your payroll register and IRS Form 941s/W-3 reconciliation
Your Fixed Assets, Debt and Equity
- Fixed asset roll-forward (additions, disposals, and depreciation)
- Your invoices for material asset additions (assets you purchased during the audit period)
- Your loan agreements, amortization schedules, and year-end balances, confirmed with lenders
- Your equity activity (capital contributions, distributions, stock issuances)
Your Governance, Insurance, Tax Returns, Policies and Procedures
- A copy of board meeting minutes for the time period covered in the audit
- A copy of all of your Insurance policies for the audit period
- A copy of the tax returns you filed during the audit period
- Your internal control policy and procedures manual (more on this in the next section)
Your Audit Readiness Checklist, Part Two: Internal Controls
Internal controls show what your policies are and how you document them. When we perform an audit, we’re looking to see what your policy is and how well you follow it.
Does your policy actually work? Or is it just words on paper?
Your auditor will test your internal control policies to see how well they work. If they’re mostly verbal, write them down before your audit fieldwork begins. Your policies don’t have to be perfect, but they do need to be documented and consistently followed. It’s not enough to have a policy. You want to have evidence of how well you followed your own policy.
How to Prepare for an External Audit of Your Internal Controls:
Prepare a list of written internal control procedures. Include documentation to prove you’re following them.
This includes:
- Segregation of duties - describe each person’s role in your organization
- A description of your approval thresholds and requirements for purchases
- A description of your account reconciliation procedures
- How you control access to your systems
- A list of people who perform specific controls
- Evidence your controls were performed during the audit period (including signed approvals, reconciliation sign-offs, system logs, etc.)
What If You’re Not Ready for Your Audit? How to Prepare
What if your books are too messy to decipher? A good auditor will help you clean them up before your audit begins. If they don’t, they might have to record a negative opinion of your financial records, and no one wants that.
The goal is an unqualified opinion. If your audit contains a qualified opinion, that means your auditor is saying your records are generally accurate and fair, except for certain areas where you’re missing information or you didn’t follow proper accounting standards.
That type of opinion could discourage people from working with you. In fact, a negative opinion is worse than no audit at all. People request audits so they can see good news about you, not bad. Before your audit begins, your auditor will review your books to assess the damage. If needed, they’ll request bookkeeping services from either your bookkeeper or their own bookkeeping team. The audit won’t begin until your books are clean and audit-ready.
5 Signs You May Need to Clean Up Your Books Before Your Audit:
- You haven’t reconciled your bank accounts each month
- You booked a significant number of journal entries without supporting documentation (invoices, receipts, etc.)
- Your year-over-year (YoY) balance doesn’t match your trial balance and/or your prior year audited financials
- You don’t have a fixed asset register, or you have one you didn’t reconcile with your general ledger
- You did your revenue recognition on a cash basis when accrual was required
How to Make Your Audit Go Faster: Audit Planning Checklist
What to do in the two weeks before your engagement with a CPA audit firm begins:
- Designate a single internal point of contact to work with your auditor. Multiple cooks slow everything down. You want one person to work with the auditor, someone responsive who won’t leave the auditor waiting forever for information.
- Ask your contact person to respond to all requests within 48 hours. Your response time is the difference between a 4-week audit and a 12-week audit.
- Create a shared folder (or use your auditor's portal) containing your PBC (Prepared by Client) financial records, and organize it by category, before fieldwork starts. You don’t want your auditor to waste time tracking down basic documents. Make them easy to find.
- Review your trial balance — identify anything that looks strange, looks wrong for the time period, any unsupported journal entries, etc. It’s better if you spot these issues and investigate before your auditor finds them.
- Get your meeting minutes signed and filed. This is one of the most commonly missed items, and it takes 10 minutes to fix.
- Confirm your account reconciliations were actually completed — not just marked “reconciled" in your software. Open one bank reconciliation and confirm it aligns with the month before and the month after.
Audit Preparation Checklist for Different Audit Types
Audit preparation varies based on the specific type of audit you need. Following are lists that show you what to expect.
How to Prepare for a Financial Statement Audit: Private Companies
To prepare for a financial statement audit, you need the following financial records:
- Your financial statements and trial balance
- Your bank statements and cash records
- Revenue and accounts receivable reports
- Your expenses and accounts payable reports
- Fixed assets, debt and equity
- Your governance, insurance, tax returns, policies and procedures
How to Prepare for a Nonprofit Audit
To prepare for a nonprofit audit, you need everything listed above,
PLUS
- All of your grant agreements
- Restricted vs. unrestricted fund tracking
- The Form 990 you filed with the IRS
- Donor records for any of the contributions your auditor wants to review
- Your functional expense allocation (how you classify your nonprofit’s expenses)
How to Prepare for a Single Audit (Non-federal Entities that Spend Federal Funds)
To prepare for single audits, you need everything listed above,
PLUS
- The Schedule of Expenditures of Federal Awards (SEFA)
- Grant agreements for all of your federal awards
- Compliance documentation detailing the requirements for each federal program
Not sure if you’re required to complete a single audit? If your organization is a non-federal entity or nonprofit that spent $1,000,000 or more in federal award funds within a fiscal year beginning on or after October 1, 2024, you may be required to complete a single audit, even if you have to total expenditures from multiple federal grants to reach the $1 million threshold. This amount recently increased under the Uniform Guidance Update.
For fiscal years prior to October 1, 2024, the threshold amount was $750,000.
How to Prepare for a 401(k) Plan Audit
Preparing for a 401(k) audit is different than preparing for financial statement audits, nonprofit audits, or single audits. 401(k) audits focus solely on your organization’s 401(k) retirement plan, not your company’s finances as a whole.
401(k) plans are governed by the IRS and US Department of Labor. If you are subject to an audit of your company 401(k) plan, an Employee Plans (EP) examiner will review your plan and identify any areas of noncompliance that could jeopardize your 401(k) plan’s qualified (retirement plan) status with the IRS.
How to Prepare for Internal Audits vs. External Audits
Internal audits are usually done when you want to evaluate the quality of your own internal processes and controls to improve efficiency, productivity, or both. You can do internal audits yourself or hire someone to do the internal audit for you.
External audits are performed by objective third parties, usually CPA audit firms. These include: financial statement audits (also called regular audits or audited financials), single audits, HOA audits and Yellow Book audits.
Audit preparation for both internal and external audits is similar in that both review your processes and evaluate your internal controls. But external audits are usually requested by lenders, grantors, investors or regulators. Your state law may require you to complete external audits each year.
Internal audits aren’t required by regulators. You determine what you want to review, how you use the results, and who you share the results with.
Audit Preparation and Readiness FAQs
How long does it take to prepare for an audit?
How long it takes to prepare for an audit largely depends on how clean your books are. If you’ve reconciled your accounts each month and have kept good records that are easy to access (receipts in a shoe box don’t count), you could be prepared to begin your audit in about 2 weeks.
If you need bookkeeping services to clean up your books before your auditor takes over, that can add several weeks or even months to your timeline. Once the engagement begins, and your auditor starts working, the process lasts about 6-8 weeks. The faster you respond to their follow-up requests for information, the sooner you can be done with your audit.
What documents do auditors ask for first?
Auditors ask for prior-year audited financials, trial balances, year-end bank reconciliations, and AR/AP aging reports. The rest of your audit is based on what auditors learn from reviewing these initial records.
What's the most common reason audits take longer than expected?
Audits take longer than expected if you don’t respond to your auditor’s requests for follow-up info. This determines your audit timeline, even more than the size of your company. Your auditor can complete an audit quickly if you respond within 48 hours to their requests for information.
Do I need a PCAOB-registered auditor?
PCAOB-registered auditors are required for broker-dealers, companies registered with the SEC, or if you’re subject to a regulation that specifically requires PCAOB registration. Most private companies and nonprofits don't need PCAOB-registered auditors.
Clarity Tax Group is PCAOB-registered and peer-reviewed every 18 months by a separate CPA audit firm. For most businesses, those qualifications are enough to satisfy the requirements of the person requesting the audit.
Can I switch auditors mid-engagement?
You can switch auditors mid-engagement, but it could cost you more. Your new CPA audit firm will have to essentially start over if you switch. It’s better to vet your auditor before signing an engagement letter.
What does "audit-ready books" actually mean?
For your books to be considered audit-ready, all of your credit card, bank and loan accounts should have been reconciled, you completed your revenue recognition on an accrual basis if you were required to, all of your supporting documentation is organized and easy to access, and you have a clean trial balance, with no unexplained balances.
Now you know how to prepare for your audit, and what to expect from your auditor. You have a list of financial records to collect and categorize, and you understand how important it is to start your audit with clean books.
Establishing a single point of contact will greatly simplify your audit preparation and save you a lot of headaches. Respond to your auditor’s requests within 48 hours to keep your audit going smoothly and have it closed quickly. Your quick responses can turn a 12-week process into a 4-week project.
Not sure about the condition of your books? A quick call can help you cut weeks off of your audit timeline.