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Practical Advice for an Initial External Audit

Tim Williams's Profile

Preparing For An External Audit

The Board of Directors at my company has requested a comprehensive external audit of our company. Does anyone have any tips for preparation? Any free resources you can share for common audit findings? As background, we are a technology company and our revenues are approaching $10 MM.


Jeff Taylor
Title: CFO
Company: Communications Co.
(CFO, Communications Co.) |

Do an equity roll forward from day one and make sure your records are super clean: all docs signed and present including employee offer letters, option agreements, valuations, corporate charter, fund-raisings, etc.. The equity roll forward is one area where I have spent far more time than I would have wanted and it will stop your audit dead in its tracks. Once you have that, a big chunk of your balance sheet will be clear for the audit.

Do a 'from inception' P&L review. For a $10M company it won't be as bad as you think. Do a few months at a sitting and have your Controller there. Make sure every line item is in its right account. Track down anything that looks fishy. Ask your current or new auditor for help with questions (e.g. rev rec issues, leases, etc.) you are not certain of. This familiarizes you with your financials and cleans up simple things that they will find later.

Ask them for their audit process docs immediately. This will tell you what they will be looking at, how far back, and what you will need to produce for them. And then just dive in. It's a process...

Does anyone have example audit procedures they could throw in?

(Agent, JKS Solutions, Inc.) |

For a technology company and using big 4 you should use PWC. Value wise you should look for a regional firm with experience with technology companies. There are good ones and bad ones and happy to provide a list if you tell me what city you live in.

Post above is spot on. Focus on revenue recognition, equity being correctly recorded including warrants and stock options if applicable. Then for expenses focus on cut off. Do your own unrecorded liability testing to ensure cut off is accurate. If possible you may be better suited to get a balance sheet audit at 12/31/10. This will mean you are well placed for full audit of income statement in 2011 and keep your costs down in year one.

Eric Eaton
Title: CEO
Company: Egyptian Builders Consulting Group, LLC
(CEO, Egyptian Builders Consulting Group, LLC) |

There are a few things you can do. Would be happy to discuss with you. A few questions/observations/things to consideration:
1. What's the strength of the internal staff? Do you have background/horses to do an audit?
2. Has the firm been selected. If Private Equity is involved, they will probably push for a "Big 4" firm; especially if you believe an IPO is in your future.
3. Pre-Audit prep is critical. Have the firm give a prep list. Also, you can invest in having a small firm assist you in all the prep steps.

J. Ed Neufer CPA
Title: Consultant
(Consultant, CONSULTING) |

I've helped entities prepare for audit many times. Among other things, you should have balance sheet reconciliations for all "material" accounts, all accounts if possible (to eliminate any "junk" on the balance sheet). All the reconciliations should tie out to the trial balance and/or the rolled up financial statements. The TB needs to roll up to major accounts and major accounts need to roll to F/S. Any inter-companies should be eliminated. There should be supporting listings that tie out to the recs, such as A/R aging, A/P, any inventory listings, etc. Electronic is great and I'm sure they'll take paper if nothing else. MAJOR listings should be generated at B/S date, especially those that cannot be retrieved later! They'll want copies of all loan agreements and all other major agreements like equity ones, they'll want Board minutes, organization docs, etc. They'll probably do some analytical reviews of the I/S. Financial statements and some, if not all, footnote help would be very much appreciated by them and keep cost down. Keep in mind there needs to be support for all footnotes, cash flow items, etc. I would also talk with auditors about potential impending "issues" such as impaired assets, A/R collect-ability, low reserves (or even too high), questionable asset capitalization, debt covenants, tech. FASBs, revenue recognition, etc. Those are just some ideas not knowing your situation very well. This is something my firm gladly does for a living at reasonable billing rates, though!

Paul Weinberg
Title: President
Company: The CPA Exchange, Inc.
(President , The CPA Exchange, Inc. ) |

First find "the right" Audit Firm for your company and culture. Then meet with them to determine the best course of action so you are not wasting valuable time. While the Audit Firm cannot make management decisions for you they can advise you as to what you are going to need and how to best prepare. The key is finding the right firm - what city you are in is irrelevant - more it is what business you are in and what your culture is.

Topic Expert
Sunil Thukral
Title: Controller/Technical Accounting Advisory..
Company: Consultant
(Controller/Technical Accounting Advisory/ SEC Reporting, Consultant) |

All are good suggestions here. Here are my two cents here.....

1. Make sure you have support for all the numbers in the financials and they tie to your books. Keep all the support for the different numbers in separate tabs so it is easy to review.

2. If there are some complex accounting issues, make sure you have some accounting memo's to document your position - usually in an technology company you will have revenue recognition issues (i.e. issue relating to amount and timing). So a accounting memo that makes reference to U.S. GAAP, documenting your position will most certainly help.

3. Obtain and apply the disclosure checklist. This will ensure that you are not missing any items. In the recent years there has been more focus on disclosing the fair value.

If you follow the above, you can keep your audit costs low as it will be a quick audit.

All the best for the Holiday Season!

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