Unlike most of Cathy Keeps Books, this page is not layperson-friendly. Making audit prep friendly would take a lot longer than this! But remember, auditors are not your enemy. Rather, they are invaluable resources to the full-charge bookkeeper and will usually answer questions free of charge outside of the audit period. Auditors live by GAAP, and it never hurts to follow their example.
Audit prep often comes in the form of a PBC request list. PBC stands for “prepared by client,” and if you have been keeping monthly workpapers you’ll have most of the ingredients for these items already. One thing to know is that a PBC list is seldom arranged in the order that is most useful to you. It proceeds by auditor logic, which is not the same thing as bookkeeper logic. Therefore, let’s rearrange.
0. Equity tie-out
I’ve given this a zero because it’s probably not actually on the PBC list. But it’s crucial if you wish to avoid audit complications and auditors with perturbed expressions (never a good thing). Equity has to roll, meaning that the closing equity on books for the previous year (PY) must match the equity the auditors are starting with in the current year (CY). In practice—and to be very reductive—you can check this by comparing the total net assets on your PY balance sheet with the closing equity on your PY audited financial statements.
If there were adjusting entries for the PY and you haven’t entered them yet, do so now! Otherwise, equity certainly won’t roll.
1. Adjustments that change your books
After a bunch of organizational info you’re probably not responsible for (board minutes, bylaws, etc.), the first thing you’ll see on a PBC list is often “trial balance.” In modern terms—auditors have their own language, too—this means your QuickBooks or other accounting software file. It comes first, but it’s actually the last thing you send. Before that, you have to make all the changes that your year close requires. That may involve the following schedules and adjustments:
- Accrued payroll, vacation, and/or expenses
- Deferred revenue
- Payroll reconciliation
- Prepaid expense
- Petty cash reconciliation
- Restricted funds
- Fixed assets and depreciation
- Payroll allocation
- Overhead allocation (or some kind of cost allocation plan for the functional expense statement)
- In-kind donations
2. Analytical reports
These are based on information from your accounting software, but you’ll have to add some analysis. For instance:
- A P&L flux; that is, a comparison of this year’s P&L with last years, with annotations by you explaining variances over a certain threshhold (often, 15% and a dollar figure)
- A balance sheet flux
- Significant expense analysis
- Subsequent events (any significant transaction that occurred between the end of the fiscal year and now)
- Related party transactions
3. Reports pulled from your accounting software
If your auditors are going to have direct access to your books, whether through an accountant’s copy or via QuickBooks Online or similar software, they can pull most of these reports themselves. However, they’ll probably still ask for them, and it’s good form to give an auditor what she asks for. (I have clients who hold it as an article of faith never to give auditors anything they don’t ask for, but that’s up to you.) These items may include:
- Profit & loss, or budget to actual
- Balance sheet
- Accounts receivable aging
- Accounts payable aging
- Repair & maintenance expense detail
- Consulting & professional fees detail
This group of requests will likely include payroll registers, payroll tax returns, W-2s, 1099s, bank reconciliations, and bank statements. A word of caution: If anything you do in step 1 affects cash for the last month of the year, your bank reconciliation will have to be redone. Even if the bottom line for the month is unchanged, the auditors will see that the uncleared totals have changed, because they’re good like that. That’s why this step is number 4 instead of number 1.
5. Information for the 990
At a larger client, it’s easy to forget this part. Sometimes the auditors won’t ask for it until the bulk of the audit is over, and sometimes they send it with the beginning but in a sort of postscript that you’ll be tempted to overlook. Avoid unpleasant surprises and remember you’ll need to provide:
- Wage & benefit information for the five highest paid employees (this includes any kind of employee-benefit expense: health insurance, retirement matching, even parking spaces)
- The five highest-paid contractors, with total paid
- List of gifts and grants over $5,000, with donor information
- General tax questions
Long as it is, this is by no means a complete list of everything auditors ask for. But these are the basics of the accounting side. Draw up a workplan for yourself and make sure you’ve scheduled enough time for all the tasks. And remember, everything’s going to be okay!