Focus Areas for Financial Statement Audit Preparation
Kyle Geers
January 19, 2024
For those who have experienced financial statement audits, the process can feel overwhelming with extensive request lists and tight deadlines.
Auditors prioritize areas with elevated risk—those involving substantial balances, critical financial metrics, or intricate US GAAP applications. Effective audit preparation requires strategic prioritization of these key focus areas.
Revenue
Unless your company is pre-revenue, Revenue typically receives top audit priority. As a significant business metric that varies by product and involves complex GAAP considerations, preparation requires:
ASC 606 Policy Memo
Companies must follow the revised ASC 606 standard. Having an accounting policy that outlines each revenue stream and/or customer contract type under ASC 606 is critical to ensure revenue is recognized properly.
Revenue Scoping
Document how revenues separate by entity, product type, or customer type to prevent auditor confusion and higher fees.
Revenue Details and Support
Provide detailed breakdowns by contract, with accessible supporting documentation including contracts, invoices, payments, and delivery proof.
Acquisitions
Acquired businesses or assets receive focused audit attention. Requirements include:
Acquisition Technical Memo
Document transaction details and accounting evaluation per US GAAP standards.
Valuation/Purchase Price Allocation Report
Assets and liabilities require fair value recording at acquisition date, including newly identified intangibles.
Closing Balance Sheet
Provide the acquired entity’s supportable balance sheet with detailed reconciliations for key items.
Debt/Equity
For external funding sources, prepare:
Technical Memo
Address US GAAP classification and transaction cost treatment for each major funding instrument.
Funding Agreements
Provide underlying agreements for auditor review of selected instruments.
Recent Accounting Standards
Two significant recent updates require attention:
Leases (ASC 842)
Operating leases now require balance sheet recording. Early compliance preparation is essential.
Credit Losses (ASC 326)
Beginning FY2023 for nonpublic companies, new guidance addresses credit risk in assets and liabilities, affecting reserves for receivables and similar items.
Reconciliations/Support
Auditors typically select accounts for testing. Prepare year-end reconciliations for:
Assets
Document large or material accounts like accounts receivable, fixed assets, and significant prepaid amounts.
Liabilities
Support accounts payable, payroll accruals, and deferred revenue items.
Conclusion
Audit preparation involves a combination of technical accounting knowledge and information gathering. A divide-and-conquer approach prevents overwhelming single individuals or small teams. This may involve other departments or external specialists for complex valuations and technical accounting matters. Professional assistance can significantly streamline preparation and prevent costly delays.
Need Help Preparing for Your Audit?
Audit preparation involves a combination of technical accounting knowledge and information gathering. Let Zeroed-In help you get ready.
Schedule a Discovery Call
Related Articles
Want to sell or get funded? Here’s the first thing you should do.
Learn why cleaning up your financial statements is the first step before pursuing M&A or funding, and how US GAAP compliance impacts your transaction success.
Kyle GeersWhen Should You Start Preparing for an Audit? (Hint: It's Earlier Than You Think)
A practical guide for startup CFOs on audit preparation timelines, the four phases of audit readiness, and why starting early saves time, money, and credibility.
Kyle GeersWhat a Series B Finance Team Should Actually Look Like
A practical guide to structuring your startup finance team at Series B — balancing permanent hires with fractional and outsourced expertise.
John Ikosipentarhos