13 Things Your Auditor Will Need For An Initial Audit

We often are engaged to do initial audits of companies preparing to go public .  Many have limited operating histories and have never been through an audit.  Your auditors are going to need a lot of information to complete the audit and I can tell you we appreciate it when our clients have everything together.

What should you have ready?  Here is the list we give to our new clients:

1 - General ledger

Most new companies use QuickBooks.  You can easily export your general ledger to Excel or send a backup copy of your QuickBooks to the auditor.  The general ledger is going to give your auditor a clear indication of the amount of activity they need to audit.

2 - Trial balance

Auditors love your trial balance.  All of the numbers in your financial statements are traced back to the trial balance and it is a key document for your auditor.  This too will come from QuickBooks or your accounting software.  We strongly prefer to receive it in Excel as we can copy it directly into the trial balance part of our electronic workpaper software.  Oh - turn on the account number feature too.

3 - Copies of  loans, leases and material contracts

Accounting standards require disclosure of all loans, leases and in some cases material contracts.  Your auditor needs copies to make sure your disclosures are complete and accurate.  For example, standards require disclosure by year of your minimum required lease payments for the next five years and the minimum expected sublease payments, if any.  Lease expense for all years presented must also be disclosed, and the lease is a key piece for testing that amount. 

Material contracts may include, but are not limited, to long-term agreements with suppliers or customers, officer employment contracts, and buy-sell agreements.

4 - Loan statements

Just about every company going public has some kind of debt.  Auditors are required to confirm all debt with the creditors.  Providing a current loan statement to your auditor will make the confirmation process easier, as it will have current information and, perhaps most importantly, a current mailing address.

5 - Listing of all new fixed asset purchases with invoices

This is a given in any audit.  If you had significant fixed asset purchases in years prior to the initial periods under audit, you should look for those invoices too.

6 - Depreciation schedule

If you have never had financial statements prepared in accordance with generally accepted accounting principles ("GAAP") but have filed tax returns, your depreciation schedules are most likely on a tax basis only.  Many tax methods are acceptable under GAAP - 7 years and 200% double declining balance is a common tax method for equipment and is often reasonable for GAAP.  However, you are not allowed to take Section 179 bonus depreciation and other basis reductions sometimes allowed under the tax rules in a GAAP statement.  If your depreciation schedules are in a good fixed asset software program, it is usually pretty easy to compute GAAP depreciation.

7 - Board minutes for all years under audit and through the current date

Auditors are required to read all board of director meetings minutes, as these often contain information related to the financial statements.  You will also be required to include a statement in your representation letter to the auditor at the conclusion of the audit that you have provided them will all minutes, so get them together ahead of time.

8 - Payroll reports, if any

Not all new businesses have payroll - some don't even have employees.  But if you do, your auditors will want to see them for testing of wage expense.  These will also help the auditor test for any unrecorded payroll tax liabilities.

9 - Stock Subscription and stock option agreements

Many new businesses have agreements in place to issue stock to key investors, existing stockholders and employees.  Many often have option agreements in all place.  Your auditor will need to examine these documents to test for completeness of disclosures and to test the determination of stock option expense.

10 - Names and contact information for any attorneys used and stock transfer agent

Your auditor will have you send letters to your attorneys asking for a description of services provided and issues they are representing for you.  Disclosures are required (and the rules are changing) on disclosure of contingencies relating to legal actions and this letter is key evidence for your auditor.  The auditor is also required to obtain information from your stock transfer agent.

11 - Copies of merger agreements (completed or pending)

We often see companies go public through a reverse merger, or perhaps they have completed a merger through which they started their operations.  Either way, these agreements have a major impact on accounting and your financial statement presentation.

12 - Articles of incorporation and by-laws

All corporations (private or public) must disclose the number of shares authorized, issued, and outstanding.  Part of this information comes from your articles of incorporation.  By-laws may have information on them that also must be disclosed.

13 - Listing of all bank accounts, including bank name, account number and authorized signers

Your auditor must confirm the bank balance as of the balance sheet date.  Fortunately, many banks now participate in an online service that is simplifying this process. 

 

This blog

Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies. Joel writes observations on different matters and especially on working with and using LinkedIn. He thinks he has a sense of humor.

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