How To Navigate Your First Financial Audit | Ep 6

📊 How to Prepare for Your First Financial Audit | Full Send CFO

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📢 Facing your first financial audit? It can be daunting, but with the right preparation, you can navigate it smoothly. In this episode, we cover:
✔️ What triggers a financial audit and why companies need one
✔️ The CFO playbook for audit preparation
✔️ How to ensure your financials are audit-ready and avoid common pitfalls

⏱️ Chapters

00:00 - Introduction: Preparing for Your First Audit

00:56 - What is a Financial Audit?

01:44 - Common Reasons Businesses Get Audited

03:22 - CFO Checklist: Steps to Prepare for an Audit

06:08 - Ensuring Your Financials Are GAAP-Compliant

07:55 - Common Audit Delays & How to Avoid Them

09:45 - The Audit Process Explained: Planning, Fieldwork & Review

11:48 - Final Thoughts: How to Make Your Audit Painless

✅ Key Takeaways:
✔️ Financial audits aren’t IRS audits—they verify financial accuracy for investors & lenders.
✔️ Start preparing early—ensure financials are GAAP-compliant well before an audit is required.
✔️ Avoid common mistakes—messy records & missing documentation can delay the process.
✔️ A smooth audit requires clear financial policies & reconciliations—track everything!
✔️ 85% of financial audits result in a clean opinion—be in that group with proper preparation.

📢 Have you gone through a financial audit before? What was your biggest challenge? Comment below!

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Full Send | Accounting & Data

LinkedIn: Roman Villard, CPA
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Transcript

Over my career, I've had the opportunity to audit about a hundred different companies, probably more, and sit on the other side of a financial audit through the lens of a company undergoing a first audit. And it can be daunting. It can be really scary trying to figure out how to get through your first audit without any issues.

There's a lot that goes into it. And so today we're going to walk through how to prepare for your first audit. What are some of the triggers that might

cause you to have an audit and how do we get through it with relative ease and. Creating a painless experience for everybody involved, not just you and your team, but also for the auditors.

I've had the opportunity to work with so many founders who have, Come upon a circumstance where they're required to be audited, not an IRS audit, but a financial audit. And

there are many things that those businesses have in common We're going to walk through the CFO playbook on preparing for your first audit.

So first, what is an audit? It is a formal exercise taken on by independent external auditors in order to ensure the accuracy, completeness, and compliance of your financial statements. Focusing on the balance sheet, the profit and loss, and And the statement of cash flows. Now, these are

independently verified in order to meet generally accepted accounting principles or GAAP. So you must be not only on an accrual basis of accounting, but on a GAAP basis of accounting.

That's one of the biggest challenges that we typically see is having. Businesses go from a cash basis or maybe a hybrid or accrual basis, moving to full GAAP compliance. There's a lot that's involved in order to prepare for that first audit.

So what causes an audit? Typically it could be an investor or lender requirement as part of the capital that they're deploying into the company. They say, here's a million bucks. Here's 10 million bucks. We're going to require you to undergo a financial audit every single year until we see our capital back or for.

An indefinite period of time.

It could be also required through the merger and acquisition process. Hey, in order to acquire this business, we are going to require for it to be audited in order to verify the financial position so that we can make an intelligent decision for the investment. Lastly, a financial audit is required for an IPO.

As you move towards IPO, potentially testing public markets, you have to be Audit compliant. That said, there are many steps that should be taken before that you should be years GAAP compliance, and probably several audits under your belt before you even get close to that process.

So first, how do we prepare for an audit? What is the CFO checklist to prepare for the audit? First, we need to make sure that the books are completely cleaned up and up to date. This seems like square one, which it is, but you need to make sure that you've got a clear, Record of your financial accounting for the last 12 months.

And I would actually expand that to the last 24 months, because in a first year audit, you are always required to undergo an opening balance sheet audit, which means that the auditors need to go in and verify the balances at the start of the period that's being audited. So for instance, if your audit period is December 31st, 2024, you will need to undergo an audit for January 1st, 2024.

First, 2024 in order to validate the opening balances for your audit. That would be an opening balance sheet audit. and the auditors walk through a very similar process as they do in the year end audit, but it is focused on the balance sheet. So you have to prepare for two different audits in your first year audit.

That's something that many businesses aren't. Entirely aware of that. They actually have to go back in time even further than they anticipated to become audit ready. So making sure that your financial records are in order from 24 months back at a minimum is going to be essential to starting the audit process off on a good foot.

What we're looking for here in that preparation for clean books is really scrubbing the balance sheet, making sure that all of your accounts are reconciled. You have supporting documentation for all of the big ticket items on your balance sheet and ensuring that things like prepaid expenses, deferred revenue, accrued liabilities, things like that have a clear balance reconciliation to support the balance that is represented on the balance sheet at the opening balance sheet date and at the year end.

Oftentimes what's happening during that process are cutoff procedures. So a cutoff procedure could be, I received an invoice for services in the month of December, but that invoice receipt was received after year end. So we need to ensure that for the period that the services were rendered, according to GAAP, they are being recognized in that period, even if the invoice was received after the period end.

So there are procedures that are being taken by the auditors in order to catch things like that to ensure that the accounting implications are recorded in the correct period.

Another thing that can be often overlooked is that as you're walking through the cleanup process and preparing for that first year audit, you really need to ensure that revenue recognition and expense categorization is handled correctly. And what I mean by that is that ASC 606 is the guide that auditors use to determine whether or not your revenue was recognized appropriately.

So they're going to walk through the contracts that you have with your customers, identify payment obligations, and align the revenue with those payment obligations per the contract. So you should have a process documented that allows you to easily and clearly capture how and when revenue is being recognized.

Now, from an expense categorization standpoint, from a bare minimum, let's make sure that Personal expenses are not on the books of the business. However, there are other expense classifications that you want to ensure consistent things like allocations up to cost of goods sold and or R and D expenses.

We want to make sure that there's consistency in the behavior of categorizing those transactions. And it can take some time to go back in time in order to ensure that those are done correctly.

According to the AICPA, 60 percent of first time audits are delayed because of missing source documentation. You do not want to be in a position where you're delaying your auditor's progress because you don't have the information required for them to complete the audit. Don't be one of the 60%.

Other common issues that slow down audits are messy or incomplete financial records. It could be unclear revenue recognition, maybe mixing those personal and business expenses, and generally just a lack of supporting documentation. During my eight years of auditing companies, I would constantly be asking for information from the clients.

Hey, where's this supporting invoice? Where's the supporting bill so that I can validate what's occurring on the balance sheet. Now. As an auditor, I knew that I had to do that. I had to get my job done, but I knew that on the receiving end, ah, it was just an additional thing to their day to day work that just caused a lot of, to some degree, friction.

And I didn't want to cause friction. I wanted to be helpful and try to get through the audit process as quickly as feasibly possible because nobody likes going through an audit. That said, The auditors are just trying to get their job. They want to get it done quickly. And so give them a little bit of grace when they're continuing to ask you for documents, that's just piling up.

If you can have an outsourced team, or if you can have another team member on your team, be in charge of facilitating those requests, you can ensure that you've got a pretty good rhythm between you and the auditors to make sure that you're going to complete this audit on time.

So what can you expect during your first year audit? There's going to be really three steps that occur. One, there's the planning and risk assessment side. So the auditors are going to come in, they're asked, they're going to ask you all about your internal controls, your processes, your policies, your procedures, as it relates to your accounting department.

Now, if you don't have that documented ahead of your first year audit is when you should start to be getting that in line. And ideally, you should be establishing your company with a foundation of really quality accounting processes so that as you grow and scale, you can be prepared for this next inflection point should it come after the planning and risk assessment side, we're going to walk through fieldwork and testing.

So fieldwork is when the accounting team, the audit team is going to be making requests of you in order to support the balances that are on your balance sheet and on your PNL. And the whole intent here is to identify material misstatements. So there's a calculation that the auditors are performing to identify what is material to this business.

So for a 10 million business, a 20 expense is not going to be considered for audit purposes. Now you want to make sure you get it correct. However, there's always a lens of materiality that auditors are walking through. That said, it's a little bit different for each business based on the business model.

Once the fieldwork is completed, then the auditors are walking through a final review. So they're going through the manager review, the partner review, and then the issuing the audit report. What we're aiming for in the issued report from the auditors is an unqualified audit. opinion An unqualified opinion effectively states that we believe that your books are free of material misstatement.

Thus, external stakeholders can rely on these numbers for evaluating an investment. So every company that you invest in on the public market has a formalized unqualified opinion. Most of them have an unqualified opinion that states you can rely on these figures. The intent of the audit is not to identify fraud.

That's something that commonly happens. So, an IRS audit is very different than a financial audit. An IRS audit may actually, in fact, be looking for fraud, whereas a financial audit will be looking to ensure material accuracy of the financial statements.

Now, according to PWC, 85 percent of financial audits contain an unqualified or clean opinion. That's good news. Now, the time it takes to get to that unqualified opinion varies drastically based on the preparedness of the business that's being audited.

So how do we start preparing for an audit? We got to start preparing early. Let's start years before we are Going to be audited. Even if you are not sure if it's ever going to happen, but you know that you want to grow in scale and potentially take on outside capital, it is good practice to get your policies, procedures, and SOPs all documented so that you can start to be prepared for when that day may come.

We want to ensure that our records are up to date year round, that we're performing reconciliations on a monthly basis. And you have a team in place that understands GAAP accounting to then start applying that methodology and that approach to the underlying financial records. You want to work with a CPA or a CFO to do effectively an audit check.

Are we ready? or our audit preparedness? Processes in a good place so that when we go through an audit, we can be ready. There's a lot of firms out there that can do audit prep type work to help you get cleaned up, to help you get processes documented so that you can be ready for that audit. So as a quick check, you can go back to your last three months of audit.

Of financials and ensure that the reconciliations are in place. If you have an outsourced accounting team or even an in source team, you could just ask them, Hey, could I see the reconciliation for that deferred revenue? If it's not readily available readily on hand, that's an indicator to me that you may not be up to date on your financial records, your team should always have supporting reconciliations for your balance sheet available.

When needed,

If you can start to take those steps and better understand your financial hygiene, you'll be far better prepared to approach your first year audit without the fear and uncertainty that comes with the first year audit. So I hope those tips are helpful. If you're walking towards your first year audit and help you become a more streamlined and efficient and profitable business as you move forward.