Autumn is an intensive period in many finance functions, even when the financial statements are still months away. The year's sales are being closed, contracts finalised and the coming year planned. For companies with a calendar financial year, now is a good moment to review the state of the accounting records, governance and key processes before the year end.
An audit does not have to become a rushed project that starts only once the financial statements are ready. At its best it is a risk-based process planned across the whole financial year and designed to support the company's operations. Audit procedures performed during the financial year — commonly referred to as the interim audit — make it possible to identify questions that matter for the financial statements and the finance function at a point where they can still be addressed without the deadline pressure of the closing timetable.
In this article I go through what interim audit work usually involves, how the company benefits from it and how to prepare for it.
What does interim audit work mean?
A statutory audit covers the company's accounting records, financial statements and administration. The work is planned on the basis of the company's operations, size, industry and identified risks.
The auditor must obtain sufficient appropriate audit evidence to support the conclusions reached. Part of that work is usually most efficient to perform already during the financial year: transactions are recent, the material is readily available, and any shortcomings can be corrected before the financial statements are prepared.
In companies with a calendar financial year, the interim audit is often scheduled between September and November. For financial years of a different length or with a different closing date, the appropriate timing is assessed separately.
The scope is not the same in every company. In a small, stable company the focus may be on reconciliations, administration and a few key processes. In a growing, internationally operating or otherwise changing company, the work may be directed at revenue recognition questions, payroll, financing, contracts or new business models.
Why carry out the work already in the autumn?
There is still time to correct errors
The accounting records and financial statements almost always contain items based on estimates or judgement. Revenue recognition, financial instruments and the accounting treatment of share option arrangements, for example, may require particular consideration.
Systematic errors may also be identified in bookkeeping, VAT treatment or payroll administration. When such questions are identified well before the financial statements are prepared, the practice can be established or corrected immediately. The same matter identified only at the closing stage may instead lead to extensive retrospective work, corrective filings and unnecessary time pressure.
The closing-season workload evens out
Interim audit work is valuable even when it does not reveal material errors or exceptional events. When the key processes, administration and transactions of the financial year have already been reviewed in the autumn, the spring audit can be directed at the most significant financial statement items, valuations and notes.
This also makes it easier to schedule the annual general meeting and the registration of the financial statements.
Potential problem areas surface in good time
From the perspective of the board and management it is substantially better that questions relating to equity, related party transactions, incomplete documentation or the sufficiency of financing are dealt with well in advance. At that point options are still available.
Once the new financial year is under way and attention is on what lies ahead, no one wants surprises from the previous year.
The discussion takes place at the right time
The end of the year is often the last moment to make decisions whose timing, documentation or accounting treatment affects the current financial year. Investments, depreciation plans, financing arrangements, shareholder loans, distributions of funds and possible corporate restructurings are worth raising before the decisions have already been implemented.
The auditor does not make management's decisions, but a forward-looking discussion helps ensure that decisions are properly documented and that their financial effects are understood.
What is typically reviewed?
The focus areas are always defined company by company. The following are nevertheless typical areas of review.
Significant contracts, arrangements and changes
The work aims to identify material or exceptional events that have taken place during the financial year as well as those being planned.
Acquisitions, share issues, business successions, demergers, significant new contracts, system changes and changes in operations are worth raising as early as possible. In these situations a forward-looking discussion is almost always more efficient than assessing the outcome after the fact.
Up-to-date bookkeeping and reconciliations
The review considers whether the accounting records are up to date and whether the key balance sheet items are reconciled. These include bank accounts, trade receivables, trade payables, payroll liabilities and tax liabilities.
Particular attention is paid to old open items. Long-outstanding trade receivables may indicate a credit loss risk, but they may also show that invoicing, collection or allocation is not monitored regularly enough.
Sales, purchase and payroll processes
The work builds an understanding of how transactions arise, are approved, recorded and reconciled. In small companies a full segregation of duties is not always possible. In such cases management's own control activities — approving payments, monitoring bank accounts and reviewing financial reports regularly — become all the more important.
VAT and self-assessed taxes
VAT reconciliations, the accuracy of returns and any special situations are reviewed in line with the risk assessment. Reverse charge, EU trade, cross-border sales of services and restrictions on the right of deduction may require attention.
In internationalising businesses, VAT is one of the most common sources of error, so it deserves attention before the financial year ends.
Payroll administration and employer contributions
Reconciliations of payroll accounting, Incomes Register reports and employer contributions are reviewed as needed. Fringe benefits, travel expense reimbursements, daily allowances and other personnel costs can be gone through at the same time.
Administration and decision-making
The review of administration covers, among other things, the minutes of board and shareholder meetings, the currency of the shareholder register and the documentation of significant decisions. Distributions of funds, related party transactions, shareholder loans and changes in ownership are matters where formalities and adequate documentation are especially important.
Financing and going concern
Loan agreements, collateral, financing terms and any covenants are reviewed. At the same time a preliminary view is formed of whether financing and liquidity are sufficient and whether there are going concern factors that management needs to consider in the financial statements.
How to prepare
Good preparation reduces the time spent on the audit and also benefits the company's own finance function. In practice it is useful to ensure that at least the following material is available:
- the general ledger together with the income statement and balance sheet for the period under review
- bank statements and bank reconciliations
- trade receivable and trade payable listings with ageing
- VAT reconciliations and the status in MyTax
- payroll summaries and Incomes Register reports
- minutes of board and shareholder meetings
- an up-to-date shareholder register and information on ownership changes
- loan, lease and collateral agreements together with any amendments
- specifications of inventories and fixed assets
- information on related party transactions, shareholder loans and material contracts.
A large part of the material can often be obtained directly from the finance systems through read-only access. The audit then proceeds smoothly and fewer separate document requests are needed.
Agree the timetable well in advance
In Finnish limited companies with a calendar financial year, the financial statements must be prepared within four months of the end of the financial year and the annual general meeting held within six months of the end of the financial year. The adopted financial statements must be filed with the Trade Register within eight months of the end of the financial year.
When the interim audit has been carried out in the autumn, the spring timetable is considerably easier to keep under control. It is also possible to agree in advance when the closing material will be ready and when the year-end audit will be performed.
Summary
Interim audit work is not a mere formality. Its value comes from making the observations at a time when practices, entries and documentation can still be corrected before the financial statements are completed.
If your company's financial year ends on 31 December and the audit timing has not yet been agreed, now is a good moment to agree it. We can also go through what material is needed in your company's audit specifically. David Vatka David.vatka@kht-tilintarkastus.fi
Statutory audits and financial management advisory services for small and medium-sized companies.
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