When your auditor reaches out to ask questions and see documents months before your year-end date, you may wonder what’s going on. After all, the year’s numbers haven’t been finalized yet, so what could the auditors possibly have to do?

It’s important to note that not every auditor does preliminary testing — it’s a matter of preference for each firm. Doing preliminary doesn’t guarantee an audit will go smoother, nor does skipping it always mean greater stress after year-end.

We see key benefits to preliminary testing because we treat audits as if we were telling a financial story, and the work we accomplish during preliminary is vital to telling the whole story.

Gathering Preliminary Information

Unlike the final phase of the audit, which occurs after the year-end date, preliminary deals more with the internal workings and changes of the organization being audited. We don’t begin testing individual documents until the final phase, so you can think of preliminary as gathering information to set a clean foundation for the rest of the audit.

During preliminary we typically ask for the following information and documents:

  • Key personnel changes during the year, including board members and owners, with dates of changes
  • All current year bank and investment statements to date
  • Insurance policies showing coverage amount, coverage period and premiums
  • Internal revenue service forms (W-2s, 941s, 1099s, etc.) for inspection
  • Perform preliminary loan covenants or similar regulatory related concerns
  • Board of directors or ownership minutes (1 meeting a year is required)
  • Information on any legal actions, violations of agreements, investigations, or reports from any regulatory agency
  • Copies and estimated times of approval for any new or anticipated leases or loans

This information gives auditors the big picture view of how your organization has changed in the past year. That way, there’s less of a chance of anyone being caught off-guard during final testing.

This list of documents shouldn’t be confused with a preliminary request list. Whereas a request list asks for specific documents to help with preliminary testing, this list simply illustrates the type of information we look for during this phase of the audit.

Audit Timeline With Preliminary Testing

Preliminary testing typically starts about three months before year-end. During this phase, auditors get a clearer idea of how long the entire audit will take. In general, the fewer effective controls in an organization, the more testing (and time) is required to finish the audit.

Preliminary contains almost half the total audit time, so although your organization is being contacted prior to year-end, doing preliminary usually reduces the work to be completed after year-end.

Key Conversations During Preliminary

Whether auditors visit your office or perform the audit remotely, preliminary testing includes several key conversations to help the auditors understand your organization. Some of these conversations may include:

  • Discussion of expectations between client and auditors
  • Confirmation of deadlines, due dates, and meeting schedule
  • Guidance and clarification on new accounting policies and internal controls
  • Discussion of best practices for internal controls, procedures, and asset management

Rather than identifying actual numbers and specific account balances, auditors use preliminary conversations to better understand where your organization is coming from. This helps us identify issues early and create a plan to solve them.

Coming into preliminary season prepared for these conversations and willing to share what’s happening in your organization, everyone will start on the same page and the audit can move along smoothly.

Seeing Beyond Numbers In Preliminary

Preliminary testing can sometimes be viewed as a series of interrogations where auditors are looking for any chance to yell “Gotcha!” at your team. However, we see things differently. Rather than forcing you into a mold, we use preliminary conversations to get to know your organization and how it can improve.

If every financial statement is a chapter in your financial story, we’re here to make this year the best chapter yet.

For more information, or to submit an RFP, feel free to contact us. We’re always here to help.