Get strategies to transform your audit from a compliance exercise into a strategic opportunity for growth and improvement.
As the fiscal year draws to a close, manufacturing companies are faced with the critical — and sometimes overwhelming — task of preparing for their year-end financial statement audit.
This process not only improves compliance and transparency but also strengthens internal controls and builds trust with stakeholders. If not properly prepared for, the list of requests and questions can easily take over your day-to-day tasks.
Preparing for a year-end financial statement audit is a shared responsibility between companies and auditors. By understanding your role, organizing records, strengthening controls, and engaging proactively, you can transform the audit from a compliance exercise into a strategic opportunity for growth and improvement.
Explore 5 steps to help manufacturers effectively prepare for an audit:
1. Understand your responsibilities
Ultimately, the financial statements are the company’s responsibility. While auditors express an opinion on the statements, manufacturers are expected to maintain accurate records, provide supporting documentation, and prepare draft financial statements and/or provide information to prepare such statements.
2. Organize financial records and reconcile accounts
Begin by organizing significant financial documents, including statements, invoices, contracts, and ledgers. These items may be needed for audit support and will be easier to obtain if readily accessible.
Reconcile accounts to the general ledger to verify balances are accurate. Supporting documents and reconciliations should be easily traced back to the general ledger.
Performing your own audit procedures on accounts can help avoid last-minute adjustments and catch discrepancies early. This also provides a refresher on what occurred in the account to answer any questions from the auditors.
This is a step that — if done consistently throughout the year — helps year-end prep tremendously.
3. Assess and strengthen internal controls
In addition to reconciling accounts, audits also evaluate internal controls. Strong internal controls help to prevent and detect errors, fraud — and, you will sense a theme here — efficiency at year-end.
Key areas to focus on include the financial close and reporting process, IT systems, and inventory and asset management. Verify these systems are in place and operating effectively throughout the year.
Manufacturers specifically need oversight around inventory and asset management. Check if your inventory tracking system is properly reconciling to your general ledger and your cost accounting is accurately reflected, which should be reviewed regularly as part of your financial close and reporting processes. Sometimes these processes are all managed via interfaces, which highlights the importance of reviewing controls around IT systems, as well.
Internal control assessment example for manufacturers
Manufacturers should review if updated overhead and labor rates are properly applied to jobs. This is something that initially may not pop up in the reconciling accounts step, as the balance of jobs in WIP may tie out to the general ledger with no issues. However, a reviewer may be able to look at the details in a new light and identify errors.
Another way this could come up is if management is regularly reviewing swings in the P&L and looking at changes in the balance sheet accounts along with information on purchasing and selling. If the data is not lining up with expectations, it may cause management to look at the accounts in greater detail revealing the rates used in the jobs are incorrect. Along with accurate reporting, this process also helps companies to better budget and price their products.
4. Use technology to streamline documentation
Leverage ERP systems or cloud-based platforms to manage your financial data and streamline processes. There are many tools to help make you and your team more efficient with many of the processes listed above.
Talk with your audit team about ways to share information securely. This improves collaboration and gives your auditors real-time access to necessary information.
Technology now more important than ever. Digital improvements can help manufacturers streamline processes to save time by automating accounts payable, and during the audit process, to easily pull data from reports for multiple areas of testing.
5. Collaborate with your audit team
Contrary to outdated reputations of auditors, your auditors don’t want to make your job harder. The audit will run much smoother if your team and your auditing team work together. Establish clear lines of communication with your audit team often and early. Discuss internal deadlines, expectations, and any major operational changes that may impact the audit.
How CLA can help manufacturers effectively prepare for an audit
CLA performs audits for thousands of manufacturing companies, providing us with deep insight into what’s required and how the process can be streamlined. We can also help with process improvement through technology upgrades, labor and overhead studies, and inventory management.