With the upcoming statutory year end, auditors all over India are going to swoop into managers' cabins, and invariably be guests that are here to stay. Written by an audit intern, part of the frontline workers at every audit firm, this humorous piece seeks to highlight some common causes for friction between auditors and management. It juxtaposes the celebration of a new year with the celebration of a new fiscal year.
Imagine, it is March 2020, and there is a stack of reports on your desk to be reviewed. Your accountant has just brought you a file with myriad reconciliations. There are bills waiting to be authorised, and yes, goods and services tax (GST) filings due. You cannot tolerate any more small-talk on the national Budget. Your family is acquainted with your late sittings in office. But all that takeout food is really affecting your health, you feel bloated and dull, all the time! And just when you thought it couldn’t get worse…
A team of auditors swarms into your office, and there you are, stuck in a quagmire of reporting deadlines. It is time to close the year – the financial year, and since this affects your boss and the bottom-line, that 1st January hangover seems like fun times of old!
This scene sounds familiar to you? Cause it is what March 2019 looked like, just like March 2018, and the year before that. But it is possible for you to have another celebration this year, even as late as the end of fourth quarter (Q4) – by ensuring an agile audit and a no-hiccups compliance exercise.
Auditors have this evergreen joke about their work. And you might just appreciate it by the end of this article.
Begin with the Year in Mind
It is the responsibility of the management to design, implement and maintain an effective system of internal financial controls, including controls over financial reporting.
That jargon loaded statement boils down to two primary roles – to demonstrate to the auditors, that business as usual was, indeed, carried out as business as usual. (Your auditor might call it internal financial controls -IFC, or internal financial control over financial reporting -ICFR).
And the second – the financials are being prepared with appropriate cut-off dates, and end of day means end of day. (This will be called the 'Financial Statements Closing Procedures').
So How Do You Demonstrate BaU (Business as Usual)?
The auditor here is looking for a risks and controls matrix. It documents the flow of work in every process, and is a way of ensuring that budgetary and approval exercises rightly address the 'what could go wrong' aspects of business. Now, typically, prepared by either the management or the internal audit team, having such a document made can seem a daunting task.
The essence is just this: any activity that happens in a business unit, or department, requires a set of checks, signs, approvals, and documentation. The auditor is firstly going to ask you to walk him through the sequence of these checks and signs, then he is going to systematically draw out certain transactions to see if any deviations from the walk-through were improperly dealt with.
Proactively submitting those files, folders, and showing him the information technology (IT) enabled approval process ticks, will help him 'close the work paper' faster.
And the second objective is to show to the auditor, that they can tick and tie numbers from your login screen, to the various reports generated by the system, and finally, to pristine financial statements that can be signed by the chief financial official (CFO), and directors. And that no business done after close of the day 31st March, is accounted for in that year (accounting nuances excepted).
He Said, She Said!
While it does not feel nice to be questioned on your work and integrity, the audit intern who probably is working on your area of operations, has been told quite strictly—“if it ain’t documented, it ain’t done.”
So, help them document your effectiveness along the following illustrations:
Now this is still no assurance that an auditor’s reconciliations will agree and tally with yours. But this still goes a long way in satisfying the audit team’s search for evidence of a ship sailing smoothly.
Why Did You Do What You Did?
Explanations. The auditors are going to want an explanation for everything. They shall perform analytical tests to the summarised reports from your systems. Spent more cash on advertising - why? Had a drop in payroll expenses - whom did you fire? There is more inventory sitting in the warehouses—did you sell less or produce more?
These kinds of procedures are generally applied to areas which tend to have routine, and predictive characteristics. Think rent, utilities, payroll, insurance, interest from investments, loan amortisation etc.
There is no way one has kept a track of the why behind every what. But knowing the areas an audit intern is most likely to apply simple forecasting math is a cheat code to closing a process area and its scrutinisation. Drawing up a list of all the causes for known variances will reduce run-ins with the audit team.
Here’s a list of areas that get scrutinised all the time:
There Was a Joke Promised
The joke that was promised at the outset. Well, this is how it goes…
“Why did the auditor cross the road?”
“He looked in the file, and that’s what they did the previous year!”
Nothing captures the routines of auditors better than this joke. It is only wise to resolve quickly, some of the routine matters, and have them out of the way. There are genuine compliance matters that do crop up from time to time. And one must have a serious sit down and consult. But when you have a marathon to run, even a small pebble in your shoe could hurt a lot!
Maybe, and just maybe, having done some of the suggestions laid out here, you may go ahead and have a happy new fiscal year. All green lights!
(The author is an audit intern, having work experience spanning multiple corporate entities of various types. He has worked at a reputed big-ticket auditing firm, as well as a medium sized auditing firm. He is currently a student of chartered accountancy.)