Audits, and thus audit documentation, are a normal part of business. Yet, in recent years, business engagement teams have been fumbling the ball.
Every type of audit — financial audits, regulatory compliance audits, internal audits, etc. — has its own specific documentation process. However, the objectives of audit documentation are always the same: to reflect company ongoings accurately and exhaustively and act as evidence in an auditor’s conclusion.
What Is Audit Documentation?
The importance of audit documentation cannot be understated: it is the backbone of the auditing process. Documentation organizes evidence and analysis so that auditors can make their final statements.
Documentation will also contain records of the audit planning phase and post-audit reflections. Auditors will typically interview company leaders about their business operations, collaboratively design the audit procedures, and perform exit interviews. As such, audit documentation will identify the goals, procedures, and results of the audit.
Once the audit is complete, audit documentation becomes a reference for the client as they remedy the issues revealed in the audit. Above all, audit documentation should be an objective, incisive evaluation of a business’s finances and operations.
What Types of Audits Are There?
Financial Audits: A financial audit can be conducted internally, externally, or by the IRS. During an internal audit, an in-house auditor will conduct the audit according to company standards and report back to company leaders. An internal audit allows the company to assess its financial policies and procedures and adjust them accordingly, as well as maintain accurate tax reports to avoid IRS audits.
An external audit is conducted by a third party and thus follows the standards set by that auditor’s organization. The purpose of an external audit is to project trustworthiness and transparency for stakeholders, clients, and the public.
An IRS audit is, of course, conducted by the Internal Revenue Service. Any taxpayer may be subject to one, not just businesses. The purpose of an IRS audit is to correct potential errors in a tax return.
Regulatory Compliance Audits: Regulatory compliance audits ensure that a business is operating in compliance with the law, although they can also be used to evaluate compliance with internal policy. They are typically conducted by external auditors, given that they usually assess compliance with external legal standards as opposed to company standards. Although there are countless and ever-shifting regulations, HIPAA compliance, FDA compliance, and OSHA compliance are a few top priorities.
Operational Audits: Operational audits, unlike regulatory compliance audits, are typically conducted internally. Their purpose is to assess internal business operations and clarify how a company can improve its efficiency, profitability, product quality, sustainability, security, etc.
An operational audit may inspect, document, and report on daily procedures, the supply chain, production, product delivery, bookkeeping, marketing, and HR.
How to Successfully Assembly Audit Documentation
What You Bring to Audit Documentation
Before preparing your audit documentation, educate your team on these common auditing pitfalls:
- Insufficient planning: It is essential to plan an audit thoroughly with company leadership and the auditor or auditing team. Identify what the audit is meant to assess, what risks the company should address, and what procedures to use. It is also important to pick an appropriate auditor and spend time researching the right one.
- Insufficient allocation of time and resources: An audit can take months or even years, depending on the type. The only way to make it worth it is to do it right.
- Backdating: Backdating is a common way to invalidate evidence. Before beginning your audit, put systems in place to prevent backdating. Check your accounting software to make sure that it doesn’t allow backdating to occur.
- Insufficient documentation: Keep up on your documentation.
- Late archival of documentation: Once a document is procured for an audit, it needs to also be archived and unchangeable. The Public Company Accounting Oversight Board, for instance, advises that archiving should be completed within 45 days after the audit report is released.
- Document modification: If your company modifies its documents just before you undergo an audit, it will reflect poorly on you. Always be transparent with auditors.
Once the preparatory work is complete, your team can begin. To conduct an effective audit, the client needs to provide transparent evidence; the auditor is only one piece of the puzzle.
When considering what documents to provide for the auditors, your mind may jump to your financial records for the most recent fiscal year. Files like these that reflect information about a certain period are referred to as current files.
However, an auditor will also need access to your permanent files, which stay legitimate for long periods of time. These include licenses, long-term contracts, and policy and internal control documents, among others. Every audit examines different documents, but here are some of the most common records that auditors will request:
- Bank information: accounts, statements, reconciliation
- Records of transactions during the relevant period of time: business ledger or accounting software, expense reports, bills, repairs and maintenance reports, payroll reports
- Deposits still in transit
- Prepaid expenses for the next fiscal year
- Revenue and sales documentation
- Trial balance
- Confirmations from banks, clients, providers, and loaners)
- Legal documents: business licenses, articles of association, tax registration certificates, lease agreements, security agreements, long-term contracts
- Tax reports
- Loan documentation
- Investment documentation
- Board and staff meeting records
- Emails
- Staff schedules
- List of personnel
Documents for an IRS Audit
- Mortgage statements
- Pay stubs
- Tax returns
- Receipts
- Brokerage statements
- Retirement account records
What the Auditor Brings to Audit Documentation
The auditing team will then examine and record observations about your documents and other relevant information. All of these processes constitute examples of audit documentation:
- Records of audit documents: Documents are a broad category of evidence. The documents an audit requires will depend on the kind of audit being performed, but they can include anything from financial statements to emails. As most audits relate to money management, auditors will likely request documentation of your accounting system.
- Records of physical evidence: Clients need to demonstrate that their assets physically exist. This is then recorded in the documentation process.
- Third-party confirmations: Auditors will reach out to third parties like banks, lenders, and customers to provide records of transactions or substantiate financial claims.
- Recalculation: After creating a comprehensive record of your transactions, auditors will double-check your math. If there is a discrepancy in your record-keeping, they will be able to identify it.
- Reperformance: Auditors will also test your processes by independently performing a business operation. In doing so, they can determine the strengths and weaknesses of your business’s internal controls.
- Observation: Observation is another broad category that depends on the type of audit. An auditor might observe daily and document processes, adherence to policy and procedure, documentation practices, data management, security, and more.
Audits occur every day, yet they often fail to solve the problems they address. Well-executed documentation is one key to making auditing effective and worthwhile. However, documentation can be a strain on many businesses. They may not have the personnel, the skills, or the level of organization necessary to keep thorough documentation. In cases like these, technical writers are a great investment. The expert team of technical writers at Essential Data is here to help ensure your company is on track with documentation of all types.
Whether you need a single technical writer for a brief project or a team of consultants to produce a complete line of documentation, the quality of our work is guaranteed for you. Our clients work closely with an Engagement Manager from one of our 30 local offices for the entire length of your project at no additional cost. Contact us at (800) 221-0093 or sales@edc.us to get started.