All too often, the directors and staff of SMEs that are new to the audit process don’t know what auditors need from them to conduct effective audits. They may be unaware of reporting requirements, of what documentation is needed and what they, as entities, need to do to prepare. It’s a steep learning curve, says Katie Harvard Taylor, Principal and audit specialist at Hillier Hopkins.

“The shift from being an unaudited to an audited company is where businesses often struggle. Decisions that have always been made informally have to be formalised and documented. Management has to adjust, and shift to formal documentation of decisions and approvals that provide evidence for auditors.”

Companies meeting the audit threshold for the first time often do not know what is expected of them. As well as the burden of adjusting to unfamiliar requirements and new ways of working, in the first year, management needs to be prepared to spend additional time and effort on reporting.

“Unaudited opening balances will need to be audited the first year a company meets the audit threshold,” explains Julie Breakell, Partner at Forvis Mazars. “The previous year’s balance sheets will need to be examined and validated.”

Providing documentation and evidence in areas that cannot be objectively measured or verified and rely on judgement is often the most challenging part, according to Harvard Taylor. Judgemental areas include valuations and fair values, impairment assessments, provisions and contingencies.

As a result, SMEs often prepare evidence in these areas ‘too late’ in the process. Many will require auditor support to prepare the right information at the right time.

Given the complexities of auditing and the myriad of unknowns, how can SMEs effectively prepare to ensure the process is as efficient as possible for both parties? And how can auditors support them?

Engage with your auditor early

Breakell recommends engaging with the auditors before year end to find out exactly what they need – ideally in list form. “It’s important to have early discussions regarding the audit approach, timeline and deliverables,” she explains.

Block out time to answer questions

Investing in both time and staff resources both before and during the audit is essential. “Clients need to block out time to answer questions and be available during the field work,” says Harvard Taylor. A big part of this is providing access to key staff outside of finance, such as HR or sales who may have prepared certain documents and can resolve queries quickly.

Implement formal documentation

All companies are required to keep records but proper accounting records evidencing all transactions and balances are critical for audited companies. This, says Harvard Taylor, ‘ensures a clear audit trail’ of how decisions were reached. Information should be complete and accurate and ‘clearly tie back’ to accounting records.

Stay up-to-date with regulatory changes

SMEs should keep up-to-date with changes to regulations and accounting standards, Harvard Taylor recommends. “This will prevent surprises when the auditors ask for new assessments and documentation.

Understand what information auditors need

“A detailed list of supporting information for auditors is known as the Prepared by Client (PBC) list,” says Breakell. This includes standard items such as balance sheet reconciliations, general ledger reports and information that enables them to select and test samples. PBC lists should be agreed with the finance team before the year end. They depend on well-organised financial records and strong internal processes.

Expect difficult conversations around high-risk and judgemental areas

According to Harvard Taylor, going concern assessments are ‘high-risk areas’ for auditors. They can involve documentation of cash flow forecasts, sensitivity analyses and stress testing. SMEs should expect to field questions on this issue and should prepare to provide additional supporting evidence for judgemental areas where necessary.

“Valuations, impairment assessments, provisions and contingencies and so on are all areas where we really want the client to have prepared in advance, providing clear evidence relating to how they’ve come up with the judgments and assumptions underpinning the estimates,” says Harvard Taylor.

All of this can be tricky for SME entities to prepare, but most auditors will offer guidance on what is required in this area, to help clients prepare the right documentation. 

Establish a two-way relationship

Finally, Breakell recommends fostering a good working relationship between the SME and the auditor. “Establishing a collaborative, two-way relationship is key as poor-quality information or delays in responding on both sides can extend the audit timeline and increase costs," she explains.