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Preparing Audit-Ready Financials: Best Practices to Avoid Common Pitfalls 3 Introduction For financial professionals, independent external audits of GAAP financial statements are an inescapable reality. For public companies, it's a statutory requirement under SEC regulations and for many fast-growing private companies, it's a necessity to meet the demands of lenders, VCs, and other stakeholders. There is even a possibility that the IRS could require a financial statement audit as part of a broader tax audit. Ultimately, every audit boils down to the risk of a material misstatement in the numbers. The responsibility falls to you and your finance team to ensure that your financials present the lowest possible risk of such errors, thereby earning a "clean" (unqualified) opinion from your independent auditor. To achieve a smoother process in preparing audit-ready financials, you need well-documented transactions, balances that are calculated accurately, and financial statements and backup documentation that can be produced in a timely manner� Audits Require Well-Documented Transactions and Balances Although there are various types of risk that an audit will assess, the primary focus is on the subjective judgments, estimates, and processes you use to prepare the financial statements. The auditor tests various areas of risk in your controls, accounting measures, and reporting processes to determine the level of GAAP conformity. Effective internal controls reduce the risk of a material misstatement. While the auditor must develop an understanding of your company's control environment, a financial statement audit does not focus on controls to the same extent as a SOX audit requires. 1 Based on the results of the controls testing, the auditor gathers evidence to substantiate and demonstrate the effectiveness of your accounting and reporting processes. This generally involves checking calculations; examining records and source documents to support balances and transactions; confirming certain balances and transactions with third parties; and physically observing assets. That's why audit-ready financials invariably depend on well-documented, organized transactions and balances. 1 A SOX audit is performed as part of Section 404 of the Sarbanes-Oxley legislation in the United States that requires publicly traded companies to undergo a strict audit on financial information as well as internal controls. A SOX audit helps determine how well the company establishes and maintains adequate management controls over business and financial information.

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