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Preparing Audit-Ready Financials: Best Practices to Avoid Common Pitfalls 4 Preparing for the Audit: Organization The path to audit success begins by logically organizing your transactions so that they can be traced from the financial statements to the general ledger to the sub-ledger to the supporting documents, and back again. By taking a holistic view of financial-statement preparation and establishing a complete audit trail from transaction to report and reconciliation, you ensure the auditor can easily and effectively test your organization's accounting processes. Of course, creating audit-ready financials is easier in theory than in practice. Every financial audit begins with the lo y goal of focusing on areas that involve accounting complexity and judgment – the riskier areas of the financial statements. However, the audit process o en quickly bogs down in the reconciling and tracing of numbers through the accounting system because the accounting is not well-organized and documented. When the financials are not audit-ready, the auditor spends far too many hours understanding relatively mundane accounting issues and verifying data flows. Typically, financial statement audits get derailed by accounting and documentation deficiencies in three major areas: revenue, receivables, and consolidation. Preparing for the Audit: Revenue Recognition GAAP-compliant revenue accounting is consistently a top challenge for finance professionals because the loosely defined regulations and evolving interpretations create a high level of complexity. In many instances, the timing of revenue recognition receives the greatest level of scrutiny, especially as it relates to multiple-element arrangements where so ware and services (such as implementation and ongoing technical support) are bundled into a single contract yet accounted for separately. The auditor wants to see that each element in the arrangement is separated, valued, assigned timing and amount for recognition, and reconciled back to source documents. One of the best ways to be audit-ready for revenue recognition is to rely on an accounting system with a proven track record of automating, managing, and documenting complex revenue accounting. Whether it's for physical products, perpetual licenses, subscriptions, or services, the so ware should define separate revenue recognition templates and rules for each individual contract and line item, enabling you to easily defer recognition based on the fulfillment status for each item. Preparing for the Audit: Accounts Receivable While companies invest plenty of time and effort to ensure that customers are invoiced accurately and timely, auditors care much more about the realizable value of receivables. This requires an accounting judgment to calculate an allowance for uncollectible accounts. Your accounting so ware should track transaction details forever and maintain secure access to complete customer histories so that your judgment of collectability is well-founded and defensible. What's more, in many instances, customers pay multiple invoices simultaneously, and if that payment covers multiple accounting periods, you must properly allocate the payment to the right invoices and periods. That means matching all cash receipts to specific invoices in a straightforward, documented, traceable way. To be audit-ready, use accounting so ware that automatically applies cash receipts to outstanding invoices, starting with the oldest invoice and taking into account any payment penalties and partial balances�

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