If your tech company is preparing for an audit, especially if it’s your first one, the task can seem daunting. However, with the right steps and the right advisor at your side, preparing for an audit can be a smooth and successful process. Here’s a comprehensive guide of best practices to help you get audit-ready.
Organize Financial Documents
Start by gathering and organizing all financial documents for easy access. This includes organizational documents, bank statements, payroll records, tax filings, loan agreements, insurance policies and any customer contracts or agreements. Your auditor will need to review these documents, so having them readily available is key.
Understand GAAP Fundamentals
While it’s not necessary to become an expert in Generally Accepted Accounting Principles (GAAP), understanding the basic principles will help. This includes recognizing the importance of consistency, transparency and accuracy in financial reporting. Knowing the basics will also help the company align with best practices before the audit begins, making for a much more collaborative experience between the company’s management and your auditors.
Review Accounting Policies and Procedures
Establish and document key accounting policies and procedures, including how revenue is recognized, how expenses are classified and how inventory (if applicable) is valued. If your company is new to audits, it may not have formal policies in place, but now is the time to create them for consistency and transparency in your financial reporting.
Internal Controls and Procedures
Implement and document strong internal controls to prevent fraud, ensure accurate financial reporting and safeguard assets. Auditors will examine these controls to ensure their design and implementation are effective. Examples include segregation of duties, access controls and reconciliation procedures.
Clarify Ownership and Equity Structure
Your company’s ownership and equity structure should be well documented and transparent as possible. This includes maintaining accurate records of shareholder agreements, stock issuance, capital contributions and any changes in ownership. Also, be prepared if your auditor asks for detailed information about how equity interests are structured.
Accounting for Stock-Based Compensation
If the company issues stock options or other equity-based compensation, ensure that the accounting for these arrangements complies with ASC 718 (Compensation—Stock Compensation). This includes determining the correct fair value of options and ensuring proper expense recognition over the vesting period.
Tax Compliance and Deferred Taxes
All company tax filings and compliance requirements must be up to date. Additionally, technology companies often have significant temporary differences due to provisions like R&D tax credits, capitalized software costs and net operating losses. The company should account for any deferred tax assets and liabilities in accordance with ASC 740 (Income Taxes) or engage their tax advisor to do so.
Audit Trail and Documentation
Maintain a robust audit trail with sufficient documentation to support the financial records. This includes invoices, contracts, bank statements and other supporting documents. Auditors will require these to verify the integrity of financial statements and to trace transactions.
Set a Timeline for the Audit Process
Establish a clear timeline for when you want to undergo the audit and work backward to identify when key preparation steps need to be completed. Make sure to allocate time for addressing any questions or discrepancies that may arise during the process.
Let Windham Brannon Help You Get Audit Ready
Windham Brannon’s experienced professionals can help you prepare your technology company for a first or regularly expected audit, using industry expertise that focuses on your unique needs and challenges. For more information, talk to your Windham Brannon advisor today, or contact Kyle Putman, Technology Practice Leader.
