Auditors are required to understand your business; it is a standard of their profession. But do they really understand it?
Perhaps the audit firm itself has experience in your industry – and maybe the partner in charge does too. But how about the senior auditor and the junior auditors who spend the majority of the time at your business asking all kinds of questions?
It is important that your auditor know common accounting practices for your business and industry. The audit should be customized around it. If you are a software company, you want to make sure they understand the reporting requirements for revenue recognition. If you are a manufacturing company, they need to understand inventory and whether it is GAAP to use LIFO or FIFO.
Understanding the industry, and understanding your business, are two very different concepts.
Understanding the industry helps the auditor plan the overall audit and prepare expectations based on industry standards and results for the current audit year. Understanding your business specifically means that the auditors will spend less time asking routine questions, and more time generating results and finishing the audit faster.
In order for the auditor to understand your business, be prepared for them to spend a significant amount of time asking you questions about your business, internal policies and procedures, accounting policies, etc.
You might be thinking to yourself, “Well of course they understand my business – they have been auditing us for 4 years now.” While that may be the case, it cannot be presumed. It is crucial for the auditor to revisit their workpapers, update your business practices, and discuss any changes in the current year as well as those in the future. It is a win win situation when the auditors understand your business, their questions will be more focused and direct and take up less of your time.
As you prepare for this year’s audit
So as you prepare for this year’s audit, make sure you have adequately considered whether the auditors understand both your industry, and your specific business, and the audit requirements that you have this year – not just fit you into a generic template.