Key takeaways
- Audit cost and duration are driven by preparation quality, not balance sheet size. A well-prepared $40M business is a faster audit than a disorganised $8M one.
- Reconciliation is the single largest lever. Every balance sheet account needs independent third-party support, not a schedule that agrees to itself.
- Estimates need a written memo explaining the method and inputs. "That is what we have always used" is not an audit answer.
- Fix the obvious control gaps before fieldwork. It is far cheaper than reading about them in a management letter.
If you are facing your first financial statement audit, the most useful thing to understand early is this: the audit fee and the audit timeline are set by how prepared you are, not by how big you are. A well-organized $40 million business is a faster, cheaper audit than a disorganised $8 million one. Every hour an auditor spends chasing a reconciliation you should have had is an hour on your invoice and a week on your calendar.
The good news is that readiness is a finite, sequenceable piece of work. What follows is the ninety-day plan we run with clients approaching a first audit, usually triggered by a bank covenant, a new investor, a funder requirement, or crossing a nonprofit revenue threshold.
Days 1–15: Establish the baseline
Before any cleanup, establish what you are actually being audited against.
- Confirm the reporting framework and period. US GAAP, a special purpose framework, or Uniform Guidance if federal awards are involved. This is not a detail. It changes what has to be presented and disclosed.
- Obtain a clean opening trial balance. Auditors need comfort over opening balances. If your prior year was never reviewed by anyone independent, expect additional procedures and say so in scoping rather than discovering it in week six.
- Appoint one internal coordinator. A single named person who owns the request list, chases internally and speaks to the audit team. Audits with three part-time coordinators run long, every time.
- Ask for the PBC list now. The "prepared by client" schedule is the auditor's request list. Getting it at the start rather than at fieldwork converts a three-week scramble into a paced workstream.
The most expensive audits are not the complicated ones. They are the ones where nobody owned the request list.
Days 16–45: Reconcile everything
This is where most of the value sits, and it is the least glamorous month of the three. Every balance sheet account needs a reconciliation supported by independent evidence: a bank statement, a vendor statement, a loan amortization schedule, a signed agreement. A schedule that agrees to the general ledger because it was built from the general ledger proves nothing.
| Account | Independent support required | Common failure |
|---|---|---|
| Cash | Bank statements for all accounts, all twelve months | Uncleared items over 90 days never written off |
| Accounts receivable | Aging agreeing to the ledger, plus subsequent cash receipts | Aging does not tie to the control account |
| Inventory | Physical count sheets with a documented cut-off | No count performed at or near year end |
| Fixed assets | Register with cost, date, life and accumulated depreciation | Register does not agree to the ledger; disposals still on the books |
| Accounts payable | Aging plus a search for unrecorded liabilities | Invoices received after year end never accrued |
| Accrued liabilities | Calculation supporting each accrual | A rolled-forward number nobody can recompute |
| Debt | Loan agreements and amortization schedules | Current versus long-term split never recalculated |
| Equity | Roll-forward from prior year with support for every movement | Unexplained prior-period adjustments |
Two rules make this month go faster. First, resolve or write off stale reconciling items rather than carrying them forward again. An unexplained difference that has persisted for three years will be asked about, and "it was there when I got here" is not an answer. Second, document as you go. A reconciliation you can explain in March but not in July is worth very little.
Days 46–70: Document the judgment
Auditors are not only testing arithmetic. They are testing judgment, and judgment that exists only in someone's head is indistinguishable, from the outside, from judgment that does not exist.
Write a short memo for every significant estimate. One page is usually enough, and it should cover the method used, the inputs, where each input came from, and why the conclusion is reasonable. The estimates that come up most often are:
- Allowance for credit losses. How is it calculated, on what historical data, and does the resulting allowance actually reflect what you have collected historically?
- Inventory reserves. What triggers obsolescence, who reviews it, and when was the policy last tested against actual write-offs?
- Useful lives and depreciation. Why those lives, and do assets routinely remain in service long after they are fully depreciated?
- Accrued liabilities. Particularly bonuses, vacation, warranty and legal: each needs a computation, not a plug.
- Revenue recognition judgments. Percentage-of-completion inputs, variable consideration, or standalone selling price allocations under ASC 606.
The question that catches people out
"Walk me through how you calculated this." If the honest answer is "that is what we have always used", you have identified a memo you need to write before fieldwork rather than during it. Estimates are where first audits most often produce adjustments, and an adjustment found in week nine costs far more than a memo written in week fifty.
Days 71–85: Controls and narratives
Even where an auditor does not intend to rely on your controls, they are required to understand them well enough to assess risk, and they will report significant deficiencies they encounter along the way.
Draft a short process narrative for each significant cycle: revenue and receivables, purchasing and payables, payroll, treasury, and financial close. For each, describe what happens, who does it, what is approved, and what evidence the approval leaves behind. Then look at the result honestly and ask the uncomfortable question: could one person initiate, approve, record and conceal a transaction?
The gaps we most commonly find at this stage, and which are usually fixable in a fortnight:
- No second approver for changes to vendor bank details
- Bank reconciliations performed by whoever also releases payments
- Manual journal entries posted with no review at any value
- Departed employees whose system access was never revoked
- Payroll changes not reviewed against HR records by anyone outside payroll
Fixing these before fieldwork is materially cheaper than reading about them in a management letter afterward, and it removes the awkward board conversation about why they were not fixed sooner. The reasoning behind each is set out in Internal Controls for Small Businesses.
Days 86–90: The dress rehearsal
In the last week, run a test. Pick ten transactions at random across the year (an invoice, a purchase, a payroll run, a journal entry, a fixed asset addition) and locate every piece of supporting documentation for each. Time yourself.
If you can produce complete support for all ten within a working day, you are ready. If three of them take a week of hunting through email, you have just discovered exactly what fieldwork is going to feel like, while there is still time to do something about it.
What to expect once fieldwork starts
A first audit for a small or mid-sized business typically runs ten to fourteen weeks end to end: two to three weeks of planning and risk assessment, two to three weeks of fieldwork, and four to six weeks of review, adjustment and reporting. A recurring audit of a well-prepared client usually compresses to six to eight.
Expect adjustments. A first audit that produces no adjustments at all is unusual, and it is not a failure. It is the system doing its job. What matters is whether the same adjustments reappear next year, which is a question about your close process rather than about your auditor.
One thing worth checking first
Before committing to an audit, read the actual covenant or funder requirement. A meaningful number of organizations buy an audit when the document asks for a review, which provides limited assurance through analytical procedures and inquiry, and typically costs a third to a fifth as much. Our audit and assurance page sets out the difference in full.
If you are working toward a first audit and want a candid read on how ready you actually are, that is exactly what a scoping conversation is for. We would rather tell you in September that you need three more months than tell you in January that fieldwork is going to hurt.