Preparing for Your First Audit: A CFO\

The transition from unaudited to audited financial statements represents a significant milestone for growing companies, requiring careful preparation, process enhancement, and stakeholder management. For finance directors leading their organisation through its first audit, establishing robust preparation frameworks, understanding auditor expectations, and managing the audit process effectively are essential for achieving a smooth audit experience and positive outcomes.

Understanding Audit Requirements

Companies become subject to audit requirements under the Companies Act 2006 when they exceed certain size thresholds, are public interest entities, or are required by their articles of association or shareholders. Finance directors must first determine whether their company is subject to audit requirements and understand the specific obligations that apply.

For companies approaching audit thresholds, early preparation is crucial. Finance directors should begin developing audit-ready processes and documentation well in advance of the first audit, enabling a smoother transition and reducing the risk of audit qualifications or significant adjustments.

Establishing Audit-Ready Processes

Effective audit preparation requires finance directors to establish processes that support audit evidence gathering, facilitate auditor access to information, and demonstrate robust internal controls. Key areas requiring attention include:

Financial Record Keeping

Auditors require access to comprehensive financial records, including general ledgers, supporting documentation, bank statements, invoices, contracts, and board minutes. Finance directors should ensure that all financial records are properly maintained, organised, and readily accessible, with clear audit trails supporting all transactions.

Internal Controls

Auditors assess the design and operating effectiveness of internal controls, particularly those relevant to financial reporting. Finance directors should document key controls, including authorisation procedures, segregation of duties, reconciliation processes, and IT controls, and ensure these controls are operating effectively throughout the period.

Management Representations

Auditors require management representations regarding various matters, including the completeness of records, related party transactions, going concern assessments, and compliance with laws and regulations. Finance directors should prepare to provide these representations and ensure they are accurate and supportable.

Selecting an Audit Firm

Choosing the right audit firm is critical for a successful first audit experience. Finance directors should evaluate potential auditors based on their experience with similar companies, sector expertise, approach to audit, and ability to provide value-added insights beyond compliance.

The selection process should include meetings with audit partners, reference checks, and consideration of fee proposals. Finance directors should seek auditors who understand their business, can provide constructive feedback, and will work collaboratively to achieve audit objectives efficiently.

Managing the Audit Process

Effective audit management requires finance directors to coordinate with auditors, allocate internal resources, and manage timelines. Key considerations include establishing clear communication channels, providing timely responses to auditor queries, and ensuring adequate staff availability to support audit fieldwork.

Finance directors should also prepare for common audit areas that typically require significant attention, including revenue recognition, inventory valuation, provisions and contingencies, related party transactions, and going concern assessments. Early identification of potential issues enables proactive resolution.

Post-Audit Considerations

Following the first audit, finance directors should review the audit experience, implement recommendations from management letters, and establish processes for ongoing audit readiness. This includes addressing any control weaknesses identified, improving documentation processes, and embedding audit considerations into routine financial reporting.