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Are you ready for the Financial Audit Season?

davidprior8


Preparing for internal and third-party audits is the most important initiative for a chief financial officer, but sprawling enterprise resource planning, or ERP, systems and complex financial transactions often make it difficult to track and account for business spend.

To “win the audit,” organisation should embrace a process-first and data-driven approach. This approach not only improves efficiency and effectiveness, but it also results in better data—such as reliable overviews of assets, liabilities and spending. Here are a few ways organisations can adopt this strategy.


Move to a process-centric mindset

The vast majority of audit issues are business process issues. There are a few key processes that directly intersect with financial audits and about which organisations can gather meaningful data: 

  1. Procurement (Procure to Pay):

    1. Purchasing: Reviewing the processes for acquiring goods and services, including vendor selection, purchase orders, and contract management.

    2. Accounts Payable: Verifying that payments to suppliers are accurate, timely, and properly authorised.

  2. Sales and Revenue (Order to Cash):

    1. Sales Transactions: Ensuring that sales are recorded accurately and in the correct accounting period.

    2. Accounts Receivable: Confirming that receivables are accurately reported and that there are effective procedures for collecting outstanding amounts.

  3. Inventory Management (Forecast to Fulfilment):

    1. Inventory Controls: Evaluating how inventory is managed, including receiving, storing, and issuing processes.

    2. Physical Counts: Verifying the accuracy of inventory records through physical counts and reconciliations.

  4. Payroll and Human Resources (Hire to Retire):

    1. Payroll Processing: Reviewing the processes for calculating and disbursing employee wages, including deductions and benefits.

    2. Employee Records: Ensuring the accuracy of employee data and compliance with labour laws and regulations.

  5. Cash Management (Forecast to Reconciliation):

    1. Cash Receipts: Verifying that all cash inflows are recorded and deposited accurately.

    2. Cash Disbursements: Ensuring that all cash outflows are properly authorised and recorded.

  6. Fixed Assets (Acquire to Retire):

    1. Asset Management: Reviewing the processes for acquiring, depreciating, and disposing of fixed assets.

    2. Asset Verification: Confirming the existence and condition of fixed assets through physical inspection.

  7. Financial Reporting (Record to Report):

    1. General Ledger: Ensuring that all financial transactions are accurately recorded in the general ledger.

    2. Financial Statements: Verifying that financial statements are prepared in accordance with the applicable accounting standards.

  8. Treasury and Investments (Invest to Optimise):

    1. Investment Management: Reviewing the processes for managing and recording investments.

    2. Treasury Operations: Ensuring the accuracy of cash flow forecasts, bank reconciliations, and other treasury activities.

  9. Compliance and Regulatory Reporting (Monitor to Report):

    1. Regulatory Compliance: Ensuring that the company complies with relevant laws, regulations, and industry standards.

    2. Tax Compliance: Reviewing the accuracy and completeness of tax filings and payments.

  10. IT Systems and Controls (Secure to Operate):

    1. IT General Controls: Evaluating the controls over IT systems that support financial reporting, such as access controls, change management, and data backup procedures.

    2. Application Controls: Reviewing controls within specific applications that process financial transactions.

 

These processes are critical for maintaining the accuracy and integrity of financial information and ensuring compliance with relevant laws and regulations. Auditors assess the effectiveness of internal controls within these processes and identify areas for improvement.


As you prepare for an audit, organisations should shift to a process-centric approach and centre their conversations around the end-to-end financial value chain instead of only financial statement reconciliation. For example, gain a deep understanding of outgoing cash by analysing procure-to-pay and accounts-payable processes to determine the variants that cause the largest financial management issues. 


Make audit readiness a continuous lifecycle

A clean audit is well-documented and repeatable, so organisations must shift their approach from reactive to proactive and integrate audit readiness consistently throughout the year. This can take a few forms:


  1. Before the audit: Build a real-time audit control tower to address data gaps from the previous year. Organisations should embed the audit control tower concept within the CFO’s organisation to drive a data-driven approach to audit readiness.

  2. During the audit: Initiate more productive and proactive conversations with auditors to talk about processes rather than transactions. An example is to consider the procurement-to-pay process while talking about purchasing approval deficiencies with an auditor.

  3. After the audit: The audit control tower can rally the organisation around a few common findings to drive business process improvement and automation projects that implement real-time spend controls.


Leverage data science to solve audit deficiencies

Audit deficiencies tend to come in a few key forms:

  1. Inadequate Documentation: Insufficient or incomplete documentation to support transactions, controls, or decisions.

  2. Weak Internal Controls: Ineffective or poorly designed internal controls, increasing the risk of errors or fraud.

  3. Misstatement of Financial Records: Errors or inaccuracies in financial statements, such as incorrect account balances or misclassifications.

  4. Lack of Segregation of Duties: Failure to separate key duties among different employees, leading to potential conflicts of interest or fraud.

  5. Inadequate Reconciliation Procedures: Insufficient or irregular reconciliation of accounts, leading to discrepancies between records and actual balances.

  6. Non-compliance with Accounting Standards: Failure to adhere to applicable accounting standards or financial reporting frameworks.

  7. Inaccurate Revenue Recognition: Errors in recognising revenue, including premature or delayed recognition, impacting financial results.

  8. Unreliable Estimates and Assumptions: Use of inaccurate or unsupported estimates and assumptions in financial reporting, such as in asset valuations or provisions.

  9. Weak IT Controls: Insufficient controls over IT systems, including access controls, data security, and backup procedures.

  10. Inadequate Risk Management: Failure to identify, assess, and manage financial and operational risks effectively.

  11. Improper Expense Recognition: Incorrect or inconsistent treatment of expenses, leading to financial misstatements.

  12. Lack of Management Oversight: Insufficient review and oversight by management over financial reporting and internal controls.

Process Intelligence and data science can help organisations address these deficiencies by visualising processes from end-to-end and identifying where CFOs can make the most impactful remediation.


Looking ahead

Audit findings are difficult to respond to and often rely on multi-million- or billion-dollar ERP upgrades, but a data-driven approach to audit readiness is within reach. Unlocking financial process data allows organisations to proactively position their CFOs to win the audit and provide more efficient use of an organisations money and better outcomes for stakeholders.


Reach out to find out about how #TEC150 can support your Financial Audit readiness leveraging the No.1 Process Intelligence Platform #Celonis. David.prior@TEC150.com  

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