Law firm finance teams will often talk about the challenges that an audit brings. Finance teams have limited capacity to answer questions from auditors whilst performing their routine duties; timelines can slip which can impact routine finance team functions as well as the audit process.
For a first-year audit these challenges can be even greater due to unfamiliarity with the audit process. These challenges can manifest themselves as potential overrun fees, staff stress and delays.
The good news is there are steps that can be taken to make the process as efficient as possible. Whilst the auditor should be providing guidance, there are pre-emptive steps that finance teams can take to make the process more efficient.
Prior to an audit commencing there will be communication between the finance team and the audit team which will include a list of deliverables. Finance teams should scrutinise this list closely and consider whether they are able to provide the information requested within the timeframe specified. Where clarification needs to be sought this should be obtained in advance. Having these conversations early will save finance teams time and ensure that they are able to provide the correct information the first time.
Where the list of deliverables contains reports run from the accounting system, finance teams should consider whether any of these reports can only be run at a point in time. Where retrospective reports cannot be run, this can create an avoidable time drain reconciling reports back to the year-end balance.
A significant amount of the information requested will relate to objective items. However, some items will relate to subjective items, where management have made judgements and estimates in the calculation of figures for inclusion in the financial statements. Where such items are present, the auditor will typically want to “get into management’s shoes” before reaching their own conclusion. To this extent, consider whether the evidence provided documents management’s thought process in sufficient detail. Typically for a law firm, an auditor will want to get comfortable with the WIP provisioning policy. Finance teams should consider whether the evidence supplied tells the auditor why management consider a particular WIP provisioning policy to be appropriate.
Auditors will want access to fee earners to provide rationale as to why they consider a WIP balance to be recoverable. Finance teams will need to liaise between auditors and fee earners to ensure that the information requested is provided. This can be pre-empted to a certain extent; fee earners can be requested to provide rationale for all WIP balances greater than an agreed threshold on a monthly basis for instance.
Where the deliverables relate to more objective areas, finance teams can reduce the number of follow up questions by collating the information to support balance sheet items at the time of preparing the year-end figures. If evidence has been used to calculate say accruals and prepayments at year end, it makes sense to retain this in an easily accessible folder at the time of preparation rather than have to search for the evidence again at the time of the audit.
Several tests performed by the auditors will start from outside of the accounts system. Sales testing will typically start from timesheets. Do the finance team know how to obtain the information required and can the timesheets be traced to matters by the audit team?
Where the auditors are preparing the financial statements, have management considered how their trial balance will map to the statutory accounts?
Auditors will typically want to verify fixed assets held by the entity. For some assets, such as vehicles, identification is straightforward. However, for homogenous items such as laptops, has management implemented a method of tracking individual items? Again, this will both enhance the efficiency of the audit process and enable management to safeguard the assets of the entity.
Not all information requested by the auditors directly relates to figures within the trial balance. Auditors will want access to certain legal agreements, for example, leases, finance facilities and partnership agreements. Are these legal agreements readily available?
Finally, the finance team should consider the practicalities of being audited. Does the entity have sufficient space to accommodate the audit team? Are they able to log into the finance and/or practice management system? As auditors move to cloud-based audit packages, internet access is key i.e. are they able to access the firm’s wi-fi network? Are all members of the finance team available when the audit is being performed?
Whilst consideration of the above points will help the audit process to go more efficiently, a number of these points will also aid management of the business. Having a documented thought process for WIP provisioning may help management to arrive at a more robust WIP provisioning figure which will enable better decision making. Likewise, making fee earners justify the recoverability of their WIP balances on a regular basis throughout the year will enhance the reliability of the firm’s figures throughout the year, identifying potential issues ahead of the year end audit.