Based on general perceptions, many see the word “audit” and associate it with a negative connotation. Whether financial statement audits are viewed by accounting teams as a necessary evil or not, the primary goal of auditors is to help our clients ensure their financial statements are materially accurate and provide the data and operating insights necessary for financial executives to make informed company and management decisions.

As deadlines for privately-held fiscal year audits come to a close, we interviewed two LBMC clients who completed their first audits to ask what advice they would give others to aid in their first-year audit preparation. While an audit opinion is an ultimate deliverable, we always want to find a solution to make the process of completion as efficient and effective as possible.

Managing PBC Request Lists and Information

At the onset of an engagement, LBMC provides a PBC list (“prepared by client”) to company management. While not fully comprehensive in a first-year audit, this generally provides a detailed list of initial information we need to begin the audit and is organized by financial statement audit area. In preparing for the audit, we ask questions to determine the types of requests needed to address risks and key audit areas identified.

PBC list recommendations include:

  1. Maintaining information electronically, which provides for easy upload to audit share sites

While most companies are moving towards maintaining electronic financial records instead of paper records, smaller start-up companies may not have a formal reconciliation and document retention process due to lack of resources. As your company prepares for the initial audit, consider scanning information electronically or moving to electronic records when available to provide for a smoother transition.

  1. Reviewing the PBC list directly with the auditors

Review the PBC list with the auditors to identify items that are not driven by existing company reconciliations/analyses and begin working on those items first as they typically require more preparation time.

  1. Asking for further clarity when the purpose of a request is unknown.

Additionally, consider asking the auditor follow-up questions to requests that aren’t clear, as there may be an easier way to provide the requested information or an alternative based on how the company typically reviews a certain metric. Discussions such as these with your auditors will not only reduce the preparation time on your end but also assist the auditors with understanding your business and metrics that are important to management.

Working through any issues or questions during the first year of an engagement will help make the PBC list more tailored to your company and easier to tackle in future years.

Preliminary Analytics

Clients have also expressed that performing analytics prior to the audit, similar to how the auditor would perform their independent analyses, would be beneficial.

For healthcare clients, these preliminary analytics around accounts receivable and revenue recognition would be advantageous, not only to the company but the auditor as well. This information will help prepare the client for questions that will arise during the audit.

Additionally, having client prepared analytics as a reference during the audit can reduce the number of questions that are sent back to the client for further research, as the work has already been done!

Auditors also tend to analyze financial results from a different perspective and provide a different viewpoint to management. However, if an internal preliminary analysis has already been performed, it will be easier to compare the auditor’s analysis to the internal analysis and provide timely responses to questions.

Whether it’s an in-depth review of accounts receivable or a trended income statement variance analysis, preliminary internal analytics before the auditor arrives will help in preparation for the follow-up questions that will arise during your financial statement audit.

Locating pertinent documents

Some of the first PBC items requested during an audit relate to the company’s formation and operating documents, significant contracts, lease agreements, buy/sell agreements, as well as related amendments. As most of these documents are not referred to daily, locating them can sometimes prove to be challenging. If a financial statement audit is in your company’s future, making efforts now to locate and retain these documents in an easily accessible location can save time when the audit is upon you.

Documenting company policies and procedures

As part of a financial statement audit for a private company, auditors are required to obtain an understanding of the company’s internal control environment. As part of these procedures, we typically request written documentation of the company’s significant policies and procedures. For healthcare companies specifically, the most significant areas would include the revenue and accounts receivable cycle and third-party settlements (if applicable). While documentation can require substantial efforts initially, taking the time to formally document policies around the company’s revenue recognition model, contractual allowance and bad debt reserve methodologies, and reconciliation procedures around accounts receivable and third-party settlement accounts will not only reduce effort required during the actual audit but will also help identify any breakdowns or weaknesses in the company’s internal control environment, again ensuring the company is audit-ready. Additionally, if comprehensively drafted, documentation can include the company’s important key metrics, payor specific information, important vernacular, etc. and double as a convenient resource for internal employees.

While a first-year audit will require additional time and employee resources than an accounting department may have previously anticipated, hopefully, these pieces of advice from other healthcare companies which have just completed their first-year audits will help prepare you and your company to be a step closer to becoming audit-ready when the time arises. Learn more about new revenue recognition standards and what you need to know.

Laura McGregor is a Senior Manager in LBMC’s Audit and Advisory practice. She can be reached at