📘 External Audit Preparation Guide: How to Get Ready for a Smooth Review
For many companies, the phrase “external audit” sparks anxiety. Even when the books are accurate, the process can feel invasive, time-consuming, and unpredictable. But an external audit doesn’t have to be painful. With the right preparation, it becomes a structured, efficient process that reinforces the credibility of your business — and even uncovers opportunities for growth.
An external audit is more than a compliance exercise. It’s a signal to investors, lenders, and stakeholders that your company is disciplined, transparent, and trustworthy. The difference between an audit that drags on for months and one that’s smooth and uneventful is how well you prepare before auditors arrive.
This guide walks you through everything you need to know to get audit-ready — from closing the books and organizing documentation to managing fieldwork and addressing findings. Whether this is your first audit or your tenth, these steps will help you approach it with clarity and control.
Why External Audit Readiness Matters 📊
An external audit provides independent verification that your financial statements are accurate and compliant with accounting standards. That verification has real-world consequences:
🏦 Investor confidence: Audited statements strengthen your position with investors, lenders, and potential buyers.
📈 Better decision-making: Clean financials give leadership reliable data for planning and strategy.
🧭 Faster capital access: Banks and investors move faster when they trust your numbers.
🔁 Internal discipline: Preparing for audits often uncovers weaknesses in controls or processes — before they become costly problems.
But these benefits only come when the audit process runs smoothly. That requires proactive planning and a controller-led approach.
🔍 Internal vs. External Audits: Why Both Matter
Many companies focus solely on external audits and overlook the value of internal audits — but the two are complementary.
External audits are performed by independent accounting firms. Their primary purpose is to provide assurance to external stakeholders that your financial statements are accurate and compliant with GAAP and other standards.
Internal audits are conducted within the organization. Their goal is to evaluate internal controls, operational efficiency, and compliance before external auditors arrive.
Think of an internal audit as a proactive health check and an external audit as the final report card. Companies that invest in strong internal audit processes typically experience smoother, faster, and less expensive external audits — because most issues are resolved before the auditors ever walk in.
📅 Step 1: Start Preparing Early — 90 Days Before Fieldwork
Successful audits start long before the auditors arrive. The final quarter of your fiscal year is the best time to begin preparing. Early preparation allows you to identify and fix issues proactively instead of scrambling under pressure.
Start by:
📄 Reviewing accounting policies for revenue recognition, capitalization, and expense treatment.
📂 Ensuring every balance sheet account has complete supporting documentation.
📆 Meeting with auditors to discuss scope, deliverables, and timing.
🧹 Resolving known issues like unposted entries or unreconciled accounts before they become findings.
📌 Controller Tip: Treat the audit as a project. Build a checklist with deadlines, assign responsibilities, and track progress weekly leading up to fieldwork.
📚 Step 2: Close the Books Cleanly and Accurately
A smooth audit depends on a clean year-end close. That means your general ledger must reflect reality and every account must be reconciled.
Key steps in your close process:
✅ Recognize revenue accurately and defer unearned amounts under ASC 606.
✅ Accrue all expenses and adjust prepaid items.
✅ Post depreciation and amortization.
✅ Reconcile payroll to tax filings and benefit accounts.
✅ Complete inventory counts and tie them to the GL.
✅ Reconcile bank accounts, credit cards, and loans.
📌 Controller Tip: Review accounts for unusual balances, negative amounts, or unexpected changes. Investigate and resolve them before auditors flag them.
🗂️ Step 3: Prepare Reconciliations and Supporting Schedules
Auditors will test the accuracy of your balances by tracing them back to source documents. The more complete and organized your reconciliations are, the faster they can complete their work.
At a minimum, prepare:
🏦 Cash: Bank reconciliations, statements, and lists of outstanding items.
💳 Accounts receivable: Aging reports, significant balances, and allowance calculations.
📬 Accounts payable: Vendor aging reports and tie-outs to the GL.
🏗️ Fixed assets: Rollforwards, additions/disposals, and depreciation schedules.
📁 Prepaids and accruals: Schedules, invoices, and amortization tables.
💰 Debt: Loan agreements, amortization schedules, and interest computations.
🏢 Equity: Cap table, shareholder agreements, and stock transaction details.
📌 Best Practice: Include cross-references to source documents (e.g., invoice numbers or statement pages) to make audit testing faster and easier.
📊 Step 4: Review Revenue Recognition and ASC 606 Compliance
Revenue recognition is one of the most scrutinized areas of any audit. Under ASC 606, revenue must be recognized when and as performance obligations are satisfied — not simply when cash is received.
Audit-ready revenue documentation should include:
📝 Clearly defined performance obligations for each contract.
📊 Evidence of how revenue is allocated across deliverables.
🏗️ Proof of progress for revenue recognized over time (e.g., milestones, usage data).
📈 Deferred revenue rollforwards that tie to the general ledger.
📌 Example:
If your company bills a customer $120,000 upfront for a 12-month subscription, you must recognize revenue monthly as the service is delivered.
Journal Entry for Monthly Revenue Recognition:
Dr Deferred Revenue 10,000
Cr Revenue 10,000
Accurate, well-documented revenue policies reduce the risk of audit adjustments and build credibility with your auditors.
🧭 Step 5: Strengthen Internal Controls
Auditors care about more than just numbers — they also evaluate the systems and controls behind them. Weak controls can result in deficiencies or even material weaknesses noted in your audit report.
To strengthen internal controls before the audit:
🔐 Segregate duties: No single person should record and approve transactions.
📋 Document approvals: Maintain evidence of approvals for invoices, payroll, and journal entries.
🧪 Test key controls: Perform walkthroughs of revenue, purchasing, and cash processes.
🗝️ Review system access: Limit access to financial systems to authorized personnel.
📌 Controller Tip: Keep documentation of control testing and performance. Approval logs, reconciliations, and access reviews are common auditor requests.
📁 Step 6: Organize Your PBC List (“Prepared By Client”)
Auditors will send a PBC list — a detailed request list for documentation. How well you manage this step often determines the pace of the audit.
Best practices for managing your PBC:
🗂️ Use a shared folder structure: Organize documents by category (cash, AR, AP, fixed assets, etc.).
📅 Assign owners and deadlines: Each item should have a responsible person.
📁 Label documents clearly: Use consistent, descriptive naming conventions.
📊 Provide explanations where needed: Include narratives or rollforwards to give auditors context.
📌 Best Practice: Aim to deliver at least 90% of the PBC items before fieldwork begins. Fewer follow-up requests mean a faster, smoother audit.
🔎 Step 7: Conduct a Pre-Audit Review
Before auditors step in, conduct your own “mock audit.” This helps you catch issues before they do.
Checklist for a pre-audit review:
✅ Analytical review of financials (e.g., year-over-year trends, ratios).
✅ Review of large or unusual transactions and their documentation.
✅ Verification that all reconciliations tie to the GL.
✅ Confirmation of documentation for revenue, accruals, and reserves.
✅ Review of board minutes, contracts, and legal letters for disclosure needs.
📌 Controller Tip: A “fresh eyes” review by someone not involved in day-to-day accounting can often catch overlooked issues.
🧪 Step 8: Manage Fieldwork Proactively
Fieldwork is when auditors dive deep into your records, test transactions, and verify balances. Your job is to make that process as smooth as possible.
Tips for managing fieldwork:
📆 Daily check-ins: Short morning meetings keep communication flowing.
🧠 Be proactive: Anticipate additional requests and prepare documents early.
📋 Track requests: Maintain a live list of open items and their status.
🤝 Assign a point of contact: A single liaison avoids confusion and ensures consistency.
📌 Controller Tip: Responsiveness during fieldwork can dramatically shorten the audit timeline and reduce findings.
📄 Step 9: Address Questions and Adjustments Quickly
Auditors will have questions and may propose adjustments. Your responses should be clear, evidence-based, and timely.
Best practices:
📁 Respond with documentation: Evidence is stronger than explanations.
🧾 Evaluate proposed adjustments: If you disagree, provide clear support for your position.
🔁 Post agreed adjustments quickly: Delays here can slow down the issuance of the final opinion.
📌 Controller Tip: Keep a log of all proposed adjustments — accepted and rejected — to help you identify patterns and improve processes before the next audit.
📊 Step 10: Conduct a Post-Audit Review
Once the audit is complete, review the findings and use them to strengthen your accounting function.
Key actions:
🧭 Review management letter comments: These often contain valuable suggestions.
📋 Assign follow-ups: Turn each comment into a specific action item with an owner and deadline.
📘 Update policies: Incorporate improvements into your accounting procedures.
📆 Plan earlier: Use insights from this year’s audit to prepare even earlier next year.
📌 Best Practice: Treat each audit as a feedback loop — an opportunity to improve controls, policies, and processes.
✨ Final Thoughts
A financial audit doesn’t have to be stressful. With strong preparation, it becomes a predictable, well-managed process that reinforces your company’s credibility and strengthens its financial foundation.
When led by a capable controller, audit preparation goes beyond compliance. It builds trust with investors and lenders, enhances internal discipline, and creates confidence in the company’s financial reporting. Most importantly, it shows that your business is ready for what’s next — whether that’s expansion, funding, or acquisition. 📩 Acrux Advisory helps companies prepare for external audits with confidence. From reconciliations and documentation to revenue recognition and internal controls, we help you turn audit preparation into a strategic advantage.
📌 Services & Disclaimer
Acrux Advisory is not a CPA firm and does not provide services requiring a public accountancy license. All services are focused on accounting operations, financial reporting, and controller-level support. We do not provide audit, attest, or tax services that require licensure. Availability may vary, and engagements are accepted based on current capacity.