Just been bought?  Six Tips for Successfully Achieving First Year Audit

• March 17, 2023
• Jennifer Clement

by Amy Moore, Principal, CLA Post-Merger Integration Team and Christopher Walton, Principal, Assurance & Consulting

If you’ve recently been bought—your buyer may require an audit.  That’s a tall order for a team that is likely exhausted after diligence and trying to get used to new workflows.  As you ready your team, here are a few tips to help that first-year audit go smoothly.

1. Understand timing and obligations based on debt and/ or operating agreements.

First, build a roadmap that spans from the close of the transaction through audit readiness.  Agree on areas of finance and accounting that would benefit from modernizing as the financial statements are readied for audit.

2. Select an audit firm early.

Be clear with your potential auditor about your state of readiness and key areas you are developing.  Choose a firm who has a lot of experience working with clients on a first year audit process.  Ask about capacity the firm has to help you and plan early for items that can be accomplished off-cycle.

3. Clarify the period of time the audit will cover.

In most cases, the audit will cover from transaction date forward, but it may cover pre-close periods as well. 

4. Get the most out of diligence.

Maximize the ROI of the time your team spent during diligence to drive a roadmap of improvements.  Evaluate any material adjustments from the Quality of Earnings process to avoid surprises.   Take note of accounting changes that may be needed to get to full GAAP. 

5. Prepare an opening balance sheet.

Keep in mind that you will probably need to provide the same level of information on the opening balance sheet as the year-end balance sheet for the auditors. 

Auditors may ask to see some or all of the following: 

• Confirmation that purchase accounting was done properly.
• A technical memo of transaction details and key assumptions used in accounting.
• Physical inventory taken at close (typically done by the auditor).
• A tangible or intangible valuation.  Great to get their input on scope.  
• An evaluation of your cut off testing process (ideal to tighten that up) that is captured in net working capital statements. The auditor will perform cut-off testing.
• A plan to identify which intangibles are relevant if the allocation of intangibles in excess of purchase price are identified.  You will need an appropriate professional to value intangible assets in accordance with ASC 805 Business Combination guidance.

6. Document significant accounting processes.

In order to plan the audit, the auditor will need to walk through documentation detailing significant accounting processes. These are a key component of the audit firm’s understanding of the relevant people, process and systems before walkthroughs can be performed.  A few docs the auditors will look for include: 

• Revenue recognition
• Fixed assets capitalization
• VIE consolidation
• Share-based compensation
• Private company accounting elections (goodwill amortization, grouping intangible assets with goodwill, other than trade name), etc.

Best practice:  a month-end close checklist helps confirm you have key processes covered. 

The bottom line

Ask for the list of documents the auditor requires well in advance to allow plenty of time to prepare and avoid surprises.

For some firms it may be the first time they have drafted financial statements, and the right support or resources are key to a smooth audit process. 

CLA can help with that.

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