Preparing for your first audit: a calm, practical guide for accountants

What to expect from an audit

An audit is an independent check that your financial statements give a fair picture of the business. In practice, the auditor will ask for records, pick some transactions to look at more closely, and ask you to explain how things were recorded. They are not there to catch you out. Most of what they ask for is already part of normal bookkeeping, which is why the best preparation is simply having your books tidy and your paperwork organised.

If you would like to see how the whole process unfolds from the auditor's side, our guide to the audit process is a good companion to this one.

Make sure the books agree with the bank

This is the single most useful thing you can do. For every bank account, compare the balance in your accounting records to the bank statement at the year-end date, and list the differences. Typical differences are cheques not yet cleared or payments received just after the year-end. Each one should have a clear explanation.

• Reconcile every account, including foreign currency accounts, credit cards and payment platforms.
• Clear or explain any item that has been sitting there for months.
• Keep the final reconciliation together with the matching bank statement.

Check who owes you and who you owe

Your accounting system should be able to produce a list of customers who owe money and a list of suppliers you still need to pay. Check that each list adds up to the total shown in the accounts. If it does not, find out why before the auditor does.

Also look through the customer list for old debts you no longer expect to collect. It is far better to raise these yourself, with a short note on what you have done to chase them, than to have the auditor spot them.

Record expenses in the right year

Costs belong in the year the business used the goods or services, not the year you happened to pay for them. Two situations come up most often:

• Bills not yet received or paid. Utilities, professional fees, staff bonuses and unused leave that relate to the year should be recorded, even if the invoice arrives in the new year.
• Payments made in advance. Insurance, rent or subscriptions that cover next year should be spread, with only the part for this year counted as an expense.

A quick way to check is to read through invoices and payments from the first few weeks after year-end and ask whether each one relates to the year you are closing.

Count your stock and list your assets

If the business holds stock, do a physical count around the year-end and keep the count sheets. Compare the result with your records and note any differences. If you have equipment, vehicles or furniture, keep a simple list showing what each item is, when it was bought, what it cost and how it has been written down over time. Remember to record anything that was sold or scrapped during the year.

List loans and balances with directors or related companies

Auditors pay close attention to money moving between the business and its owners or connected companies. Prepare a simple schedule showing each loan or balance, who owes whom, the amount at year-end, and the agreement behind it, including any interest or repayment terms. If there is no written agreement, ask your director whether one can be put in place, and be ready to explain the arrangement. Our article on directors' current accounts covers what SMEs need to know in more detail.

Keep supporting documents easy to find

The auditor will pick transactions and ask to see the paperwork behind them. You will save a lot of time if you can produce it within minutes. A simple system works well:

• Organise by year, then by type: sales invoices, supplier invoices, bank statements, contracts, payroll, and records of director decisions or meetings.
• Save scanned copies in clearly named folders rather than leaving them in email inboxes.
• Make sure each entry in the books can be traced back to a document.

If a document is missing, do not recreate it. Tell the auditor what happened and what you can offer instead, such as a bank record or an email trail.

Write down the "why" behind judgement calls

Some figures in the accounts rest on a decision rather than a receipt: why a customer's debt was written off, how long you expect a machine to last, or why you set aside an amount for an expected cost. Write a line or two next to each one explaining your reasoning and what information you used. When the auditor asks, you can answer calmly and show the note.

Tell your director what you will need from them

Some questions can only be answered by the owner or director, such as the purpose of a large payment or the terms of a loan. Give them an early heads-up that the auditor will want to speak with them, and ask them to be available. It also helps to agree beforehand who signs what, so nothing waits on someone who is overseas.

Expect questions, and don't panic

Auditors ask a lot of questions. That is normal, and it does not mean they have found a problem. A few habits make the experience easier:

• Answer in simple terms, and give the document that supports your answer.
• If you do not know, say "I'll check and come back to you" rather than guessing.
• If you spot a mistake in your own books, say so early. Auditors are used to corrections, and they value honesty far more than perfection.
• Keep a short list of questions asked and answers given, so nothing is forgotten.

It is also fine to ask the auditor what they need and by when. Most are happy to explain, and a short call at the start often saves days of back and forth. If you are still deciding whether your company even needs one, see Do you really need an audit?

The bottom line

Your first audit is less about being perfect and more about being organised. If your bank balances agree, your customer and supplier lists add up, your costs are in the right year, your assets and loans are listed, and your paperwork is easy to find, you will have covered what matters most. The rest is answering questions honestly, and learning as you go. The second audit is always easier than the first.

At Chua and Lee Associates, we work with Singapore SMEs and their finance teams so that audit season feels manageable. To learn more, see our Audit services and Accounting services.