Preparing for Annual & Quarterly Audits: A CFO's Checklist

Many CFO’s do not want to think about the word “audit” during the summer, if at all, but auditing your business is not just essential during tax season. You should be thinking about both quarterly and annual audits year-round to ensure the financial health and compliance of your company.

At Critical Connexion, our financial experts are continuously communicating with our clients about their auditing needs. There are advantages to preparing for both quarterly and annual audits, and choosing which one (or both) depends on several factors, from your business structure and cash flow, to the number of employees, industry regulations, and overall financial goals. That’s what we will discuss in this month’s blog.

Annual audits are usually a standard part of every company’s financial health, yet many companies don’t also perform audits quarterly. Maybe it is because of the stress audits can bring on, the additional cost of auditing every three months, or the time it takes to do them right. As the CFO of your company, understanding both annual and quarterly audits is crucial, so we thought we would share some background on both types of audits and a “CFO Checklist” to help you get started!

The Importance of Annual and Quarterly Audits

Having a seasoned financial expert evaluate your company’s financial statements – whether it is a third-party evaluator or in-house expert – will ensure your company is compliant with all regulations and financially sound to assure your employees, investors, and regulators you’re on the right track. This is why many CFOs choose to have both annual and quarterly audits performed.

Since quarterly audits are done every three months, this frequency gives you a strong focus on key financial areas of your company and any specific areas of concern. Annual audits, on the other hand, give you a comprehensive, year-end review of your company’s overall financial health and compliance. More specifically, annual and quarterly audits do three important things when done together:

Ensure your financial transparency and accuracy,
Ensure you are meeting regulatory and compliance requirements,
Enhance your credibility with stakeholders and investors,

Your company’s financial reports are literally the backbone to your success – they give you a clear and comprehensive view into your organization’s financial health. This is why most companies rely on both quarterly and annual audits to stay informed of any trends, changes, or strategies required throughout the year.

An annual and quarterly audit each serves a different purpose and offers specific insights into your company’s financial standing and overall health. Performing quarterly audits in tandem with your annual audit can give you a real-time assessment of your business’s financial performance by focusing on a specific three-month time frame.

Annual audits: Usually performed 3 months after the end of the last fiscal quarter (i.e., Q4) and give a complete, long-term overview of your company’s financial performance over the respective year.
Quarterly audits: Usually performed within 2 months after each fiscal quarter (i.e., Q1, Q2, Q3, Q4) and present an even more comprehensive overview of your company’s short-term financial performance by focusing on that specific three-month period of time. They can also guide your company’s financial choices and expectations for the next quarter and progress toward your annual financial goals.

Who needs quarterly audits? CFOs in particular need quarterly reports to analyze financial trends in the industry and then make data-driven decisions and adjustments. Not only that, but your senior management, investors, and lenders also appreciate the information in quarterly reports. For example, investors want to be assured you’re complying with all regulations, while senior management can review your company’s financial performance and then use the data to identify any areas that may need adjustment before the end of the year.

Who needs annual audits? Again, you as the CFO, your senior management, investors, and lenders should be reviewing the report from your annual audit to properly assess your company’s financial health, profitability, and compliance with financial regulations. If you have executives or a board of directors, they should also be privy to your company’s long-term performance through annual audits.

Although annual and quarterly audits do offer diverse insights into your company’s performance, when used together they will give you three things:

The ability to monitor your monthly financial reports and make any adjustments immediately, if necessary, to fit into your bigger financial picture.
A broader view of identifying trends through quarterly reports, and then also identifying longer-term trends and opportunities through annual reports.
Strategic planning through both short- and long-term financial reviews, and ensuring compliance with regulatory requirements.

Preparing for both annual and quarterly reports can help you address challenges, identify trends in the industry, and then adjust to any changes or strategies necessary. Taking the time to prepare for quarterly audits as well as the standard annual audit will ensure you are on track with your yearly goals by guaranteeing financial transparency between each quarter.

A CFO’s Checklist of What is Needed to Prepare

How can a CFO prepare for annual and quarterly audits? Here are eight initial steps you can check off your list in advance to make the auditing process as smooth as possible:

Organize your financial records – invoices, receipts, bank statements, and all other financial documents.

Calculate your stock-based compensation expenses according to the Financial Accounting Standards Board (BASB) guidelines. This includes adhering to ASC 718 (Accounting Standards Codification Topic 718), which requires companies to disclose their stock-based compensation expenses.
Perform account reconciliation and verify balances to find any errors and large or unusual amounts that need to be investigated (over the three-month and annual period).
Thoroughly examine your revenue and expenses so you can verify your transactions are appropriate, properly documented, and if warranted, accruals are recorded for the period. Also review any major transactions, which usually require additional, detailed documentation for further transparency.
Perform an inventory and verify the value of your assets to ensure the values that are recorded reflect the current market values.
Hire an outside, third-party auditor who you trust! If you are unsure what certified public accountant or auditor will work best, consult your investors for recommendations.
Organize your financial documentation to save your third-party auditor time (and to save you money).
Update your Financial Reporting Value (FRV) to ensure you are using the most recent numbers. This is especially important for quarterly audits to ensure you are using up-to-date data for that three-month period.

As the CFO, you will more than likely be delegating many of the steps above. However, you need to be aware that they should be completed before you have annual and quarterly audits performed for your organization.

Compiling the Proper Documents for an Annual and Quarterly Audit

Many documents will be similar for an annual and quarterly audit, but typically they will include the following:

Quarterly Audit	Annual Audit
Three-month summary income statement showing profits, revenues, and expenses.	Yearly summary income statement for the entire year’s profits, revenues, and expenses.
Balance sheet illustrating a quarterly snapshot of equity, assets, and liabilities.	Balance sheet illustrating the entire year’s equity, assets, and liabilities.
Cash flow statement over the quarter.	Cash flow statement for the entire year.
Key Performance Indicators (KPIs) that track both the cash inflow and outflow over the quarter.	Key Performance Indicators (KPIs) that track both the cash inflow and outflow over at least a 12-month period to illustrate how well the company manages its cash position.
Commentary and insight into the company’s performance, any challenges over the quarter, and plans for the next quarter.	A statement about any changes in equity over the course of that year (i.e., issued stock, retained earnings), as well as commentary and insight into the company’s performance, challenges, risks, and strategic plans for the upcoming year.

Remember…quarterly audits will give you a strategic overview to help you identify your company’s short-term performance patterns and long-term trends, sales and expense fluctuations, forecasting and budgeting, and guides to improve your strategies for the next quarter. Annual audits give insights into your company’s overall performance and strategy, plan your long-term growth plans and initiatives, and predict the future of your organization.

However, BOTH AUDITS will build trust, transparency, and credibility with your internal and external stakeholders and investors.

Do You Need Both?

Not every CFO will need both annual and quarterly audits, and it really depends on a variety of factors: your company’s size, your industry’s regulations, and the cost of each, to name a few. In the end, there is no “one-size-fits-all” answer to auditing your finances. That being said, we have found that performing both annual and quarterly audits will play fundamental roles in the financial health and compliance of your organization.

About Critical Connexion:

Critical Connexion is a distinguished business management & consulting firm that focuses on leveraging a foundation of leading finance, HR management, strategic sourcing, risk & operations experts to accelerate brand success for clients.

We specialize in navigating the evolving landscape of corporate growth by adeptly addressing changing systems, processes, and people requirements. Recognizing the substantial nature of technology and changing business needs, we ensure that these resources are directed with foresight and expertise. We are your extended partners for business growth, scaling seamlessly and brand elevation.

Contact Us:
Ph: 213-798-6676
Email: info@criticalconnexion.com