Use this helpful summary to understand what documentation your financial auditors want to see.
What auditors want
The annual audit is a valuable process to make sure that your company’s financial procedures are in order. It should give your officers and auditors confidence in the strength of your company’s financial systems.
Being prepared for an annual audit will ensure a smooth process for everyone involved.
To prepare for your next year-end financial statement audit, use this handy checklist of tax provision items an auditor usually wants to see:
- Audit will focus on the financial statement amounts for taxes which may include:
- Current and deferred income taxes receivable / liabilities which might be split between short term and long term (deferred income taxes);
- Income taxes included in other comprehensive income; and,
- Current and deferred income tax provision / recovery on the income statement.
- Lead sheets documentation should be able to support the figures and any material estimates used in calculating the figures and in the notes to the financial statements:
- Provision working papers showing calculations of amounts on financial statements and source of inputs used;
- Supporting working papers for material estimates used in calculations such as pension and share-based compensation accruals;
- Reconciliation of statutory tax rate to effective tax rate; and,
- Tax benefit memos to support recognition of tax losses as deferred tax assets (or any other potentially contentious deferred tax assets).
- The auditors should easily be able to perform the following:
- Tie the inputs from the tax provision to the trial balance or other reports directly sourced from the general ledger;
- Proof of payments made to the taxing authorities for instalments (such as statement of accounts and/or bank statements supporting additional payments not on statement yet); and,
- Make an assessment that the estimates used are reasonable and consistent with the company’s general risk appetite and growth strategy. This includes the tax rates and provincial allocation used.
- The auditors may also ask for the following information:
- Last year’s notices of assessment for all legal entities in the group to ensure there are no hidden liabilities;
- Statement of accounts to ensure instalments as recorded are correct and that there are no further liabilities; and,
- Listing of the companies’ open years which indicates the tax years that have become statute barred.
Note: An audit of income taxes will be primarily substantively tested meaning that lower audit reliance is generally placed on internal controls and system controls.
Consider the annual audit as a verification process of your company’s financial systems and statements. The auditor will look at the accuracy of the numbers and company processes and let you know if any internal control steps should be taken. As a result of the audit, opportunities for improvement might be identified, leading to more effective management systems.
Discover the Claret Partners Advantage
No matter what your business or the size, tax departments have a significant responsibility – to deliver efficient, credible tax provisions, reporting, and compliance. Achieving this goal requires your data, technology, people, and process be effectively integrated.
To discuss your tax provision needs, please call 416-406-3337 or contact us to request more information.