Annual Audit Preparation
Document Type: Procedure
Version: 1.0
Last Updated: February 2026
Distribute To: Controllers, CFO, Accounting Staff
Purpose
Establish procedures for preparing for the annual financial statement audit to ensure efficient, successful audits.
Why Audit Preparation Matters
Benefits of Good Preparation:
- Shorter audit duration
- Fewer audit adjustments
- Lower audit fees
- Less staff disruption
- Better auditor relationship
- Cleaner opinion
Consequences of Poor Preparation:
- Extended fieldwork
- Audit adjustments
- Management letter comments
- Higher fees
- Strained relationship
- Potential opinion issues
Audit Timeline
90 Days Before Year-End:
- Confirm audit dates with CPA firm
- Review prior year management letter
- Address prior year comments
- Identify new accounting issues
- Plan interim work
60 Days Before Year-End:
- Request PBC (Prepared by Client) list
- Begin year-end reconciliations
- Schedule confirmation mailings
- Clean up outstanding items
- Document new contracts/policies
30 Days Before Year-End:
- Finalize estimates and accruals
- Complete physical inventory (if applicable)
- Confirm cut-off procedures
- Prepare preliminary WIP
- Schedule audit kickoff meeting
Year-End:
- Execute cut-off procedures
- Secure supporting documents
- Begin confirmation process
- Start drafting footnotes
During Audit:
- Provide requested items promptly
- Be available for questions
- Review draft adjustments
- Address issues immediately
PBC List (Prepared by Client)
Common Audit Requests:
General:
- Trial balance (final)
- General ledger detail
- Bank reconciliations (all accounts)
- Minutes of board/shareholder meetings
- Contracts (new or amended)
- Insurance policies
- Debt agreements
Revenue/AR:
- AR aging at year-end
- AR confirmation letters (blank)
- WIP schedule (final)
- All contracts for open jobs
- Approved change orders
- Billing reconciliation to WIP
Costs/AP:
- AP aging at year-end
- AP confirmation letters (blank)
- Subcontract agreements (significant)
- Job cost detail
- Accrual support
Payroll:
- Payroll registers
- Benefits expense detail
- Officer compensation detail
- Certified payroll (if applicable)
Fixed Assets:
- Fixed asset rollforward
- Depreciation schedule
- Additions/dispositions support
Other:
- Prepaid expense detail
- Accrued expense detail
- Note payable schedules
- Related party transactions
- Legal letters
- Management representation letter
Confirmation Process
Confirmations Typically Required:
| Type | To Confirm |
|---|---|
| Bank | Cash balances, loans |
| AR | Customer balances |
| AP | Vendor balances (sample) |
| Legal | Litigation, claims |
| Insurance | Coverage, claims |
| Bonding | Outstanding bonds |
Confirmation Process:
- Auditor prepares confirmation letters
- Company adds customer/vendor addresses
- Auditor mails confirmations
- Responses go directly to auditor
- Follow up on non-responses
- Alternative procedures if no response
Tips:
- Verify addresses are current
- Flag problematic customers
- Expect some non-response
- Be prepared for alternatives
WIP Schedule for Audit
Auditor Focus Areas:
| Area | Auditor Concern |
|---|---|
| % Complete | Supported? Reasonable? |
| Cost to complete | Documented? Reviewed by PM? |
| Change orders | Approved? Collectible? |
| Claims | Conservative? Documented? |
| Loss provisions | Adequate? |
Documentation Required:
For Each Significant Job:
- Contract and amendments
- Approved change orders
- Cost-to-complete estimates (PM signed)
- Billing history
- Correspondence (if issues)
Common Audit Adjustments:
| Issue | Adjustment |
|---|---|
| Over-optimistic % complete | Reduce revenue |
| Unapproved change orders | Remove from contract |
| Claims not probable | Remove from revenue |
| Loss jobs | Additional provision |
| Cut-off errors | Timing adjustment |
Key Audit Areas for Contractors
1. Revenue Recognition
Auditor Procedures:
- Test % complete calculations
- Verify cost-to-complete estimates
- Test contract modifications
- Review change order approval
- Test cut-off
Your Preparation:
- Support for % complete method
- PM sign-off on projections
- Change order documentation
- Evidence of approval
2. Receivables
Auditor Procedures:
- Confirm balances
- Test collectibility
- Review subsequent receipts
- Evaluate allowance
Your Preparation:
- Clean AR aging
- Collection history
- Subsequent receipts
- Support for allowance
3. Costs
Auditor Procedures:
- Test job cost coding
- Verify cost accumulation
- Test cut-off
- Review allocations
Your Preparation:
- Accurate job costing
- Support for accruals
- Cut-off documentation
4. Related Parties
Auditor Procedures:
- Identify relationships
- Test transactions
- Disclose appropriately
Your Preparation:
- List of related parties
- Document transactions
- Support arm's length pricing
Working Paper Preparation
Organize for Each Account:
Lead Schedule (Account Summary)
├── Reconciliation
├── Supporting Detail
├── Confirmations/Third Party Support
└── Roll-Forward (if applicable)
Best Practices:
- Electronic files organized by account
- Clear cross-references
- Self-explanatory workpapers
- Support for significant items
- Prior year comparison
Communication with Auditors
Before Audit:
- Kickoff meeting
- Discuss changes from prior year
- Review timeline and deadlines
- Identify key staff contacts
During Audit:
- Daily check-ins
- Prompt response to questions
- Escalate issues early
- Review adjustments timely
After Audit:
- Exit meeting
- Management letter review
- Discuss findings
- Plan improvements
Common Audit Problems
| Problem | Prevention |
|---|---|
| Missing documents | Year-end organization |
| Delayed responses | Dedicated staff time |
| WIP disagreements | PM involvement |
| Cut-off errors | Clear procedures |
| Reconciliation gaps | Monthly discipline |
| Related party issues | Proper documentation |
Management Letter Response
When You Receive Comments:
- Review carefully
- Understand the issue
- Agree or discuss
- Develop remediation plan
- Document response
- Implement changes
- Follow up next year
Goal: Zero Repeat Findings
Related Documents
- Month-End Close
- WIP Reporting
- Financial Reporting
- Banking Covenants
Template provided by support.construction. Good audit preparation reduces stress and costs.