Preparing for the Year-End Audit: Don’t Overlook These Key Planning Areas

November 16, 2018

Preparing for the Year-End Audit: Don’t Overlook These Key Planning Areas

By Adeline Lee, CPA, Senior Manager

It is not hard to see why the year-end audit might be stressful for in-house accounting and finance departments.

However, communication and preparation can avoid disrupting routine accounting functions and decrease the risk of errors and missed deadlines. Working with your auditor, early planning and preparation can help companies better manage their yearend audits and prevent last-minute surprises.

As companies gear up for their year-end audits, many of them focus on locking in their auditor’s fieldwork start date, performing account reconciliation and discussing deliverables. However, there are some frequently overlooked areas that have a direct impact on the overall audit, financial statement presentation and disclosures. Part of the planning process should include discussing with your auditor if your company has experienced any of the following scenarios, which could ultimately affect the timeliness of report issuance.


If your company has obtained a new loan, refinanced an existing loan or entered into a new joint venture, the new lender/investor very often requires some type of financial statements. Even before the preparation for the year-end audit, it is very important to revisit pertinent agreements to determine the financial reporting requirements – not only for the reporting due date but also for the required reporting framework. Financial statements are prepared based on either Generally Accepted Accounting Principles (GAAP) or other special purpose frameworks, such as income tax basis. In fact, it is not uncommon for real estate entities to prepare their financial statements on an income tax basis. So, what happens when the lender is looking for a GAAP financial statement? Discussions should be initiated with the new users to see if the current framework is acceptable to them. If it is not, consult your auditors as soon as possible to evaluate proper courses of action. Presenting financial statements on an incorrect reporting framework without notifying the users would be considered non-compliance.


Apart from financial reporting requirements, loan documents sometimes contain financial covenants that are required to be met at each financial reporting period (measurement date), but they sometimes become an afterthought upon closing. It is good practice to keep track of financial covenant calculations throughout the year. Performing preliminary calculations based on projected amounts offers planning opportunities, which help mitigate undesirable outcomes and eliminate surprises.

When a company is in doubt about meeting financial covenants at a measurement date, early discussion with lenders is always recommended – as they too don’t like surprises. Once a company is certain that a covenant is violated, lenders should be contacted immediately for a bank waiver request. If a bank waiver is not obtained before report issuance, there will be additional disclosures required in the notes to the financial statements, and the debt will need to be reported as current liability. This may lead to substantial doubt about the company’s ability to continue as a going concern.


A recently enacted accounting standard on “Going Concern” affects audits of financial statements. Conditions or events, considered in the aggregate, that raise substantial doubt about a company’s ability to meet its obligations as they become due for a reasonable period of time are explained below. Soon-to-mature debts, negative cash flows from operations, a cumulative capital deficiency and loss of major tenants are conditions or events that might raise substantial doubt. The standard extended the evaluation timeframe, and shifted the evaluation and disclosure responsibilities to management, regardless of the financial reporting framework.

Under the old standard, the evaluation timeframe for going concern issues that might arise was within one year after the financial statement date. The new accounting standard extended the timeframe to one year after the date the financial statements are issued or are available to be issued.

Under the new accounting standard, the initial evaluation responsibility has been shifted from the auditor to management. It is a 3-step process: management is responsible for (1) identifying events and conditions that raise substantial doubt about the company’s ability to meet its obligations as they become due in the ordinary course of business, (2) evaluating the significance of events and conditions identified and (3) evaluating if management’s plan can be effectively implemented and alleviate such doubt. Once management determines substantial doubt exists, disclosure is required regardless of whether management’s plan can alleviate such doubt or not.


As companies prepare for their year-end audits, management should not overlook areas that have a direct impact on the overall audit, financial statement presentation and disclosures. Reviewing these areas well in advance helps mitigate last minute surprises, making the year-end audit less stressful.