14 Essential Financial Documents and Records Needed for an Audit: Ensuring Compliance with Debt Covenants

From financial documents to vendor bills and contracts, Ankush Sharma shares what you need to prepare for a smooth and efficient audit.

Did you know that organizations lose an estimated 5% of their annual revenue to fraudulent activities, often due to a lack of financial transparency? This statistic underscores the urgent need for stringent financial regulations and streamlined processes. It also highlights how audits are a legal requirement and a crucial step in safeguarding your company’s reputation and financial integrity.

As Escalon’s Lead Controller of Private Equity Practice, I have participated in multiple audit surveys. I understand the challenges and potential risks in preparing these crucial financial documents for an audit. However, with the proper knowledge and assistance, these challenges can be overcome, and the risks can be minimized.

     1. Financials for the last three years

For any company, no matter the size, having your financial statements for the last three years on hand is not just essential; it’s a necessity. These documents are necessary to avoid delays in the audit process, potential fines for non-compliance, and a negative impact on your company’s reputation.

     2. General Ledger, Accounts Payable (AP), and Accounts Receivable (AR) Aging Reports

Each of these three documents serves a specific purpose.

• A general ledger represents a record-keeping system and essentially offers a detailed record of all your company’s financial transactions. In simpler terms, it’s like a diary of your company’s financial activities, showing every penny that comes in and goes out.
• Accounts payable and accounts receivable reports are critical for showing outstanding debts and owed receivables.

Together, these documents help your auditor accurately assess your cash flow and credit management, which is essential for painting a wholesome overview of your company’s financial well-being.

     3. Balance Sheet Reconciliations:

As a business owner, you must know that auditors request balance sheet reconciliations before an audit. This is like a detailed check-up of your company’s financial health. It’s done to scrutinize and check the accuracy of a company’s financial statements. These reconciliations help identify discrepancies between recorded and actual account balances, ensuring financial integrity. Thus, monthly reconciliations are necessary to prevent errors and detect potential fraud.

     4. Bank and Credit Card Statements with Reconciliation

Reconciliations of your bank and credit card statements ensure that the recorded balances align with the actual amounts in your bank and credit card accounts. This meticulous approach not only aids in accurate financial reporting but also enhances the overall integrity of your financial management processes. Ensuring these documents are in order supports a seamless and efficient audit process, highlighting your commitment to transparency and financial accuracy.

     5. Fixed Asset Listing

A detailed fixed asset listing, encompassing acquisition dates, costs, depreciation, and current value, is imperative. This comprehensive documentation allows auditors to confirm your company’s existence and accurately assess the value of your company’s physical and intangible assets.

     6. Vendor Bills

Organizing all vendor bills is essential for a thorough and accurate audit. A best practice is maintaining comprehensive records, including invoices, payment documentation, and related correspondence, in a centralized and easily accessible system. This way, auditors can verify your expense records and ensure all liabilities are accurately reported.

     7. List the Top 10 Customers and Vendors

Auditors often request a detailed list of your top 10 customers and vendors. Although this request may seem out of the ordinary and can usually be automated through a vendor-management system, it is crucial to understand your key business relationships and assess their impact on your financial health. By analyzing these relationships, auditors can evaluate dependency and build a risk management contingency plan to ensure your company’s economic stability and performance.

     8. Contracts Related to Customers, Vendors, Employees, and Leases

It is imperative that all significant contracts, including those with customers, vendors, employees, and leases, are readily and easily accessible when needed. These documents are critical in verifying compliance with contractual obligations and understanding potential liabilities, which are vital in an audit process.

     9. Deferred Revenue Waterfall & Deferred Commission Schedule

Accurately recognizing revenue and expenses in their appropriate accounting periods is essential for maintaining the integrity of financial statements. Deferred revenue and commission schedules play a pivotal role in this process. These schedules ensure compliance with accounting standards and provide auditors with the necessary information to accurately validate your company’s financial position.

For auditors, these schedules are indispensable tools that facilitate a thorough review and validation of financial statements. By clearly mapping out the recognition of revenue and expenses, auditors can ensure that all economic activities are recorded correctly, reflecting the company’s proper financial health.

     10. Inventory Roll-forward Schedules and Inventory Reports For All Warehouse and Third-party Logistics (3PL) Locations

Comprehensive inventory reports and detailed roll-forward schedules for all warehouses and 3PL locations are essential. These documents are pivotal for auditors to verify inventory levels, track movements, and assess valuation, ensuring the reliability of company inventory records. Having these records meticulously organized and readily available underscores your commitment to financial transparency and operational efficiency, facilitating a seamless audit process. This professional approach boosts your company’s financial integrity and enhances stakeholder confidence.

     11. The capitalization table (CAP)

The CAP is a critical document that showcases a company’s detailed account of ownership percentages alongside the company’s securities, including stocks, warrants, and equity grants. This information is essential for auditors to verify the ownership structure, assess equity transactions, and ensure accurate equity representation in the financial statements. It proves indispensable in maintaining transparency and accountability in financial reporting and contributes significantly to the audit process.

     12. Policy Documents Like Fixed Asset Policy, Purchase Policy, Travel, and Expense Policy Employee Handbook

Policy documents such as the Fixed Asset Policy, Purchase Policy, Travel and Expense Policy, and Employee Handbook present an organization’s standard practices and procedures. These documents are vital in demonstrating compliance with internal controls and regulatory requirements. They provide auditors with a clear understanding of how transactions are managed and controlled within the company, ensuring transparency and adherence to best practices.

     13. Supporting Documents to Validate the Beginning Balances of the Audit Period

Ensuring you start a period or book with accurate balances is fundamental as it establishes the foundation for the entire audit period. Essential documents typically include prior-period financial statements, reconciliations, and adjustment records. These documents provide the historical context necessary for auditors to verify the continuity and consistency of economic data. Maintaining precise and comprehensive documentation can create a reliable starting point for auditors, facilitating a smoother and more efficient audit process.

     14. Standard Operating Procedures for Key Business Functions

Standard Operating Procedures (SOPs) are comprehensive documents that meticulously outline the steps required to execute essential business functions. These SOPs are instrumental in maintaining consistency and utmost accuracy across operations, ensuring that each process is performed effectively. Furthermore, for auditors, SOPs serve as vital tools for evaluating the reliability of a company’s internal controls, providing a clear framework that supports operational integrity and compliance.

The Key Takeaway:

In the complex financial management landscape, meticulous organization and accuracy of financial documents are not just best practices but necessities. These critical documents are essential for a seamless and efficient audit process. The preparation ensures compliance with stringent financial regulations and debt covenants. It also fortifies the integrity and transparency of your business operations.

Maintaining detailed financial statements, general ledgers, reconciliation reports, and other vital documents enables auditors to accurately evaluate your company’s financial health. This level of preparedness demonstrates a commitment to operational excellence and economic responsibility, ultimately safeguarding your business against potential financial discrepancies and regulatory pitfalls.

In an era of heightened financial scrutiny and regulatory compliance, prioritizing the organization and accessibility of these essential documents is a strategic move toward sustained business credibility and self-sustained growth and success.

Want to know how our experts can help you? Escalon has helped over 5,000 companies across various industries improve their compliance regarding internal controls and streamline processes. Talk to us today.

Disclaimer: This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal, or accounting advice in this article. If you would like to engage with Escalon, please contact us here.

Authors

Ankush Sharma

Ankush Sharma is a seasoned financial expert with over 18 years of experience at Escalon Services. Renowned for his passion for innovation, Ankush has demonstrated a remarkable ability to drive business growth. His extensive career has equipped him with exceptional skills in process improvement, change management, and implementing advanced financial systems. Ankush's dedication to achieving measurable results makes him an invaluable asset to Escalon Services and its clients.