Guidance and tips for real estate companies to help demystify and de-stress the annual audit process
An audit requirement can be driven by your lender, joint venture partner or investors, all with the objective of determining whether the financial records are complete and accurate, in accordance with GAAP, tax basis or IFRS. Another objective: that the financial statements fairly present the company's financial position and results of its operations.
Here’s guidance and tips to help demystify and de-stress the process.
Often the need for an audit will be known from day one; however, if you refinance a property five years down the road, the lender could at that point request an audit from inception to date. Therefore, it’s important to be prepared and maintain the appropriate records from the beginning to save yourself a headache later on.
On a related note, when you’re prepared and maintain good records on a regular basis, there’s less need to halt operations during audit time trying to prepare schedules and reconciliations and gather missing documents.
It’s helpful to understand the general audit approach and where the auditor will focus their attention. An auditor does not verify 100% of all transactions, but focuses on larger items and more complex transactions, and conducts a sampling of the rest. Companies need to have all their records in order, because a random sample can select a very small invoice for which you need to have support.
Missing information counts as an error, and may get extrapolated (statistically applied to the rest of the population to calculate the projected overall error) and create a potential audit adjustment. Complex transactions that an auditor will certainly look at include acquisitions, sales, refinancings, waterfall calculations, litigation accruals and anything at fair value.
Tips for a successful audit
- First, ensure that you’ve verified the audit requirements, including the basis of accounting required in your situation (e.g., GAAP, tax or IFRS) and the stated deadline in the loan documents or joint venture agreement. Even confirm the legal entity that’s subject to the audit requirement – meaning whether it’s the owner entity, the holdings entity or otherwise.
- Open the lines of dialogue throughout the year. Don't attempt to hide the messier transactions; it’s better to bring them to the auditor’s attention. Engage the audit team with questions early on for new or complex areas. You can get their insight on accounting and reporting implications for complex or unusual transactions in real time, rather than after year-end.
- Designate a key contact for the auditors, which should be an appropriate person at management level who has experience with financial audits. This individual can serve as the liaison between the auditors and the finance team.
- Key meetings with the audit team, which can vary in degree of formality, will include a planning meeting before year-end, a kickoff meeting at the start of fieldwork and an exit call at the end of the audit. During fieldwork, we strongly recommend scheduling recurring weekly meetings between the key contact and the audit team. A lot more can be resolved during a 20-minute call than can sometimes be done through email, however convenient email may be.
- Agree upon a timeline for deliverables and stick to it. If issues arise, make sure to update your auditor immediately and make changes to the original timeline. Don’t wait until the end hoping you can make it. A team approach from the auditor and client is always the most successful.
- Regularly review the provided-by-client (PBC) request list with the auditor to update status, assign responsibilities and ask for clarification about vague requests. You can question their objective if the request doesn’t seem sensible and suggest alternative sources of information if you see better options.
- Prescreen your company: Do you have adequate documentation around written policies and procedures? Do you retain sufficient information around transactions? Are controls actually in place and being used as documented? Is an audit trail preserved? (e.g., who signs off approvals of key calculations or reports?).
- Have you corrected any internal control deficiencies raised in prior years? An auditor will be sure to check on this.
While in progress
- Communicate to your finance team and any other relevant parties that the audit is ongoing and that it should be treated as a priority. Explain the process to them, and keep a positive attitude. We all understand an audit adds extra work to your day-to-day routine, but it’s a necessary and often productive process if done correctly.
- Give your team members a heads-up to respond freely and accurately to inquiries and also keep you abreast of discussions and ensure they’re responding accurately. Your team should limit conversation to the specific question or transaction they’re being asked about. They should be honest, simple and direct. They should not speculate or comment about things with which they have no direct knowledge or expertise.
- Don’t provide irrelevant documents, like a zip file with your full closing binder from the lender, when they’ve requested only the closing statement. Don’t send over spreadsheets with a dozen extra tabs of historical data or extra analysis, etc. The auditor may raise questions regarding the information in these files, which may open you up for more questions.
- Always review schedules and support before providing them to the audit team. Ensure schedules tie to the trial balance, make sense, and don’t include blatant errors or invite obvious questions. Anticipate follow-up questions that will arise. This quality review step is critical and will save you significant time with fewer follow-up inquiries.
- Sometimes companies will offer auditors read-only access to the accounting system so the auditors can pull the leases, invoices or other supporting material themselves. This can save your finance team a lot of time; however, you’ll want to ensure the access applies only to the specific entities or areas needed for the audit.
Get value from your CPA firm and audit team
- Best practices – Auditors observe the best (and worst) practices across a broad spectrum of companies in the industry. Pick their brains about the best practices for controls, processes, leverage, etc. Ask for their efficiency suggestions.
- Consultant referrals – On a similar note, auditors have a lot of exposure to attorneys, risk consultants, etc., from their various clients, and can make introductions.
- Technical expertise – Your in-house team may not have the capacity to be an expert on every relevant GAAP or tax topic; you can leverage resources at the CPA firm.
- CPE opportunities – For those CPAs in private practice, take advantage of the many free CPE opportunities your accounting firm likely offers to keep up on your education credits.
Finally, let your auditor be an asset to you! Reach out to our Mazars team to find out more about audit support and preparation services.
Katelyn Kogan, Senior Manager
Tatyana Hixon, Senior Manager