The Dreaded Audit

Mar 09, 2015

Even though my primary focus is cost accounting,  I still prepare a number of income tax returns for my compliance clients I find difficult to let go. However, I do not participate in any audits. Auditing is not something I enjoy, so it has been easy remove it from my plan of work and instead focus my energy on cost accounting.

Many of you reading this may be going through an audit or a review from an outside accountant. I now many dread the thought of an audit as it consumes a significant amount and takes priority over you day-to-day business activities. Often times, an audit is required for shareholders, the bank, or potential investors.

AuditHowever, why is an audit so dreaded? Is it simply because you are busy and have other things to do other than dealing with an auditor? Or, is there more to it? Could it be the issues an auditor may find and having to deal with those becomes an even larger problem?

It seems to me, the bigger and more common adjustment one focused on inventory. Why is that? Many times it is because of faults in your costing system. If your system is not correctly accounting for overhead, it is therefore not adding the correct amount of cost to inventory. When a review of your inventory system is completed it is determined the value of your inventory is significantly too high or too low. Either way, this is a large adjustment straight to your bottom line. This can very quickly create an unexpected profit or loss.

Sometimes these swings occur in the direction you desire or need for your current financial situation. Other times they are shocking and detrimental. Regardless, playing Russian Roulette with your financial statements is not the situation you want to be in.

Make next year’s audit painless. Get your costing system in line and know what your numbers should be and provide adequate documentation to your auditors so you will not have any surprise adjustments. This will allow you to make changes based on your needs and not have any surprises when everything is finished and it’s too late to change anything.

Categories: Cost Accounting