Friday, March 9, 2012

The Audit Binder

Parsley Sage Rosemary & Ginsburg llp

“always a reasonable result for a reasonable fee, always”


Accounting Department


Mike Marget


March 9, 2012


The Auditors are Coming!  -- Audit Binder

Good meeting yesterday with the auditors from Beane & Beane, CPAs.  The following are my notes from the meeting concerning the Audit Binder.

The Audit Binder is nothing more than the assemblage of all the materials we need to produce for the auditors so they can begin, then complete their work.  The term “binder” – as you probably gathered – is a bit of a misnomer since they prefer most of the information be presented in spreadsheet formats or as PDFs in the case of documents.  The “audit jump drive” might be a better name for the thing (remember, you read it here first, but it is unlikely to catch on.)

Here’s what we should be prepared to include in the Audit Binder, subject to further instructions from the auditors that some of this stuff can be skipped or reduced in quantity:

1)     Trial balance showing current year-end numbers opposite prior year numbers;

2)     Draft financial statements – the one’s we prepared as of year-end this year and last, with an explanation of significant category or account balance variations from year-to-year;

3)     Copy of the general ledger for the year;

4)     Copy of the firm’s policies and procedures manual, with any changes from the prior year highlighted;

5)     Memo explaining any changes in the accounting system (e.g., new software) or changes in how we process transactions or reflect transactions in the general ledger or financial statements. 

6)     PBC (Prepared by Client) Schedules:

a.      Copy of all bank account reconciliations for the year;

b.      Subsidiary ledger detailing trust account balances and activity for the year;

c.       Subsidiary ledger detailing client retainer balances activity for the year;

d.      Aging of work-in-process fees, expenses and costs advanced;

e.      Aging of accounts receivable;

f.        Capital asset additions and retirements, with depreciation lapsing schedule;

g.      Accrued liabilities as of year-end, including profit-sharing/401k contributions payable;

h.      Detail supporting all other asset and liability accounts;

i.        Schedule detailing changes in partner capital accounts;

j.        Copy of the budget for the year just ended;

k.      Copies of prior year-end tax returns, Forms W-2, 1099 and draft K-1s;

l.        Summary of all financial-related loan covenants, including ratios indicating the firms compliance;

m.   Analysis of payments made to outside lawyers; and

n.      Summary of outstanding litigations involving the firm as a party.

7)     Transaction documentation – it is not uncommon for the auditor to select certain invoices, vendor disbursements and expense account distributions for review during field work;

8)     Tax information:

a.      Signed copy of the most recent tax return;

b.      Draft copy of the current year’s return or information;

c.       Any correspondence between the firm and federal, state or local taxing authorities;

9)     External verification letters:

a.      Letter(s) signed by an authorized bank account signer directing banks to verify year-end account balances directly to the auditor’s mailing address;

b.      Letter(s) to outside counsel, signed by a member of the firm, directing counsel to write letter to the auditor concerning potential loss contingencies;

10)Firm documents:

a.      Most recent partnership agreement and other governing documents;

b.      Minutes of Management Committee meetings;

c.       Copies of any new merger or later hiring agreements;

d.      Copies of any new loan agreements, equipment or real estate leases, or other significant agreements made or modified since the prior year; and

11) Information as to Changes in Firm Management or Structure:

a.      New member of the Management Committee;

b.      Any changes in key administrative or accounting personnel.

I know this looks like a daunting list, but all of the information is or should be at our fingertips.  We can meet again next week and assign tasks to get all of this material gathered and organized in advance of the auditors’ arrival.

Our goal is to keep ahead of the audit work; anticipate their needs; keep them busy at all times (not waiting for us); answer their questions; and eventually get them packed up and out of the office as quickly as possible.  We can do this!


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