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Accounting Reference08

Audit Readiness

What auditors ask for, balance sheet substantiation, materiality and the request list.

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Reference Notes

Subsequent events after the balance sheet date

Events after the balance sheet date but before the statements are issued, or available to be issued, are recognized when they provide evidence of a condition that existed at the date, such as a customer's bankruptcy revealing a receivable was already doubtful. Events that arose afterwards, such as a fire, an acquisition or a new financing, are not recognized and are disclosed when leaving them out would make the statements misleading (ASC 855-10-50-2). A company that neither files with the SEC nor is the obligor on conduit debt traded in a public market evaluates them through the date the statements are available to be issued and discloses that date (ASC 855-10-25-2, 50-1).

Source: FASB ASC 855-10 (25-1A, 25-2, 50-1, 50-2)Last revised September 2026General information, not advice

Going concern assessment

Management evaluates, for every reporting period, whether conditions raise substantial doubt about the company's ability to continue as a going concern for one year after the date the statements are issued, or available to be issued for a private company, considering its plans to mitigate them; substantial doubt exists when it is probable that the company cannot meet its obligations as they become due within that year. When doubt exists the statements disclose the conditions, the plans and whether they alleviate the doubt. A lender or an auditor asks about it whenever a company has losses, tight cash or a covenant problem.

Source: FASB ASC 205-40 (205-40-20, 50-1)Last revised September 2026General information, not advice

What an auditor asks for: the PBC request list and fieldwork

The prepared-by-client list for a financial statement audit typically asks for the trial balance and ledger detail, bank statements and reconciliations, receivable and payable agings, the fixed asset roll-forward, debt agreements and confirmations, revenue contracts and cut-off support, accrual and prepaid schedules, equity documents, minutes, legal letters and, at the end, a management representation letter. Fieldwork adds walkthroughs of the main processes and samples of transactions traced to support. A company that has substantiated its balance sheet every month answers most of the list from its own close files.

Source: AICPA AU-C standards; practiceLast revised September 2026General information, not advice

Audit, review and compilation: the levels of assurance

An audit gives an opinion on whether the statements are fairly presented, based on testing evidence; a review gives limited assurance from inquiry and analytical procedures; a compilation presents management's statements with no assurance at all. All three are attest engagements, and each comes from the company's independent accountants; the company on the other side of the table gets ready for one and is supported through it by its own accountants, which is the work a firm like this one does. Which level a lender or an investor requires is written into their agreement.

Source: AICPA AU-C (audits); SSARS AR-C 80 (compilations) and AR-C 90 (reviews); AICPA ET 0.400.04 and 0.400.18Last revised September 2026General information, not advice

Materiality in an audit and in the company's own close: misstatements, clearly trivial, uncorrected misstatements, small differences

An auditor sets an overall materiality for the statements and a lower performance materiality for testing, based on a benchmark such as revenue, assets or earnings (AU-C 320). It accumulates every misstatement it finds above a clearly trivial level, far below materiality, asks management to correct them, and judges the uncorrected ones individually, together and by their nature (AU-C 450). A company's close benefits from its own threshold for investigating differences, but a small error that repeats every month is a control failure regardless of its size. Materiality is a judgement, not a licence.

Source: AICPA AU-C 320, 450; practiceLast revised September 2026General information, not advice

Study

Test Yourself

A few questions on Audit Readiness, drawn from the notes on this page, to check what stuck.

The assistant writes these questions from the reference notes on this page each time you ask. A generated question or answer can be wrong: check it against the standard the explanation names. General information, not advice.

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How to Read These Notes

General information, not advice.

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