Annual Audit Coming Up? Here’s What Finance Should Prepare First

An annual financial statement audit is an independent examination of the financial statements prepared by a company for the year. The company supplies its statements, ledgers, contracts, bank records, inventory records and other evidence. The auditors learn how the business works, assess risk, test transactions and issue an audit report. Shareholders, management, banks and other readers use that report to judge how much confidence to place in the statements. An audit is not bookkeeping, and it is not a tax inspection.

The same questions appear before almost every annual audit: “Who has the signed contract?” “Why did the warehouse total change again?” “Is this spreadsheet really the final version?” By lunchtime, the shared folder contains files called Final, Final 2 and Final — Use This One.

This does not necessarily mean the finance team has been careless. More often, the accounts, the business records and the supporting documents have been kept in separate places all year and are only being joined together now. Think of the audit in simple terms. Someone who does not know the company needs to understand what happened, why it was recorded that way and what proves it. If the records answer those questions naturally, much of the preparation is already done.

First, decide which numbers are official

Before the audit begins, confirm which companies are included, which period is being audited and which version of the financial statements everyone should use. Check that the totals in the statements lead back to the accounting records. If the statement shows RMB 5 million of cash, the underlying bank accounts should add up to the same amount.

Finance teams often call this “closing the books.” It does not mean the records can never change again. It means that the routine transactions have been recorded and reviewed, and this is now the working version. If something later needs to change, record what changed, why it changed and when. That is much more useful than adding another word to a filename.

A group also needs to agree which subsidiaries are included and how transactions between group companies are removed from the consolidated figures. Otherwise, two reports can each be reasonable on their own and still never agree with each other.

Follow one sale from start to finish

Suppose the company sells a machine for RMB 100,000. The contract is signed, the machine arrives on 28 December, the customer accepts it on 3 January, the invoice is dated 30 December and the cash arrives on 10 January. Whether the sale belongs in this year or next year cannot be decided from the invoice date alone. The contract and what actually happened matter.

Walk through the sale in order: contract and order, dispatch and transport, customer acceptance, invoice, payment and finally the accounting entry. It is much like tracking a parcel. When every step connects to the next one, an unfamiliar reader can understand the transaction without guessing.

Use the same approach for purchases and expenses. A materials purchase should show why it was made, who approved it, whether the goods arrived and whether the invoice and payment belong to it. A travel claim should explain who travelled, why, who approved it and who was paid. Auditors do not need the largest possible collection of documents. They need documents that tell one consistent story.

Check the places where audits often slow down

Start with the banks. Compare the balance in the accounts with the bank’s records. If the company records a payment on 31 December and the bank processes it on 2 January, a temporary difference may be perfectly reasonable. The payment instruction and the later bank record should explain it.

Then look at customers and suppliers. If the company says a customer owes RMB 800,000, the sales records, the finance detail and the customer’s own records should make sense together. For inventory, compare the accounting quantity with what the warehouse actually holds, including damaged goods, goods on loan and goods still in transit. For fixed assets — long-term items such as computers, vehicles and machinery — check that the item still exists and that the company owns or controls it.

This comparison is called a reconciliation. In plain English, it means checking two records kept from different viewpoints and explaining every difference. Keep the original data on both sides. Mark each difference as timing, different scope, an error or still under investigation. An explained difference is manageable. A difference that has quietly been overwritten is much harder to trust.

Some questions need more than an invoice

Certain audit questions cannot be settled by finding one missing document. Did a year-end sale really belong in this year? Is an overdue customer balance still collectible? How much might an ongoing legal dispute eventually cost?

Accountants may describe these as revenue recognition, impairment and provisions. In everyday language, the questions are: Has the sale really been earned? Is the asset still worth the amount shown in the accounts? Is there a likely future payment that should be reflected now? The answers depend on contracts, actual progress and current facts.

A one-page note is often enough to start. Explain what happened, the amount involved, the important dates, how the company recorded it, the evidence supporting that treatment and what remains uncertain. Ask operations or legal colleagues to help where necessary. Finance should not have to reconstruct the whole story alone while the audit team waits.

Use the request list as a handover sheet

A useful request list shows the item, the owner, the agreed delivery date, the actual delivery date and the current status. File names should identify the company, year, subject and version. A file called “Guangzhou_2025_Bank_Detail_V2” is much easier to manage than one called “Latest.”

Keep audit questions and answers in one place as well. Record who is finding the document, who is explaining the issue and whether the response is complete. When the same question is split across chat messages, emails and conversations, three different answers can easily appear.

Before sending a file, do a common-sense check. Can the total be traced back to the accounts? Can the accounting entry be traced to a real business event? Are the company name and date correct? Is every difference explained? Does a judgmental matter have an owner? Auditing standards refer to “sufficient appropriate evidence.” In ordinary language, that means enough evidence, evidence that can be trusted and evidence that actually relates to the question. Audit preparation is not about making the accounts look prettier. It is about making the company’s business understandable.