So is it possible to have a no-adjustments audit?
Yes, it is! No audit adjustments is one of our aims at Accounting For Good - we can’t always achieve it as sometimes there are items that were truly unexpected or weren't communicated to the accounting team. But those things aside, we know that with good planning, communication and reporting it is possible to have no auditor adjustments. Let’s tackle some of the potential surprises mentioned in our July article.
Underspending on funded projects - if you have an obligation to acquit or report back on specific funds, you should keep track of the income and expenses in a separate cost centre (called tracking categories in Xero, jobs in MYOB). You should also have a separate budget which is essentially the financial aspect of your workplan for that activity or program. With cost centre accounting and budgets in place you will be able to report on activity against budget and get an early indication of whether things are going to plan or not. For example, if you had budgeted for a management fee or other cost recovery, a variance at that item in your report will quickly alert you if you haven’t implemented those internal charges.
Return of unspent funds - the majority of funding agreements, certainly government ones, require any unspent funds to be returned to the funder. Where this is the case it is very important that you don’t overstate your profit by recognising more income than you should. It is good practice to hold grant funds in a liability account and to recognise only enough revenue to offset the expenditure to date. Your budget variance report will alert you that income is unfavourable to budget (or that there is too much income allocated to the project) and that expenses are lower than expected, but your overall surplus result will be accurate and so will your net asset position (assets less liabilities). Certainly don’t drop all the income into “Grant Income” when you receive it - it obfuscates more than it makes clear. If necessary, provide some training or support to members of the team or Board to understand the interaction between the Profit & Loss/Income Statement and Balance Sheet. In the worst case, where you are unable to spend or get approval to rollover the funds, the funds in the liability account will give you assurance that you have sufficient cash to repay it when required.
Depreciation - consider accounting for depreciation throughout the year, rather than just at year end. Xero has automated depreciation which flows from the asset register and keeps the asset and depreciation accounts up to date each month. Alternatively, you could process standing monthly journal entries based on your year-end depreciation and make a small adjustment at year end to account for new and written off assets.
Bad debts - keep an eye on your Aged Receivables or debtors (people who owe you money) on a regular basis and especially make a concerted effort in the month or two before year end. Xero has an invoice reminders function which automates email reminders for unpaid invoices. Determine how you will follow up debtors - eg. at what point will you give up on email reminders and make a phone call? How will you escalate if it remains unpaid? Will you engage a debt collection service and would you do that for all or only invoices above a certain value? And at what point would you write off a debt as uncollectable? The Board should approve the list of invoices for write off and sensibly they should be appraised of the debtor position regularly by including an Aged Receivables report with the financial reports. If debtors is an issue for you, you might consider including allowance in your budget for bad debts so that the ‘surprise’ is anticipated.
Late arriving invoices - your budget should provide you with a good guide as to whether the expenses you expect have been accounted for. Comparing the month to previous months (being aware of quarterly or less frequent billing cycles) will also alert you any line items that look out of shape. Accrue any items that you identify as missing. If you are making extraordinary purchases be sure to tell the supplier that you want the invoice dated in June and provided quickly. You could also consider raising a purchase invoice for those items so that there is a record in the accounts in advance of the invoice arriving. And don’t forget to accrue wages to year-end! It would be close to a miracle if your last pay-run of the year ended on 30 June and therefore the first pay-run in July will probably cover some June days - make a journal entry to take up the expense in the June accounts..
Forecast - check your budget variance reports each month and consider why variances are appearing and what might happen next - is it a timing issue or is it a trend? Using that information to forecast the year-end result each month will help you towards achieving a no-surprises EOFY result.
Report disclaimer - the Board will be keen to see the year’s result so you may need to present a report knowing that there may be some adjustments. You might consider a brief note in the report commentary noting that the accounts are yet to be audited and may therefore be subject to adjustments.
So, with a bit of planning and critical thinking, it is possible to have a no-adjustments audit.