A Successful Audit, The First Time & Every Time!
By: Meghan DeRoo McConnan, CA
For some issuers, their first OM is their first experience with a financial statement audit. For others, it is an annual event. For many issuers, the process can be time consuming and confusing. However, it does not have to be, and there are a few basic things that issuers can keep in mind to ensure the audit is done efficiently and cost effectively.
For a first audit for a new company:
- Incorporate or Register your Company. First, make sure you have the company incorporated (or registered in the case of a limited partnership) prior to approaching an auditor. This may seem basic, but in their eagerness to get the offering memorandum out the door, we often see issuers try and kick start the audit, before they have any of the legal structures in place.
- Make sure company Shares are settled. If you are doing an opening balance sheet audit of a new company, make sure that you have issued your share capital in the company, and deposited the requisite amount of cash in the company’s bank account. Your auditor will be looking for proof that the shares have been issued, and paid for, before they can have any material to issue an audit opinion on!
- Ensure you auditor has the paperwork mentioned in the OM. Also make sure your auditor receives on a timely basis, any of the agreements that the Company has (such as limited partnership, trust agreements etc.), that will be referred to in the offering memorandum, even if those agreements are still in draft.
For issuers that are getting an audit of an operating company, either for the first year of operations, or for the years after incorporation:
- Stay as organized as possible. Being organized with your accounting information becomes even more crucial to an efficient audit. Make sure that you review the accounting records that you have prior to handing them over to the auditor, and make sure that you understand what all of the balances are, and that you can provide support to back up those balances.
- Be available to answer questions. Also, be prepared to respond to questions about what has happened in the year, and also what’s happened after year-end. Ideally, the issuer should provide the first set of draft financial statements. We recommend that you work towards that, even if that requires you to attempt to fill in some notes on a preliminary basis, before getting assistance to fill in the blanks.
- Include non-financial information that could have a financial impact. You also need to consider what might not be included in the numbers, but that may have an impact on the financial statements. Some examples include whether there are any contingencies, is there litigation and an assessment of ‘going concern,’ which means an assessment of whether the Company can continue in operations for a minimum of the next twelve months. (For new issuers, a going concern note in the statements is common, however for operating companies there is more assessment required).
- Be prepared to answer difficult questions. If the Company financial statements are showing net losses, negative cash flows from operations, or negative working capital, be prepared for your auditor to ask for support as to why you think the Company is sustainable for the near future, and whether there should be some additional financial statement disclosures around the uncertainty of whether your Company will be able to continue as a going concern.
- Expect to back up estimated amounts. Expect your auditors to spend a lot of time on areas where there is greater uncertainty about the dollar amounts that should be recorded in your financial statements. For example, a bank balance is easy to see and ensure it is correct but the estimate of how much of your accounts receivable may not be collected is more uncertain. Under the Canadian Auditing Standards that came into play for auditors two years ago, the focus on understanding and thoroughly assessing estimated amounts is strongly emphasized, and you will find there is a lot of focus on estimated numbers.
ASPE or IFRS? Picking your Strategy
We have heard that some exempt market dealers (EMDs) are requesting that issuers commit to ongoing audits. One important decision that issuers need to make is whether they are intending on including the financial statements of the Company that they had audited in an offering memorandum in the future. All financial statements included in offering documents are required to be prepared under International Financial Reporting Standards (IFRS), the same standards that public companies follow. These standards are complex, and require significant amounts of note disclosure.
If you are not intending to include your Company’s financial statements in any future offering memorandums (i.e. you are not intending to raise further funds), you have the option of changing to Accounting Standards for Private Enterprises (ASPE) for the years subsequent to the financial statements being included in the offering memorandum. However, if you wish to continue updating your offering memorandum, or intend to use the company for future offering memorandums, then you will again need to follow IFRS, and if you have comparative financial information from prior years, this also will need to be under IFRS. Therefore your best bet is to remain under IFRS all the way through, if you think you will need to include the company’s financial statements in future offerings!
Avoid changes to the Company structure in the OM
Additionally, make sure that you approve the structure and terms of your offering prior to finalizing the offering memorandum, and financial statements. In some cases, we see issuers who has completed the whole process, and then approached the EMDs who inform them that they cannot market the offering with the way it is structured.
Keep in mind that auditors must review the offering memorandum as they are considered to be associated with it, by virtue of including their auditor’s report on the financial statements in the final offering memorandum. Based on this, you want to get a first draft of the offering memorandum to your auditor as soon as possible. The auditor will want to ensure that their auditor’s report is dated the same date or later than the offering memorandum as the financial statements will need to include a subsequent event note that describes the offering memorandum and its terms. In addition, IFRS requires the date that the board or management approves the financial statements be disclosed, and this date should be the same date as the auditor’s report.
Throughout any audit (like most of life), the key to the best outcome is communication! This is especially true when you are including the financial statements in an offering memorandum, where there is the need to have the financial statements and the offering memorandum be consistent with each other. So make sure you communicate regularly and frequently with your auditor and lawyer to make this a useful and smooth process!