How to Prepare Your Books for an Audit

As the financial year ends, businesses across Australia must ensure their financial records are audit-ready. Being prepared can prevent unnecessary stress and compliance issues, whether the audit is voluntary, required by industry regulations, or required to meet statutory obligations.

A well-organised financial record is essential for audit success and helps businesses maintain transparency, make informed decisions, and avoid penalties.

This guide provides Australian businesses with up-to-date best practices for audit preparation, covering legal requirements, financial documentation, inventory checks, and tax compliance.

Let’s Get Straight to the Point

If you’re short on time, here’s a quick summary:

✔ Know if You Need an Audit – Companies must be audited if they meet at least two of the following:

• Annual turnover exceeds $50 million
• Gross assets exceed $25 million
• More than 100 employees

✔ Start Early – Begin preparations in April–May to avoid last-minute issues.

✔ Check Inventory & Reconcile Accounts – Ensure all records match actual stock and asset values.

✔ Review Tax & Compliance – Confirm GST, PAYG, and superannuation obligations are correct.

✔ Prepare Key Financial Documents – Ensure balance sheets, profit and loss statements, and cash flow statements are ready.

✔ Consider Provisions & Write-Offs – Assess bad debts, stock obsolescence, and legal risks.

✔ Verify Foreign Exchange Transactions – Ensure accurate currency conversion for international dealings.

✔ Engage with Auditors Proactively – Provide documents in an organised manner and respond to queries promptly.

Who Needs an Audit in Australia?

1. Mandatory Audits for Australian Businesses

Certain Australian businesses are legally required to conduct audits based on their financial size and structure. Companies meeting at least two of the following conditions must conduct an annual audit:

• Annual revenue exceeding $50 million
• Total gross assets over $25 million
• Employee count exceeding 100

Failure to comply with statutory audit requirements can lead to significant penalties from the Australian Securities and Investments Commission (ASIC). Additionally, audited financial statements provide credibility when applying for loans, seeking investors, or bidding for government contracts.

2. Other Businesses That May Require Audits

Even if your business does not meet the mandatory audit threshold, you may still need an audit if:

• You run a public company (required under the Corporations Act 2001).
• You are a large proprietary company (as per ASIC regulations).
• You operate in an industry requiring audits (e.g., financial services, charities, or superannuation funds).
• You are applying for government grants or funding, often requiring audited financial statements.

Certain non-profit organisations and charities must also submit audited financial statements to the Australian Charities and Not-for-profits Commission (ACNC). It is always advisable to check with regulatory authorities to determine specific audit obligations.

Preparing Your Financial Records for Audit

1. Start Planning Early

Preparing for an audit should begin months before the financial year ends on 30 June. Aim to have your financial records reviewed by April or May to resolve any discrepancies ahead of time.

• Assign responsibilities – Ensure staff members know their roles in audit preparation.
• Create a timeline – Set deadlines for reconciliations, inventory checks, and document reviews.
• Consult with auditors – Discuss any potential red flags or compliance issues in advance.

Addressing potential issues early can reduce the likelihood of last-minute stress and ensure a smoother audit process.

2. Ensure Accurate Bookkeeping

Accurate bookkeeping is the foundation of a successful audit. To maintain compliance:

• Record all transactions promptly – Ensure every invoice, receipt, and financial transaction is correctly logged.
• Perform monthly reconciliations – Regularly compare financial records with bank statements to identify discrepancies.
• Maintain tax records – Ensure that Business Activity Statements (BAS), payroll reports, and superannuation payments are current.
• Keep supporting documentation. The Australian Taxation Office (ATO) requires that receipts, contracts, and agreements be stored for at least five years.

Key Financial Statements to Prepare

1. Balance Sheet

A balance sheet provides a snapshot of your company’s financial position at the end of the financial year, detailing assets, liabilities, and equity.

• Ensure all fixed assets are accurately recorded, including any depreciation or adjustments.
• Verify that all outstanding loans and payables are properly accounted for.
• Check that shareholder equity and retained earnings align with previous years’ records.

2. Profit & Loss Statement

This statement outlines revenue, expenses, and net profit or loss.

• Ensure sales records match revenue reported in financial statements.
• Categorise expenses correctly, separating operating costs from capital expenditures.
• Verify wage payments and ensure compliance with superannuation and PAYG tax obligations.

3. Cash Flow Statement

Cash flow records all money flowing into and out of the business.

• Ensure bank reconciliations are complete.
• Identify any outstanding payments or unpaid invoices.
• Verify loan repayments and interest expenses are reported accurately.

Inventory & Asset Verification

1. Conduct a Physical Inventory Check

Stock discrepancies can raise audit concerns. Conducting a stocktake before 30 June ensures:

• Recorded inventory matches actual stock levels.
• Damaged or obsolete stock is written off or adjusted.
• Inventory records are aligned with purchasing and sales records.

2. Assess Fixed Assets & Depreciation

• Ensure all business equipment, vehicles, and property are properly valued.
• Depreciation schedules must comply with ATO asset depreciation rates.
• Consider writing off any assets that are no longer in use.

Reviewing Tax Compliance

1. GST & PAYG Withholding

Ensure that Goods and Services Tax (GST) and Pay-As-You-Go (PAYG) withholding obligations are current.

• Verify that BAS lodgements match financial records.
• Confirm all superannuation guarantee (SG) contributions have been paid.

2. Income Tax & Deferred Tax Considerations

• Calculate corporate tax liabilities accurately.
• If applicable, account for deferred tax assets and liabilities.

Provisions, Write-Offs & Adjustments

1. Create Provisions for Known Risks

Provisions are financial reserves set aside to cover expected liabilities or potential risks that may arise in the future. These are important for ensuring financial stability and transparency in reporting. Businesses should account for:

• Legal disputes – If your business is involved in pending litigation, auditors expect to see a provision set aside for potential legal fees or settlements. This ensures that your financial statements accurately reflect expected obligations.
• Employee entitlements—Businesses must provide benefits such as unused leave, long service leave, and bonuses. Underpayment or incorrect provisioning of employee entitlements can result in compliance breaches with the Fair Work Ombudsman.
• Bad debts – Not all customers will pay their invoices. If outstanding receivables are unlikely to be collected, your business should make a bad debt provision or write them off entirely. This prevents overstating revenue in financial statements.
• Product warranties – If your business offers product warranties, consider creating a provision for expected warranty claims. Failing to do so could lead to an inaccurate profit calculation.

2. Review Outstanding Liabilities

All outstanding business debts must be accounted for, including loans, supplier invoices, lease payments, and interest obligations. Auditors will verify that these liabilities are properly recorded in financial statements.

• Ensure all supplier invoices are accounted for and that no unpaid obligations are missing from the books.
• Verify interest calculations on business loans and confirm they align with banking records.
• Review lease agreements and ensure rental expenses, including changes in rent, are recorded correctly.

Reviewing provisions, write-offs, and liabilities before an audit reduces the likelihood of discrepancies, smoothing the audit process and reducing the risk of needing post-audit corrections.

Foreign Exchange Transactions & Multi-Currency Considerations

Foreign exchange transactions must be properly recorded and reconciled for businesses dealing in multiple currencies before an audit. Exchange rate fluctuations can impact profits, expenses, and liabilities, making accurate reporting essential.

Convert Transactions at the Correct Exchange Rates

Foreign currency transactions must be converted to Australian dollars using the appropriate exchange rate. Businesses should:

• Use the Reserve Bank of Australia’s (RBA) exchange rates to convert foreign currency transactions at the correct historical rate for each transaction.
• Apply consistent accounting policies for foreign currency gains and losses.
• Reconcile foreign currency bank accounts with the company’s general ledger to ensure all transactions match up.

Engaging With Your Auditor

1. What Auditors Will Check

Auditors will focus on:

• The accuracy of financial records.
• Compliance with Australian Accounting Standards.
• Internal controls to prevent fraud and financial misstatements.

2. Best Practices for Working With Auditors

• Organise records – Ensure all financial documents are structured and accessible.
• Provide explanations – Be prepared to justify unusual transactions or adjustments.
• Respond promptly – Delays can lead to extended audit timelines and increased costs.

Conclusion

Audit preparation doesn’t need to be stressful. Businesses can confidently approach audits by starting early, keeping financial records in order, and ensuring tax compliance.

✔ Plan ahead – Start reviewing accounts by April–May.
✔ Check compliance – Verify taxes, superannuation, and GST obligations.
✔ Work with professionals – Accountants can identify errors before the audit.

With a proactive approach, your business will be well-prepared for any audit, ensuring transparency, accuracy, and compliance.