Audits run late when the books are still moving. A client that closes the year in a fixed order, locks the period and hands over reconciled schedules saves the engagement team days of back and forth. Give the list below to the client at the planning meeting, with a date next to each line. For books that need cleanup first, see books cleanup before the audit. The recurring monthly version of this process is in the month-end close checklist.
Why the handover matters to the auditor
Auditors select items for testing from the client's own records. Auditing standards (AU-C 500, and ISA 500 internationally) require the auditor to evaluate whether information produced by the entity is reliable enough to use, including evidence that it is accurate and complete. ISA 500 gives the example of testing a population of payments: if the population from which items are selected is not complete, the results of the test are less reliable.
A trial balance that still changes, or a schedule that does not agree to the ledger, forces the auditor to test the schedule before testing anything with it. A locked trial balance and tied-out schedules remove that step.
The close, in order
- Cash. Reconcile every bank, credit card and payment processor account to the statement for the last day of the year. List outstanding items with dates and clear them against January statements.
- Receivables and payables. Tie the aging reports to the general ledger control accounts at year end. Any difference is explained in writing. Review credits and unapplied cash.
- Cutoff. Record revenue and expenses in the period of delivery or receipt. Review the last five business days of shipments and the first five of January for each side. See cutoff testing.
- Accruals. Book unpaid payroll, bonuses, paid time off, interest, utilities and professional fees, and review January invoices for December services. See accrued expenses entries.
- Prepaids and deferred revenue. Roll forward each account with an amortization schedule that agrees to the ledger.
- Fixed assets. Roll forward cost and accumulated depreciation with additions, disposals and depreciation expense.
- Debt and equity. Agree loan balances to lender statements and split current and long-term. Agree equity activity to the minutes and agreements.
- Adjusting entries. Book entries with support attached and a preparer and date. Keep a log of entries made after the initial close.
- Lock the period. Set the lock date in the accounting system and give the auditor a copy of the final trial balance. Late changes then require a logged reopen.
Worked example 1: an accrual that is easy to miss
A client pays staff every other Friday, in arrears. The pay period from Monday, December 21, 2026 through Friday, January 1, 2027 is paid on Friday, January 8. Gross pay for the 10 weekdays in that period is $84,000. The December 25 and January 1 holidays are paid at the regular rate and counted as working days.
- Weekdays in the period, counting both holidays: 10.
- Weekdays in the old year: December 21, 22, 23, 24, 25, 28, 29, 30 and 31, or 9 days.
- Accrued payroll: $84,000 times 9 divided by 10, or $75,600.
- Employer Social Security and Medicare tax at 7.65 percent (6.2 percent plus 1.45 percent): $75,600 times 7.65 percent, or $5,783.40.
Entry: debit wages expense $75,600 and payroll tax expense $5,783.40; credit accrued payroll $75,600 and accrued payroll taxes $5,783.40. Without it, expenses are understated by $81,383.40.
The 7.65 percent rate holds only while an employee's wages are under the Social Security wage base, which is $184,500 for 2026. Above it, only the 1.45 percent Medicare rate applies, so a client with highly paid staff should run the accrual by employee.
Worked example 2: interest and prepaid insurance
Accrued interest. A $400,000 note carries 7.5 percent interest, paid quarterly on November 30, February 28, and so on. At December 31, one month of interest has accrued: $400,000 times 7.5 percent times 1/12, or $2,500. Debit interest expense and credit accrued interest for $2,500.
Prepaid insurance. A $36,000 annual premium was paid on October 1 for coverage through September 30. At December 31, three of twelve months have expired: $36,000 times 3/12, or $9,000 of expense. The prepaid balance is $27,000, and the amortization schedule should show both numbers.
Common errors the auditor finds
- Bank reconciliations dated correctly but with old outstanding items that no one has investigated.
- Aging reports run on a different date than the trial balance.
- Vendor invoices received in January for December services left unrecorded.
- Vacation and paid time off accrued for the financial statements but computed differently from last year.
- Depreciation expense in the ledger that does not agree to the fixed asset schedule.
- Entries posted after the lock date with no log entry.
A note on tax timing for accruals
For clients on the accrual method, the IRS general rule is that an expense is deductible once the all-events test is met and economic performance has occurred. For services provided to the business, economic performance generally occurs as the services are provided, and for compensation it generally occurs as the employee renders service. Vested vacation pay is deductible for the year earned if it is paid within 2 1/2 months after year end. Book accruals under GAAP follow their own rules, so the tax return preparer should receive the accrual schedule and the payment dates.
Handover package
- Final trial balance with the lock date.
- Reconciliations and schedules above, each tied to the ledger.
- Adjusting entry log.
- List of open items and known errors, with amounts.
Related: the adjusted trial balance worksheet shows how the auditor's entries sit beside yours.
Sources
- International Auditing and Assurance Standards Board, ISA 500 Audit Evidence (paragraphs 7 and 9, A49 on information produced by the entity; AU-C 500 is the US counterpart): https://www.ifac.org/_flysystem/azure-private/publications/files/A022%202013%20IAASB%20Handbook%20ISA%20500.pdf
- Internal Revenue Service, Publication 15 (Employer's Tax Guide), Social Security and Medicare rates and 2026 wage base: https://www.irs.gov/publications/p15
- Internal Revenue Service, Publication 538 (Accounting Periods and Methods), accrual method, economic performance and vacation pay: https://www.irs.gov/publications/p538
- American Institute of CPAs, AICPA Professional Standards (AU-C 500 Audit Evidence): https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error