Preparing for Your First External Audit

The first external audit is a milestone in a business’s development, and one that can be daunting for a business and a finance team that have not been through it before. When a business reaches the point of requiring an audit — through growth, through a regulatory or legal requirement, or at the request of investors or lenders — it faces a process that is unfamiliar, demanding, and consequential, and how well it prepares for that first audit shapes both the experience and the outcome. A business that prepares well for its first audit navigates it as a controlled, manageable process; one that is unprepared faces a stressful, difficult experience that may expose problems and damage confidence. For the finance team facing a first audit, understanding how to prepare is genuinely valuable, because the first audit is a step into the unknown that preparation makes far more manageable.

This guide is written for businesses and finance teams preparing for their first external audit, who want to approach it well. It covers what an audit is and what to expect, why the first audit is particularly demanding, how to prepare the business and the finance function, how to work with the auditor, and the common difficulties a first audit encounters. It complements our guidance on audit preparation and the audit relationship, with a specific focus on the first audit and the particular challenges of going through it for the first time. The aim is the practical understanding a business needs to prepare for and navigate its first external audit, turning a daunting milestone into a manageable process.

What an Audit Is and What to Expect

For a business facing its first audit, understanding what an audit is and what to expect removes much of the uncertainty. An external audit is an independent examination of the business’s financial statements, conducted by a qualified auditor, to form an opinion on whether they give a true and fair view of the business’s financial position and performance. The auditor gathers evidence to support this opinion — examining the records, testing the transactions and balances, scrutinising the accounting treatments and judgements — and concludes with an audit opinion on the financial statements. The audit is therefore an independent check on the reliability of the business’s financial statements, providing assurance to those who rely on them.

What to expect is a process in which the auditor requests information and evidence, examines and tests the business’s financial information, asks questions about the figures and the accounting, and works toward forming their opinion. The business’s role is to provide the auditor with the information and evidence they need, to explain the figures and the accounting, and to respond to the auditor’s queries — which requires the business to have its financial information in order and to be able to support and explain it. The audit involves a period of the auditor’s work, often including time at the business, during which this exchange takes place, concluding with the audit opinion and the finalised, audited financial statements. Understanding this — what an audit is, what the auditor does, and what the business’s role is — demystifies the process for a business facing it for the first time, and provides the basis for preparing, because preparation is largely about being ready to provide the auditor with what they need.

Why the First Audit Is Particularly Demanding

The first audit is particularly demanding for reasons specific to its being the first. The business and the finance team are unfamiliar with the process, which makes it harder to anticipate what the auditor will need and to prepare efficiently, and which can make the experience stressful simply through its unfamiliarity. The business may not have the records, the reconciliations, and the supporting evidence in the state an audit requires, because a business that has not been audited may not have maintained its financial information to the audit-ready standard, so the first audit often exposes gaps that have to be addressed. And the first audit involves establishing the relationship with the auditor and learning how the audit works, which adds to the demands of a first time.

The first audit may also be more likely to surface problems, because the business’s financial information has not previously been subject to audit scrutiny, so issues that have gone unexamined may emerge — errors, weaknesses in the records, accounting treatments that the auditor questions. This is part of why the first audit can be demanding: it is the first time the business’s finances face this level of independent scrutiny, and the scrutiny may reveal things that need addressing. Understanding why the first audit is particularly demanding — the unfamiliarity, the records that may not be audit-ready, the relationship to establish, the problems that may surface — helps a business approach it realistically and prepare for the particular challenges of a first time. The first audit is genuinely more challenging than subsequent ones, and recognising this is the basis for preparing adequately rather than underestimating the undertaking.

Preparing the Business and the Finance Function

Preparing for the first audit is largely about getting the business’s financial information into the state an audit requires, and doing this in good time before the audit. The foundation is sound, reconciled financial records — the balance sheet accounts reconciled, the figures supported, the records accurate — because the audit examines these and an audit of poor records is difficult and may expose problems. A business preparing for its first audit should get its records into audit-ready condition, addressing the gaps and weaknesses that a previously-unaudited business may have, which often requires deliberate effort to reach the standard the audit requires. Getting the records sound is the most important preparation.

Beyond the records, preparation means assembling the supporting evidence the audit will need — the reconciliations, the analyses, the documentation, the support for the accounting treatments and judgements — so that the business can provide the auditor with what they require. It means identifying and being ready to explain the significant accounting treatments and judgements, because the auditor will scrutinise these. And it means understanding the audit process and what to expect, so the business can engage with it effectively. The finance team should also ensure it has the capacity to support the audit, because the first audit is demanding of finance’s time. The business that prepares this way — sound records, assembled evidence, documented judgements, understanding of the process, adequate capacity — approaches its first audit ready, which makes the experience far more manageable; one that is unprepared faces the difficulty of an audit on poor foundations. Thorough preparation, in good time, is the key to navigating the first audit well, and it is largely about getting the financial information to the audit-ready standard before the auditor arrives.

Working With the Auditor

The first audit involves establishing a working relationship with the auditor, and approaching this well makes the audit go more smoothly. The business should engage with the auditor constructively — being open and cooperative, providing the information and evidence promptly and completely, explaining the figures and the accounting clearly, and engaging honestly with the auditor’s questions. An auditor who finds the business organised, responsive and open works with it far more easily than one who finds it disorganised, slow or evasive, and the constructive engagement makes the audit more efficient and builds the relationship for future audits. For a first audit, establishing this constructive relationship from the start sets a good foundation.

The business should also use the first audit as an opportunity to understand the audit and to learn from the auditor. The auditor, examining the business’s finances, will often identify areas for improvement — in the records, the controls, the processes — and a business that takes these observations seriously and acts on them improves its finance function and makes future audits smoother. The first audit is a learning experience, and a business that approaches it openly, engaging with the auditor and learning from the process, benefits beyond just getting through it. Being straight with the auditor about any issues, rather than hoping they go unnoticed, is also important, because an auditor who discovers concealed problems loses confidence, while one who sees issues handled honestly retains it. The business that works with the auditor well — constructively, openly, learning from the process — navigates the first audit better and establishes a relationship that serves future audits, which is covered more fully in our guidance on the audit relationship. Working well with the auditor is part of making the first audit a success.

The Common Difficulties of a First Audit

First audits encounter recognisable difficulties, and a business that anticipates them can prepare. The most common is poor records — financial records that are not in the state the audit requires, with unreconciled balances, unsupported figures, and gaps that the audit exposes — which makes the audit difficult and may surface problems. The remedy is getting the records into audit-ready condition before the audit, which is the most important preparation. A second common difficulty is the surfacing of problems — errors or issues in the previously-unaudited finances that emerge under audit scrutiny — which can be unsettling but is part of the first audit’s value in identifying what needs addressing. The remedy is the thorough self-review that finds the problems before the auditor does, and the honest handling of those that emerge.

A third difficulty is the unfamiliarity with the process, which makes the first audit harder to prepare for and navigate, and which the understanding of what to expect addresses. A fourth is the demand on finance’s time, because the first audit is demanding and a finance team unprepared for the workload may struggle, which the adequate capacity addresses. And a fifth is the accounting judgements and treatments that the auditor may question, which a business that has not faced audit scrutiny may not have documented or considered as rigorously as the audit requires; the remedy is identifying and documenting the significant judgements in advance. The business that anticipates these difficulties — poor records, surfacing problems, unfamiliarity, time demands, questioned judgements — and prepares for them navigates the first audit far better than one caught out by them. Anticipating and preparing for the common difficulties is much of what preparing for a first audit involves, and the finance professionals who have taken a business through its first audit, and can prepare another business for the experience, are genuinely valued. The broader audit preparation discipline is covered in our guide on audit preparation.

After the First Audit: Building on the Experience

The first audit, however demanding, is also the foundation for smoother audits in future, and a business that builds on the experience makes the most of it. The first audit reveals a great deal — what the auditor needs, where the business’s records and processes were strong or weak, what caused difficulty, what the auditor observed about the finance function — and a business that takes these lessons forward improves both its finance function and its readiness for future audits. The issues the first audit exposed can be addressed, the records and processes strengthened, the preparation refined, so that the second audit is easier than the first and each subsequent audit easier still.

The auditor’s observations from the first audit are particularly valuable, because they identify where the finance function can improve, and acting on them between audits strengthens the function and smooths future audits. The relationship established with the auditor in the first audit also carries forward, and a business that built a constructive relationship has a foundation for the ongoing audit relationship. The business that treats the first audit as the start of an improving cycle — learning from it, addressing the issues, strengthening the function, building the relationship — turns the demanding first audit into the foundation for progressively smoother audits, which is the right way to view it. The first audit is a milestone and a learning experience, and building on it is what makes the difficulty of the first time pay off in the ease of future audits. The business that does this well finds that the audit, daunting at first, becomes a manageable routine, which is the goal.