Lessons Learned from the 2018 Audit Season

Here in Rwanda the deadline for submitting and paying taxes for most companies is 31 March. This year the 31st fell on a Sunday, so everyone was lucky enough to get an extra day to finalize their submissions. Most companies need to submit their audited financial statements along with their tax filings, which makes January to March extremely busy for all accountants – internal accountants, bookkeepers, external auditors, and tax consultants are all working towards the same deadline of 31 March.

Now that audit and tax season is over and we all have room to breathe again, here are a few key lessons we learned during the 2018 audit and tax season while assisting our clients go through their audits in Rwanda.

Think about materiality

Your external auditors focus on material balances and so should you. For most companies, these accounts typically include revenue, cost of goods sold, and personnel expenses on the income statement. The most material balances on the balance sheet will differ based on the industry the company operates in but often include inventory, fixed assets, loans and other debt.

How can you ensure these material balances are correct at year-end and audited properly?

  1. Perform a soft close a few months before year-end: Review your material balances at 30 September or 31 October to ensure all transactions up to that date have been accurately recorded – at year-end you only have a few months of data to review, drastically reducing time spent in January when deadlines are tight. Gather supporting evidence for all large transactions up to that point so that a package is ready for auditor review come year-end.
  2. Meet with your auditors and agree to an audit plan: Before the year-end audit procedures begin, meet with your auditors to discuss major transactions impacting your material balances. Understand how they plan to test these balances and exactly what supporting documents they require. Discuss with your auditors the most efficient way to perform this testing – their testing should be tailored to your industry, your company’s accounting systems, and the activity that occurred throughout the year.
  3. Assign responsibility: For each material balance, assign a member of your team as the point person. They will be responsible for preparing all required documentation and communicating with the auditors for any questions on the topic. This allows your team to plan well in advance and prepare all documentation as soon as the year-end has closed.

Spend time on accounting estimates

Accounting for certain balances requires judgment and estimation. Your auditors should spend significant time on these balances and you should be ready for questions on the methods and your inputs to develop these estimates. Here are a few common estimates and how to make sure you’re developing these properly.

  1. Accrued expenses: Although accruals may seem simple, we constantly see issues with the accruals balance at our clients. To ensure you’ve properly accrued for all expenses, perform an analysis of your monthly expenses, with the help of the team member responsible for expenses and accounts payable. Develop a comprehensive list of all these vendors and expenses and monitor these amounts over 3-6 months to ensure your estimate is accurate. With audit season over, now is the perfect time to do (or re-do!) this analysis and ensure you’re capturing all required accruals each month.
  2. Foreign exchange gains and losses: In Rwanda, many companies have foreign suppliers, customers or related parties, resulting in many transactions in different currencies (RWF, USD, EUR, GBP, KES are just a few we see all the time) and foreign exchange gains or losses! Estimating FX gains or losses can actually be quite simple, if you have a well documented process in place each month. Companies should develop this process and book their gains and losses monthly, to accurately reflect asset and liability balances at the end of each month. Again, now that audit and tax season is over, now is a great time to review how your company calculates FX each month and if it is effective.
  3. Allowance for doubtful accounts: Especially with the change in accounting standard this year (introduction of IFRS 9), the allowance for doubtful accounts has become an increasingly common area of focus for external auditors. This estimate will vary company by company but a piece of advice for all companies – talk to your auditors well in advance of year-end! Understand best practices they’ve seen and ensure they are comfortable with your methodology well before the year is closed out.

Plan well in advance

It is impossible to prevent all issues, some are often outside of your control, so it’s extremely important to plan well in advance and include buffers in your timeline. Here in Rwanda, penalties for late tax filings are high. With the move to online filings, there is also the potential for system outages or issues. This is why we recommend that our clients start planning for the audit and tax filings well in advance of their deadlines. Ideally, this process begins before the end of the year.

Hopefully these tips help you manoeuvre through next year’s tax and audit season a bit more smoothly!