Year-end adjustments and the audit file

The traditional year-end has a shape: the auditor sends a list, and finance spends two weeks reconstructing evidence for things that happened up to twelve months ago.

Where is the invoice for this addition? What supports this accrual? Who approved this journal? Can we see the contract behind this revenue?

None of these are difficult questions. They are difficult retrospectively, because the evidence exists in an email, a folder, someone's memory, or a filing cabinet — and the person who knows may have left.

Attach the evidence as you go

The evidence should be attached to the transaction when the transaction is created, not assembled afterwards.

A supplier invoice posted from a captured document carries the document. A journal carries who raised it, who approved it and the reason. An accrual carries its basis. A capital addition carries the invoice and the approval.

Done consistently, the audit file is not built — it is extracted, because everything the auditor asks for is already attached to the thing they are asking about.

That is a change in how the year is run rather than a year-end technique, which is why it cannot be retrofitted in the fortnight before the audit.

What the auditor will ask about automated processing

If a substantial share of your transactions were processed without human review, expect specific questions. They are reasonable and they are answerable — but only if you prepared for them.

"How does the system decide?" A description of the process: what posts automatically, on what basis, at what confidence level. Not the vendor's marketing.

"What are the controls over what posts automatically?" The thresholds, the limits the system cannot exceed, the categories requiring human classification.

"How do you know it is working?" Evidence of monitoring — sampling of confidently processed transactions, error rates found, what happened when errors were found. A system nobody has tested is a system nobody can vouch for.

"Who is responsible?" A named person accountable for the automated process. See who is accountable for an automated entry.

"What changed during the year?" Threshold changes, rule changes, system updates that affected processing — with dates, because a control that changed in August means the year has two control environments.

That last one catches people out. Configuration changes are frequently made without record, and "we tightened the tolerance at some point" is not an answer.

The year-end judgements that stay human

Automation does not touch these, and it should not be presented as though it does:

• Provisions and impairment. Bad debt, stock obsolescence, asset impairment.
• Cut-off. Which period a transaction belongs to. The single most tested area, and pattern-matching is least reliable exactly where scrutiny is highest.
• Going concern. A judgement about the future.
• Related party identification. Depends on knowledge of relationships that is not in the ledger.
• Estimates generally. Useful life, residual value, warranty.

What automation contributes is assembling the inputs — the ageing, the movement analysis, the transaction listings — so the judgement is made on complete information rather than on whatever could be gathered in time.

The reconciliation of everything

Before the auditor arrives, every balance sheet account should decompose into items you can name. Not "the balance is RM 84,300" but the list of what makes it up.

The accounts that most often fail this test:

• Suspense and clearing accounts, which should ideally be nil
• Accruals, where unreversed items accumulate
• Intercompany, where a small difference has been carried for years
• Foreign exchange, where errors get absorbed
• Statutory liability accounts, where residues build

Each of these is a place where "make it balance" has quietly substituted for "understand it". An automated system helps by making the decomposition available continuously — but only if nothing has been written off to a balancing figure along the way, which is what full traceability is about.

Preparing during the year, not at the end

Four habits that change the year-end more than anything done in the final fortnight:

Attach evidence at the point of entry. Every time.

Reconcile every balance sheet account monthly, decomposed, not just agreed to a total.

Record configuration changes with date, reason and who authorised them.

Sample your own automated processing periodically and keep the results. That file is the answer to "how do you know it is working", and it is far more persuasive produced from during the year than assembled afterwards.

The realistic outcome

Year-end does not disappear. Judgement takes the time it takes, and the auditor will test cut-off and estimates regardless of how clean the processing was.

What disappears is the reconstruction — the two weeks of hunting for documents. In businesses that run this way, the audit becomes a review of a complete record rather than an exercise in assembling one, and the finance team spends the period discussing judgements rather than searching folders.

Common questions

How does automation change the year-end audit?

It removes the reconstruction rather than the audit. Where evidence is attached to each transaction as it is created — the source document, the approver, the basis for an accrual — the audit file is extracted rather than assembled, so the two weeks typically spent locating documents largely disappear. Judgement areas such as provisions, cut-off and going concern take the same time as before.

What will an auditor ask about automated accounting?

How the system decides what to post, what controls constrain it, how you know it is working, who is accountable for the process, and what changed during the year. The last is commonly overlooked — configuration and threshold changes made without record mean the year contains more than one control environment and nobody can say when it changed.

What evidence should be kept for automated entries?

For each transaction: the source document, the basis on which it was treated, the rule or model version that produced the treatment, the confidence level, and any human review that occurred. Alongside that, keep records of your own periodic sampling of automated processing, because that is what demonstrates the process was monitored rather than merely trusted.

Which accounts most often fail year-end scrutiny?

Suspense and clearing accounts that should be nil, accruals where unreversed items have accumulated, intercompany where a small difference has been carried for years, foreign exchange where unrelated errors get absorbed, and statutory liability accounts where residues build. Each is a place where making the balance agree has gradually substituted for understanding what it consists of.

Related: evidence an auditor will accept · preparing for an audit with automated books · the audit trail you will wish you had