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September 21, 2022
Streamlining Contract Review Through A Risk Based Approach
Case Study
How to Save
Time and Money
in Revenue Audit
Audit. It’s a scary word in the corporate world, yet every company has to do it. Whether it’s for your public company filing, your investors, or your board of directors, the audit is a critical time where an independent party provides assurance that your management team has presented an independent view of your company’s financial performance and position. Tax, equity, procurement, and general ledger are some of the areas that your auditors will focus on. However, the highest risk area in any audit is revenue. Revenue is the most visible number internally, externally, and to all types of investors and interested parties.
How to Save
Time and Money
in Revenue Audit
Audit. It’s a scary word in the corporate world, yet every company has to do it. Whether it’s for your public company filing, your investors, or your board of directors, the audit is a critical time where an independent party provides assurance that your management team has presented an independent view of your company’s financial performance and position. Tax, equity, procurement, and general ledger are some of the areas that your auditors will focus on. However, the highest risk area in any audit is revenue. Revenue is the most visible number internally, externally, and to all types of investors and interested parties.
How to Save
Time and Money
in Revenue Audit
Audit. It’s a scary word in the corporate world, yet every company has to do it. Whether it’s for your public company filing, your investors, or your board of directors, the audit is a critical time where an independent party provides assurance that your management team has presented an independent view of your company’s financial performance and position. Tax, equity, procurement, and general ledger are some of the areas that your auditors will focus on. However, the highest risk area in any audit is revenue. Revenue is the most visible number internally, externally, and to all types of investors and interested parties.
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Why customers choose Klarity
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The Auditor’s Viewpoint
Once engaged, your auditors will spend a large amount of time and effort scoping out and assessing risk for all of the areas that feed into the financial statements. Once planning is complete, they will perform substantive detailed testing* and control-specific testing to ensure that your processes are tight.
Are there controls in place to ensure that the financial statements are materially correct? How did the team performing these controls ensure completeness and accuracy over the reports and spreadsheets used in the process? Is the process repeatable and documented so that anyone performing the associated controls will follow the same steps?
These are the core questions that the audit team will ask themselves when determining how to audit the process and where to (try to) poke holes.
Preventive controls are the best, but detective controls can also catch errors, so marrying the two to round out your control environment is essential.
Your Control Environment
When developing a control environment, keeping your audit in mind is critical. The audit team should feel comfortable that the control environment is robust enough to catch errors that could produce a material misstatement. Preventive controls are the best, but detective controls can also catch errors, so marrying the two to round out your control environment is essential.
Here, we will focus on pain points that come up specifically as it relates to the revenue process control environment and audit.
Industry best practices for data integrity and completeness include some automated controls such as system change management controls, but still mostly rely on the manual matching of data from multiple sources.
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Why Customers Love It
“We are extremely excited to implement this Generative AI Technology for our customers. Klarity Architect demonstrates the superior analysis capabilities of AI using Multi Modal analysis and LLMs in real life scenarios. We believe in the impactful transformative value of AI and look forward to delivering tangible results to our customers by utilizing Klarity Architect.”
— Ahmed Zaidi, CEO, Accelirate
Find out how Accelirate cut documentation time by 67% and scaled their operations →
Life at Klarity
One Record of Truth
When the audit comes around and the auditors make sample selections of your transactions, you must pull all relevant data from all of the systems involved and compile them in one place for the audit team to review. This usually happens through a file share system or on a secure site owned by the audit team. Manually adding transactional data to these files often leads to information being omitted or placed into the wrong location prompting follow-up by the audit team and delays in the testing process.
The current best practice, file sharing, is not sufficient to solve this challenge. Systematic population of a unique record for each customer contract would take manual file transfer and lack of appropriate support out of the equation.
Formalizing the Process
Even the most organized companies struggle with the areas discussed above, but the best-in-class have a formalized process that is repeatable and streamlined. This leads to a consistent understanding of the process by the audit team (even new audit team members), and smoother, more consistent, and faster audits. Ensuring that these processes are as automated and streamlined as possible is the key to saving time and money!
Hidden Cost of an Audit
Something that often goes unmentioned when discussing costs of an audit are the hidden costs: all of the time spent by a team member to pull relevant documentation and answer follow-up questions from the audit team could be spent on other, more critical initiatives for the team. Your company might have a policy of double checking any analysis that was performed on a transaction before sending it over to the auditors. Consistency is key. Once you can establish what the auditors are looking for, perform tasks within your accounting policy, and develop a streamlined and repeatable process, working with auditors will be a much less painful process. However, even if your process is solid, documented, and repeatable, this process is lengthy and consumes valuable time from your staff members.
Read more about automated contract review for revenue recognition purposes.
* Substantive detailed testing are those activities performed by the auditor to detect material misstatement or fraud at the assertion level.
