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Effective Audit Budgeting

Auditors, budget season is quickly approaching! Are you prepared? Do you need some solid tips and sound advice to create a budget that is effective, reasonable, and will meet your department’s needs? Well, today we’re talking budgets!

My past blog post, Planning, Budgeting, and Time-Tracking 101, is devoted to the planning and budgeting process regarding your time and schedule. This time, when I say budget I mean the almighty dollar.

Budgeting money is easier, and less subjective, than budgeting time. That said, if you don’t approach this project correctly, problems for your department can develop as the budget year progresses. There are some common mistakes to look out for, and some simple techniques that will ensure success.  Keep reading, we’ve got you covered!

Consider Past Expenses

Usually, the budgeting process kicks off during the fourth quarter, when someone in Accounting sends a request. They need to know what you plan to spend in the next year, and how you arrived at that figure. Accounting will often provide an annualized list of what you spent in the current year, to assist you. You may be tasked with reducing spending and trimming your budget, so be ready to make some hard choices. For some auditors, you’ll just be given a bottom-line figure, which you then allocate as you see fit.

What you spent in the current year is your baseline for figuring out what you will spend next year, but it’s only the beginning of the story. Think of past spending as an indicator of future spending, and use this data to make sure you aren’t leaving out anything important.

Research and Reach Out

For most Internal Auditors, external audit and consulting projects are your biggest line items. Start with the required engagements, such as the financial statement audit, benefit plan audit, and other projects that must be outsourced.  Interim audit season is about to kickoff, so hopefully, you have external auditors lined up already. Use their price quote, proposal, or engagement letter with the current fees as your budget line item.

Other external engagements are also critical, and can be completed at any time during the year. You may not have auditors and consultants lined up yet, but that’s fine. Just send some of your potential providers a quick email, or give them a call, and ask for a price range. My business partner John and I get many of these requests this time of year, and we are always happy to discuss price and timing for Quality Assurance Reviews. It helps us plan for the coming months, and we love catching up with all of you!

Finally, make sure to ask whether travel expenses are included in the price quotes. If your company will be on the hook for additional expenses, you need to include a reasonable estimate!

Brainstorm

Once you know what you spent in the past, and what you need to spend in the coming year, it’s time to consider what else might be out there.

What new publications would you like to subscribe to? What books do you want to have in your department library? Have you included the proper professional organizations in your plan, such as the IIA and the AICPA? If you’re at a Credit Union, have you included your NACUSAC and ACUIA memberships? Have you included a subscription to The Audit Library in your budget? Hint, hint! Do any of your staff want to pursue a certification or acquire a new skill that will require training? Are you on the cusp of any new initiatives, such as transitioning to electronic workpapers or purchasing software to perform Computer-Aided Auditing Techniques? If so, what will that cost?

Lastly, don’t neglect the small things. Make sure you have the funds to order lunch during a difficult project, celebrate staff birthdays, and get cocktails with the Audit Committee now and then. Social interactions and niceties are a part of your job, so plan for them!

Build the Budget that’s Just Right

First, make sure you pad the budget a bit. Yes, you read that right. Pad your budget!

This is more practical than strategic. If you are given a fee range for an external project, budget for the high end of it. You’ll end up signing a contract and being obligated to pay in full, so there is no reason to underestimate costs. If you’re considering three conferences, use the fees for the most expensive one in your budget. This leaves your options open, and ensures an unanticipated cost here or there won’t be a disaster or cause you undue stress.

Think Goldilocks here, and don’t pad the budget too much. If you only use a small fraction of what you budgeted, Accounting and your Audit Committee should start asking questions. Accounting could suspect that you were careless in the budgeting process, and are not capable of making good decisions. That will guarantee you more scrutiny going forward. The Audit Committee could suspect that you cut corners unnecessarily, or failed to complete projects, if a large unused balance remains at the end of the year. Try to come in just under budget when all is said and done.

Approvals

Your budget draft needs to go through an approval process, which can vary from company to company. Usually, the CEO and the Audit Committee will weigh in on what Internal Audit plans to spend, and the budget approval should be documented in meeting minutes. Whoever is handling the process in Accounting certainly has the right to ask questions, verify figures, and understand the business purposes of your proposed budget. But approval should belong to the people you report to.

The best advice I can give regarding budget approval is to respect your bosses. Give them something reasonable and well thought-out that they can easily approve. Don’t say you’re going to four out of town conferences if you usually go to one, or include travel to all your site locations if you only have the resources to audit half of them. Constantly check yourself, make sure you are being realistic, and don’t over-commit.

Common Budgeting Issues

Most auditors who have been through the budgeting process over the years have had some uncomfortable or confrontational meetings with Accounting along the way. Say you budget for an outside consultant to look at a complex investment strategy, and Accounting starts questioning the expense and demanding to know what they will be looking for or what you expect to find. First of all, it’s not their call whether or not they will be audited. Second, you don’t know the results of an audit that hasn’t happened yet!

If you get through that explanation without eye-rolling, you’re definitely ahead of the game! Be tactful, but firm. You are under no obligation to explain your audit plan in detail, or justify your assessment of risks, outside of your reporting lines. At the end of the day, the Audit Committee is your boss, and approving or denying your budget is their call.

A more common issue is ownership of expenses; different departments budgeting for the same things. Make sure you have an open line of communication with departments you work with regularly, such as Risk Management, Compliance, and Legal. If you think they may have already budgeted for something, check in and ask. If you can share expenses such as outside legal counsel, professional publications, or professional fees, you’ll help the bottom line by budgeting for the team.

Budgeting is a Year-Long Process

Once the new year begins, review your budget progress regularly. Keep notes on ways you can improve, items you forgot about, or expenses that were higher than anticipated. No one’s budget is ever perfect, but you can improve year after year.

The Audit Library has created a tool to help. The Monetary Budget Preparation Template walks auditors through their major budgeting categories, creates sub totals, and points out expenses that can easily be overlooked. Download a copy if you need a hand, or if Accounting does not already provide something to work off of.

Readers, do you have any other tips and tricks to make the budgeting process easier and more effective? Leave a comment below, and let us know about it!

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