Preparing for Year-End: Common Financial Reporting Issues Identified in SME Audits

For many small and medium-sized enterprises (SMEs), the year-end close and audit process can feel rushed and stressful.

Yet, a significant portion of the issues identified during audits are recurring and avoidable with a bit of preparation.

This article highlights common financial reporting issues we see in SME audits and offers practical suggestions to help finance teams prepare more effectively.

1. Cut-off and revenue recognition

What goes wrong

• Sales recorded in the wrong period
• Revenue recognised before goods are delivered or services rendered
• Large, one-off contracts recognised without considering performance obligations or contract terms
• Credit notes or sales returns after year-end not properly assessed for cut-off

Why it matters

• Revenue is a key performance indicator for management, lenders and investors
• Incorrect cut-off can distort profitability and trend analysis
• For some entities, revenue recognition is subject to specific requirements (e.g. FRS 115 / SFRS(I) 15 concepts)

Practical tips

• Perform cut-off testing around year-end: compare invoices, delivery orders and completion documents
• Review post year-end credit notes and returns for potential adjustments
• For significant contracts, document the basis of revenue recognition and any key judgements

2. Accruals, provisions and expense cut-off

What goes wrong

• Utilities, staff costs, professional fees and other recurring expenses not accrued
• Overly broad provisions with limited support (“ballpark” figures)
• No differentiation between provisions (present obligations) and general reserves (not appropriate under standards)

Why it matters

• Understated expenses inflate profit for the year
• Users of the financial statements may be misled about the cost base and margins
• Improper provisions can be challenged by auditors or stakeholders

Practical tips

• Prepare a year-end accrual listing by expense category, supported by subsequent invoices, contracts or estimates
• Ensure provisions are based on specific obligations and reasonable estimates, with documentation
• Revisit long-outstanding provisions and accruals to confirm they are still valid

3. Trade receivables, credit risks and expected credit losses

What goes wrong

• Long-outstanding receivables remain recorded at full value with no assessment of recoverability
• No documented policy for expected credit loss (ECL) assessment
• Little or no follow-up on old balances, including related party receivables

Why it matters

• Receivables can be one of the largest assets on the balance sheet
• Overstating collectible amounts misrepresents financial position and may impact lending decisions
• Standards require consideration of credit risk, not just actual write-offs

Practical tips

• Prepare an aged receivables analysis as at year-end
• Identify significant overdue balances and document follow-up status, payment plans or disputes
• Establish a simple, reasonable ECL approach (e.g. by aging bucket, adjusted for specific information) and document the rationale

4. Inventory – counts, valuation and write-downs

What goes wrong

• No proper year-end physical stocktake, or limited controls over the count process
• Differences between physical counts and book quantities not properly investigated and adjusted
• Obsolete or slow-moving inventory not assessed for write-downs

Why it matters

• Inventory directly affects gross profit and margins
• Inadequate counting or valuation can lead to material misstatement
• For some industries, inventory is a key focus area for banks and stakeholders

Practical tips

• Plan a formal stocktake with clear instructions, count sheets and independent checks
• Reconcile stocktake results to the inventory ledger and investigate variances
• Review aged inventory listings and identify items for possible write-downs, with support (e.g. sales history, price reductions)

5. Director and related party balances

What goes wrong

• Loans to or from directors and related companies recorded vaguely under generic “other receivables/payables”
• No clear terms (interest, repayment, security) documented for related party balances
• Inconsistent treatment of director’s current account (mixing salary, expense reimbursements, drawings, etc.)

Why it matters

• Related party transactions are a sensitive area for governance and compliance
• Standards require clear disclosure of related party balances and transactions
• Misclassification may have tax implications or affect compliance with local requirements

Practical tips

• Compile a list of related parties (individuals and entities) and ensure balances are correctly identified
• Document basic terms for material loans and balances (even if informal previously)
• Prepare a schedule of related party transactions for the year, including nature and pricing basis

6. Fixed assets and depreciation

What goes wrong

• Fixed asset registers not properly maintained or reconciled
• Assets that are disposed of or no longer in use still carried on the balance sheet
• Inconsistent or arbitrary useful lives and depreciation methods

Why it matters

• Overstated fixed assets inflate equity and distort return-on-asset metrics
• Depreciation impacts profit trends and tax computations
• Proper records are important for insurance, asset management and financing

Practical tips

• Maintain and update a fixed asset register with cost, accumulated depreciation, location and status
• Review assets for impairment, disposal or write-off at least annually
• Ensure depreciation methods and useful lives are consistent and documented

7. Loans, borrowings and interest

What goes wrong

• Bank loans and shareholder loans misclassified between current and non-current
• Missing or incomplete loan agreements and supporting documents
• Interest not properly accrued or classified (e.g. capitalised vs expensed)
• Breaches of loan covenants not identified or disclosed

Why it matters

• Users of the financial statements need to understand the company’s liquidity and repayment obligations
• Loan covenant breaches may trigger repayment clauses or require disclosure
• Incorrect classification may mislead stakeholders about solvency and risk

Practical tips

• Prepare a year-end loan summary showing principal, interest, maturities and covenants
• Reconcile loan balances to bank confirmations and statements
• Accrue interest up to year-end and check compliance with covenant terms

8. Inconsistent disclosures and note presentation

What goes wrong

• Notes not updated for changes in the business, standards or prior-year corrections
• Inconsistent terminology and note references (e.g. note numbers not matching the face of the statements)
• Boilerplate accounting policies that do not reflect actual practice

Why it matters

• Disclosures help users understand the financial statements and key risks
• Inconsistent or outdated notes may raise concerns about governance and attention to detail
• Regulators and lenders often pay attention to disclosure quality

Practical tips

• Review notes with a focus on relevance and consistency, not just copying prior year
• Ensure note numbers, titles and cross-references match the face statements
• Update accounting policies where there are new types of transactions or changes in standards/practice

9. Documentation and audit support

Even when the underlying accounting is reasonable, a lack of documentation can delay or complicate the audit.

Common gaps

• Missing or incomplete supporting documents (contracts, invoices, agreements)
• No reconciliation schedules for major balances
• Key judgements not documented (e.g. provisions, ECL, impairment)

Practical tips

• Prepare audit schedules for major balances (e.g. receivables, payables, accruals, loans, revenue)
• File key contracts and agreements in an organised manner (physical or digital)
• Document management’s rationale for significant estimates and assumptions

10. How SMEs can make the audit process smoother

To reduce last-minute pressure and improve the audit experience, SMEs can:

• Start year-end planning early – agree timelines with the auditor and internal teams
• Close the books on a provisional basis and perform internal reviews before the audit starts
• Use a simple year-end checklist covering cut-off, reconciliations, provisions and documentation
• Involve key decision-makers early for significant judgements or unusual transactions

A well-prepared year-end package often leads to fewer surprises, shorter audit timelines and more meaningful discussions with auditors.

11. How Ascern can help

At Ascern, we work with SMEs and growing businesses to:

• review their year-end closing process
• identify common risk areas and implement simple controls
• prepare or review financial statements for compliance with SFRS / SFRS for Small Entities
• perform statutory audits, reviews or agreed-upon procedures focused on key areas

Our aim is to make the year-end and audit process clearer, more predictable and more useful for management, not just a compliance exercise.

If you would like to discuss how to strengthen your year-end preparation or address recurring audit findings, we would be pleased to assist.