Audit Readiness for State and Local Governments: Best Practices for Finance Leaders

As public accountability, federal funding requirements, and stakeholder expectations intensify, audit readiness has emerged as a strategic imperative for state and local governments. For chief financial officers (CFOs), controllers, and directors of finance, being “audit ready” is not simply about preparing for an annual financial statement or Single Audit—it is about building a sustainable framework for financial accuracy, internal control, transparency, and risk management.

This article and complementary checklists outlines best practices in audit readiness, emphasizing actionable strategies that government finance leaders can use to improve efficiency, reduce audit findings, and reinforce public trust.

Establish a Culture of Audit Preparedness Year-Round

In government finance offices, one of the most common pitfalls is treating audit readiness as a once-a-year event. Instead, embed audit preparedness into the financial management cycle by:

• Incorporating monthly or quarterly reconciliations of key accounts.
• Conducting periodic internal control assessments.
• Reviewing documentation standards throughout the year.

This proactive approach reduces last-minute efforts, reduces errors, and signals to auditors a commitment to sound financial management.

Develop a Detailed Audit Readiness Calendar

Create a comprehensive timeline that aligns with your fiscal year close and audit milestones. This should include:

• Deadlines for closing entries and account reconciliations.
• Timelines for federal fund reporting, e.g., Schedule of Expenditures of Federal Awards (SEFA) preparation for Single Audits.
• Internal deadlines for draft financial statements and audit schedules.

By assigning clear roles and responsibilities to staff it prevents duplication of effort, allows for proper oversight and promotes accountability across departments and functional areas.

Make Sure Documentation and Supporting Schedules Are Audit-Ready

Auditors rely on your documentation to validate account balances and test compliance. Make sure these are in place:

• All journal entries are properly approved and supported.
• Capital asset additions and retirements are updated.
• Grant-related expenditures are approved and tracked with proper backup and aligned to program requirements.

Use Prepared by Client (PBC) checklists for completeness of audit evidence by adopting or tailoring their auditor’s provided formats to assist with this process.

Prioritize Internal Control Monitoring and Remediation

Comptrollers and CFOs should make sure that control deficiencies identified in prior audits are addressed before the next cycle. This includes:

• Implementing corrective action plans from previous audits.
• Documenting policies and procedures across key processes (procurement, payroll, grant management, etc.).
• Performing self-assessments or engaging internal audit functions to test controls.

Consistent internal control evaluation also supports compliance with the COSO framework and Government Accountability Office (GAO) Green Book standards.

Coordinate Early and Often With Your External Auditors

Maintain open communication with your audit team throughout the year. Schedule a pre-audit planning meeting to:

• Discuss changes in accounting standards (e.g., GASB 96 on subscription-based IT arrangements).
• Highlight organizational or transactional changes (e.g., major capital projects, bond issuances).
• Review anticipated challenges or complex estimates (e.g., pension/OPEB liabilities).

Early auditor engagement fosters smoother fieldwork and fewer surprises during final audit stages.

Leverage Technology to Streamline Audit Preparation

State and local governments increasingly benefit from financial systems that support audit readiness, including:

• Document management systems to store and retrieve supporting documentation efficiently.
• Workflow automation tools to monitor compliance and internal approvals.
• Dashboards and analytics for real-time visibility into financial performance and audit risks.

Investing in cloud-based ERP solutions or grant management systems can significantly reduce audit lag time and improve accuracy in reporting.

Prepare for Single Audit Requirements With Granular Detail

If your entity expends $750,000 (for years beginning after 10/01/24, the threshold is $1,000,000) or more in federal awards, a Single Audit is required under the Uniform Guidance. Best practices include:

• Keeping a running SEFA throughout the year.
• Maintaining a detailed grant file for each award with budgets, award letters, expenditure documentation, and compliance certifications.
• Identifying subrecipients and monitoring subaward performance as required under 2 CFR 200.331.

Engage in Post-Audit Learning and Continuous Improvement

After the audit concludes, hold a debrief with your team and external auditors. Use this session to:

• Identify process inefficiencies or gaps in documentation.
• Discuss auditor feedback constructively.
• Update procedures and training materials based on audit outcomes.

Treat the audit not as an evaluation, but as a feedback loop to enhance future performance and reduce organizational risk. For further guidance, please see the complementary audit readiness and implementation checklists below. 

If you wish to download the full insight and both checklists, please download here.