Auditor Relationships – What you can do to make them as painless as possible
Presented by Matthew Lenton , C.P.A.
MAYER HOFFMAN MCCANN P.C.
2301 Dupont Drive, Suite 200Irvine, California 92612
Relationship with your Independent Auditors
• Open communication
• Trust and confidence
• Independent Auditors vs. Internal Accountant
2
Being prepared before the audit • Have a plan
• Make a list of everything
• Consider prior year AJE’s as a part of the year end close process
• Assign each task to a specific person
• Establish dates (milestones and deadlines) for each task
• Follow up
3
Be Prepared for Planning Meeting
• Go through minutes for the fiscal year
• Keep a file for “the auditors should know about this”
• Identify for auditor unusual or difficult transactions recorded during the year and areas where internal control might be weak
4
Being prepared during the audit • Client’s audit liaison person should have weekly meetings
with client finance personnel that are supporting the audit process
• Keep Finance Director informed
• Consider obtaining approval from Finance Director to re-arrange priorities as appropriate
• Keep auditors informed (they may have an alternative way to satisfy themselves for a particular account balance)
5
Year end entries • All year end entries need to be posted before the audit
starts
• Hard to audit a moving target
• Look over adjustments posted last year by finance
• Look over adjustments detected by auditor last year
• Once audit starts, agree to not keep on posting entries unless material (agree on amount)
6
Supporting schedules
• Need to be prepared by start of audit
• This is a part of properly maintained accounting records
• Agree year end balance to detail of what that balance is composed of
• Proper internal control—what have you done to insure that the year end balance of significant assets and liabilities is composed only of appropriately determined year end amounts
7
Supporting schedules
• Make sure that the supporting schedules agree with the final balances for significant assets and liabilities
8
Call auditor if not ready
• If you might not be ready, call the auditor
• Don’t wait until two days before the audit team is scheduled to start their audit
• This might be “good news” for the auditor
• Auditor might be able to accommodate your request
• Provides opportunity for “cleaner” records
• Maybe the assigned audit personnel needs more time to wrap up other assignments
• Key is giving enough notice and being flexible9
Analysis During the Year
• Reconciliation of general ledger cash balances
• Review of significant revenue and expense balances with significant variances (from prior year amounts or from budget)
• Capital asset records
10
Communication
• Emphasis of Risk Assessment standards
• It is a sign of good internal control to know when to call the auditors for help
• Inform auditors if you didn’t have time to get to something
• Identify for auditors issues that might warrant special audit consideration
• You want the auditors (not the press) to help you deal with potential “problem areas”
11
Take Ownership of Financial Statements
• Perform a meaningful review
• Don’t need to ascertain make-up of every number
• But should question and look into amounts that “don’t look right”
• You know the financial activity of your organization better than the auditors
• Required by new auditing standards
• Obtain and review disclosure checklist prepared by auditors (or prepare for them)
• Understand audit adjustments and GASB 34 entries12
Take Ownership of Financial Statements
• Client’s review must be sufficient to detect misstatements that are “more than inconsequential”
• Obtain and review disclosure checklist prepared by auditors (or prepare for them)
• Understand audit adjustments and GASB 34 entries
• “Let go” of insignificant changes
13
Be Communicative
• Keep the auditors in the loop
• Call the auditors with questions during year
• Ask for help with difficult or unusual transactions
• Identify areas where need training
14
Be Responsive to Variances Detected by Audit
• Use auditor’s analytical review inquiries to identify potential misstatements (“things that don’t look right”)
• Read the representation letter that you sign (use as checklist of “things that I should be telling the auditors about”
15
Internal Control
• Understand that role of auditor’s internal control “feed back” has changed
• All matters communicated (unless clearly inconsequential)
16
Internal Control
• Implement appropriate recommendations
• It’s OK to disagree (but let auditors do their job and make their recommendation)
• In response explain why recommended changes are not being made (cost vs. benefit, etc.)
• This is part of the process
17
Internal Control
• Keep auditors “honest” during discussion
• “What is the fraud scenario that your recommendation is designed to correct”
• Alternative controls may be in place
18
Risk Assessment auditing standards
• Basic principle: client (not auditor) is responsible for establishing proper internal controls
• Be able to demonstrate strongly supported ethical culture
• Ethics/fraud policies
• Known protocol for reporting unethical conduct
• Monitoring controls
• Internal risk assessments
19
SAS 114
Communications with those charged with governance (financial reporting oversight):– Audit adjustments (both booked and waived)
– Disagreements with management
– Difficulties in performing the audit
– Major misstatement risks addressed by the audit
– Significant estimates inherent in the financial reporting process
– Roles and responsibilities of management and auditor
20
SAS 114
– Audit committees are not required
– Timing and form of communication depend on the circumstances
– Auditor must be able to effectiveness of two way communication
– The more serious the issues communicated, the more important to communicate them in person
– More routine communications can be done in writing
21
Be aware of upcoming GASB standards
• GASB 53 — Accounting and Financial Reporting for Derivative Instruments
• GASB 54 — Fund Balance Reporting and Governmental Fund Type Definitions
• Proposed GASB Changes Affecting the Inclusion of Component Units in the Reporting Entity (GASB 14)
22
Significant Auditing Issues
• Recovery Act – Significant impact on OMB Circular A-133 Single Audits– Significant increase in grant funding– High level of reporting requirements– Additional compliance requirements
• Buy American Provisions
– Increased Federal oversight
• Financial distress– State and local government budget issues and revenue
decreases23
