Guest Column: What guidance can your auditor provide (or not)?

Financial statement auditors don’t make business decisions for clients — their job is to assess risk

Financial statement auditors don’t make business decisions for clients, nor do they take any part in accounting processes or procedures. It’s not even their primary goal to test internal controls. Their job is to assess risk.

In the process of conducting audit and assurance work, your audit team will gain knowledge about operational controls and accounting processes. Through their planning process, interviews and selected testing, they can identify areas for improvement and assess the severity of any deficiencies or weaknesses.

This work gives your audit team a lot of knowledge about your organization. You gain insights for operational and business improvements, but that part is up to you. When it comes to guidance, here is what your audit team can and cannot do.

They can:

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  1. Identify control deficiencies, significant deficiencies or material weaknesses
  2. Perform trend and ratio analysis
  3. Provide guidance from authoritative literature

They cannot:

  1. Implement solutions for deficiencies or material weaknesses
  2. Assume responsibility for audit findings
  3. Make management decisions based on audit findings

There is a line between the auditor providing recommendations and assuming responsibility to accomplish them. Independent of decisions and implementation, auditors assess risk, test selected areas and items, and bring our findings to management. Auditors do not step in and decide how the client should respond to the information provided.

What Guidance Can Your Auditor Offer?

For the majority of audit and assurance engagements, any stated findings are opportunities for management to make improvements to controls, processes and reporting. Even a material weakness, the most severe audit finding, is not usually cause for drastic measures. The auditor can make recommendations based on generally accepted accounting principles (GAAP), which are constantly changing. Your audit team receives regular training and alerts to stay up to date on GAAP at the local, state and/or federal level.

Here are a few examples of guidance that your auditor may communicate following an engagement.

  • Recommendations to simplify accruals or accounting processes to reduce administrative burdens
  • Guidance to simplify multiple line items in the chart of accounts
  • Categorization guidance in the chart of accounts to support comparative or trend analysis year-to-year, more easily identifying changes or anomalies during your future audit, which saves time and cost
  • Industry-specific comments and experience, such as in government contracting

If the audit team discovers an issue during an engagement, they may advise on a policy/procedure to follow in the future. This guidance is based on GAAP and may be tailored to the client’s size and structure. Following this guidance, the client makes the final decision to implement it into regular practice.

When in Doubt, Ask Your Auditor

It’s a win-win when you can learn how to improve accounting processes and procedures through your audit engagement while also managing risk. Check-ins and questions throughout the year with your audit team are okay. You can make interim inquiries or conduct agreed-upon procedures to address adherence, staff training or any issues before audit crunch time.

When your audit team knows about significant changes to your financials, accounting system or processes and controls before the audit, you can address them earlier to manage document requests and testing. Some common scenarios may include:

  • Implementation of an ESOP plan
  • Significant change in revenue mix, which affected several key ratios and trends
  • Change in employee benefit plan administrator (or key third-party servicer)
  • Change in accounting system
  • M&A transactions or a change in ownership

Learning about these situations before the audit can help your audit team manage the complexity of your engagement.

Your audit team is not your adversary. They are independent advisors seeking to help you with a compliance engagement while also providing organizational value. Overall, their knowledge and insights can help your business or organization head off risk while you create processes and procedures that lead to better decision making.

Meg Hampton

Meg Hampton, CPA, MAcc, is a manager in the Audit and Assurance group at Anglin Reichmann Armstrong, with offices in Huntsville and Pensacola, Florida. She can be reached at [email protected].

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