Friday 10 November 2017
Working with your auditors
External audit fees where audits are statutory can be an uncomfortable area of discussion for auditors and clients alike. For some, there is a perception that the only real value is in a short report that keeps a company's stakeholders happy that someone independent has given the financial statements a once-over.
Whether you are a fan of your auditors and receive valuable inputs from them for your fees, or whether you feel that you cannot assign tangible value to audit fees, statutory external audits and the related fees are a reality, and it is best to ensure both parties bring as much value to each other as possible.
Audit fees are influenced by the professional hours spent on an audit engagement and the level of skill and experience of audit team members required in order to perform an audit in compliance with the International Standards on Auditing. These resources are determined with reference to many factors, each considered individually per audit engagement. The auditor should never be influenced by any other party in determining the resources needed for an audit engagement.
However, there are areas that can have an impact on audit fees that clients CAN influence. These relate to the quality of information about the accounting and operating cycles, systems documentation, quality and ease of access to the company's accounting records and availability of key personnel during the audit. In addition, the quality and turnaround times of responses to audit queries raised during the audit is also largely within the client's control.
This is the first in a series of articles in which I will explore suggestions for well-designed supporting information that may reduce the amount of time that auditors need to spend on their activities. It is solely the auditor's professional judgement in each unique audit that determines whether, in their opinion, the information that they examine is sufficient and appropriate for their purposes, and this series is not intended to provide rules for what must be accepted by auditors. It does, however, provide some insights that will enable you to engage meaningfully with your auditors about how you can improve your controls, systems, documentation or internal processes, and possibly reduce some of those audit hours.
External audits are managed much like a project and comprise various stages. Management of companies and those charged with governance have key roles to play in every one of these stages.
Acceptance / continuance activities
At this stage, the auditor must investigate, document and decide on whether to proceed as the auditor for an engagement (client). Their considerations are determined with reference to some of the International Standards on Auditing and other regulations and codes of conduct and ethics. There is not much that management can contribute to at this stage, except for ensuring that meetings held with the auditors are well-attended and that any auditor requests for information are addressed quickly, and responses are reviewed by senior management for accuracy and completeness before being sent back to the auditors.
During this stage the auditor plans the audit, both on an overall level and at a detailed level. At this point, management can provide critical and time saving inputs into the nature of their company, their governance decisions, activities and the design and implementation of their systems (accounting and operational) and their internal controls.
Execution (performing the audit)
At this stage, the audit team gathers their audit evidence over the financial statements themselves. Evidence takes many forms, from original supporting documentation to observation of processes, analysis of information, examination of the work of experts, physical verifications etc. Management can expedite this stage by project managing audit requests for information, audit queries and responses, ensuring supporting documentation is complete and of a good quality, and that key personnel are available. The required type of audit evidence will differ per financial statement item and underlying process.
Evaluating, concluding and reporting
In the final stages of the audit, the auditor evaluates the evidence obtained, and errors identified, whether there are any further issues that have come to light (going concern risks, post balance sheet events, evidence of fraud etc), and their impact on the audit opinion. Here, again, there are internal processes which the company should follow relating to the same issues. If these are well documented, this may also assist in driving audit efficiencies.
In conclusion, audit efficiencies can be contributed to by the management of an audit client by ensuring the timely availability of good quality information to the auditors in whichever audit tasks or procedures they carry out. Instilling a culture of working with your auditors creates efficiencies. This may have the impact of reducing the number of audit hours spent following up on or waiting for information, or on querying the quality of information or responses to audit queries, which in turn may reduce audit fees. This also enables the auditors to give relevant and valuable feedback on the internal control environment and other key audit matters identified, increasing the value received for the audit fees paid.
The one thing that's guaranteed about a budget is that it will be wrong. Many big companies such as my old employer, ICI, prepare budgets for the following calendar year in August or September. Even in January, month one of the year they are already out of date. By December they are irrelevant because things have moved on.
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