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That said, what is an effective audit?
Whilst the auditor is in large part responsible for the effectiveness of the audit process, management and the audit committee have an important influence. Their contributions should also be considered in the overall assessment of effectiveness. An effective audit truly challenges and tests the contents of the financial statements in order to form an opinion on whether they present a true and fair view. An audit must, of course, comply with all relevant auditing and ethical standards. Fundamentally, an effective audit must deliver the right audit opinion, in which shareholders have confidence. Other characteristics of an effective audit include:
- Communications and reports to those charged with governance that reflect the audit team’s thought processes and rationale for conclusions. These should discuss management’s approach, alternatives considered, relevant comparators and a clear articulation of the final conclusion.
- Effective interaction with management and the audit committee throughout its performance — everyone must understand what the ‘audit issues’ are, why they are ‘issues’ and how they will be resolved.
Assessing the effectiveness of the audit process is broader than assessing the auditor. Management have a role too and their contribution should also be included in the overall assessment. With this in mind, let us explore ways to assess the effectiveness of the external audit:
*On TEAM-STRUCTURE AND LEADERSHIP demonstrated by external auditor:
- Does the partner demonstrate leadership of the team and provide effective ownership and oversight of the audit?
- Do the partner(s) and manager(s) commit an appropriate amount of time to undertake the audit, to supervise staff and to meet directly with management and the audit committee?
- Do you agree with the audit team’s assessment of significant risk areas?
- Are appropriate specialists (e.g., tax, pensions, valuations etc.) involved in the audit commensurate with the complexity of issues?
*Possible sources of evidence; Indicators:
- Feedback from management on whether the partner and key team members are available and responsive, based on interactions throughout the audit.
- Feedback from members of executive management most involved in the audit process, on whether the lead audit partner is actively engaged in the audit process and audit decisions and is not over-reliant on his/her team.
- Evidence that changes are made to the audit team in response to changing business needs as well as performance issues e.g., team strengthened to deal with a major corporate transaction.
- Direct experience of the audit committee and the board based on interactions with the auditor.
- Information from the auditor on the proportion of senior to junior time and the absolute amount of hours budgeted to be spent on the audit by senior team members.
- Information from the auditor on the proportion of audit effort spent addressing risk areas.
- Feedback and insights received by the audit committee and executive management from the involvement of specialists.
*On HOW WELL THE EXTERNAL AUDIT IS TAILORED TO THE BUSINESS:
- Is the audit team’s understanding of the business and its structure, the sector and the regulatory environment appropriately reflected in the audit approach?
- Is the audit approach responsive to changes in the business over time?
- Has the approach been challenged in the current year and if so, what has changed?
- Have business risks been properly considered when assessing audit risks?
*Possible sources of evidence; Indicators:
- Evidence that senior audit team members demonstrate a good understanding of the group’s business and industry sector (e.g., from their discussions with executive and non-executive management).
- Communication of planning matters by the auditor to the audit committee shows scope changes that are responsive to changes in the size, risk and nature of the business.
- Communication of planning matters by the auditor to the audit committee shows clear understanding of the business and the risks that matter most.
- Audit committee’s consideration as to whether the external audit scope makes sense in the context of the areas of the business that it is concerned about.
- Audit approach is clearly modified year on year as appropriate.
- Commerciality, flexibility and innovation are apparent from the discussions with the audit team.
*On PROFESSIONAL SKEPTICISM in execution of external audit:
- To what extent does the team demonstrate professional integrity and objectivity? Would the audit partner say ‘no’ when needed and stand by their view?
- Is there an appropriate degree of challenge throughout the audit?
- In areas of significant accounting and audit judgement, does the audit team demonstrate the robustness of their approach including the evidence considered and the rationale for the conclusions reached?
*Possible sources of evidence; Indicators:
- Feedback from management and the audit committee on whether senior audit team members were robust when dealing with key judgments, errors, etc., whether they had conviction, were able to clearly articulate the rationale behind their position and did not unduly rely on management representations.
- The auditor’s communications about their independence clearly articulate the safeguards considered and applied to maintain independence and objectivity.
- Results of external quality reviews.
- Evidence from audit committee and other meetings that the audit partner challenges executive management’s view and does not just accept explanations received without corroboration.
- Quality and clarity of the articulation of the key audit and accounting issues. The basis for the auditor’s view is clearly explained and the audit committee understands the auditor’s thinking.
*On TECHNICAL EXCELLENCE in execution of external audit:
- Is technical excellence visible within the team and is this appropriately demonstrated alongside commercial application?
- Are management and the audit committee provided with accounting, corporate governance and other technical and regulatory insights to allow them to operate effectively in a changing environment?
- Do the partner(s) take ownership of technical judgments and are they able to clearly articulate their point of view and reasoning behind them?
- To what extent are specialist technical resources used and effectively deployed in order to address difficult or unusual technical issues?
*Possible sources of evidence; Indicators:
- Quality of analysis in communication and reports from the auditor.
- Feedback from members of executive management who are best placed to assess technical competence.
- Experience from audit committee briefings and formal meetings.
- Results of external quality reviews.
- No late surprises coming through communications.
- Feedback and insights received from the specialists where involved.
- Number of restatements and prior year adjustments.
*On COMMUNICATION AND REPORTING by the external auditor:
- Are communications from the auditor clear and concise and does the auditor communicate a point of view where relevant?
- Are the communications and reports from the auditor timely so as to allow appropriate action to be taken to prevent as well as detect material misstatements in financial reporting?
- Are communications from the auditor specific and relevant to your company and its circumstances?
*Possible sources of evidence; Indicators:
- Clarity and timing of reports to management and the audit committee and whether they provide insight into broader governance matters, the company’s financial reporting process and control environment rather than just accounting technical matters.
- Use of interim and ‘early warning’ reports in addition to communication of planning matters and findings from the audit. Feedback from management regarding communications throughout the year.
- No late surprises coming through communications.
*On THE ROLE OF MANAGEMENT in the external audit process:
- Are key personnel available and accessible to the auditor when needed?
- Is information requested by the auditor prepared on a timely basis, complete and accurate?
- Are management’s papers to the auditor and audit committee on key judgments, estimates and uncertainties well researched and written i.e., articulate the issue, approach used by management and rationale, alternatives considered and a clear final conclusion and recommendation?
- Where possible, is management proactive in seeking early input from the auditor e.g., on complex, unusual or sensitive transactions?
- Does the audit timetable allow sufficient time for robust quality control and review processes to be applied by both management and the auditor?
- Do management act on feedback provided by the auditor on financial reporting processes, and controls?
*Possible sources of evidence; Indicators:
- Delays in the audit process beyond the control of the auditor.
- Feedback from the auditor on availability and flexibility of key management personnel and timeliness and quality of information received.
- Feedback from the auditor and audit committee on quality of management’s papers on judgments, estimates and uncertainties and timeliness of involving the auditor.
- Number of audit adjustments as a result of errors in information provided.
- Auditor’s feedback on whether management implemented agreed upon actions from prior year management letters, assessments of the audit process or post audit debrief meetings.
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READ MORE>> www.EY.com: Assessing the Effectiveness of the External Audit Process
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