Checklist to Prepare for an External Audit

An external audit will protect your
investment and keep your business.

Following is a step-by-step set of instructions intended to aid in the preparation for an external audit.

The guide can also be used for internal audits. Outlined are the planning stage, the entrance interview, fieldwork, the exit interview, and the final audit report phase.

Planning & Preparation:

• Designate an audit liaison person within your organization who will act as the auditors’ main contact. This should be an experienced person with strong project management and communication skills.
• Send a general communication to faculty and staff stating that if the auditors contact them directly, they should notify the liaison.
• Have the liaison develop a list of contacts who must be kept informed of the audit progress.
• Have the liaison develop a list of people who can provide support on technical issues and gathering documentation.
• If necessary, schedule and conduct a general training session with individuals who may be asked to participate in the audit either to produce documents, be interviewed by the auditors or participate in findings discussions.
• Contact auditors and set up entrance conference. Clarify the purpose of the audit and ask that audit requirements be in writing.
• Alert the internal audit department of the upcoming audit.
• Make necessary arrangements for the audit team – meeting rooms, preliminary interview schedule, entrance conference specifics including attendees.

Entrance Conference:

• Develop a list of questions to discuss in the meeting including the purpose, objectives and scope of the audit; the awards to be included and sampling techniques; timelines including beginning and end of fieldwork and expected report date; and communication process.
• Consider giving the auditor(s) a tour.
• Determine staffing and space requirements, including whether the auditor will need internet access during fieldwork; arrange for auditor on site space; modify meeting room needs as necessary.

Fieldwork:

• Obtain the list of requested records and develop an approach for pulling the information on a timely basis. Give a target date for providing records to the auditors.
• Review the records prior to submission to the auditor. Consider if the records provide the necessary support. Anticipate what questions the records may provoke.
• Maintain a list of all records provided to the auditor.
• Meet with auditors at least weekly to learn of the status of the audit and potential issues that are identified.
• Verify the facts on which issues are based; perform re-calculations and review source documents, if necessary.
• Communicate at least weekly with those within the organization who need status updates.
• Liaison should attend meetings between faculty/non-financial staff and external auditors unless the auditor or faculty insist otherwise.
• Set up exit interview.

Exit Interview:

• Ask for a copy of each finding or draft report prior to the interview.
• Based on the nature of the issues, ask representatives from other groups to participate, e.g. general counsel, internal audit, office of sponsored programs, controllers office, etc.
• Agree on valid findings; negotiate those findings where the facts are not representative of the control weakness.
• Discuss with the auditor the disposition of the audit issue, i.e. verbal comment, report item, management letter.
• Escalate any disputed issues to supervisors.

Audit Report:

• Ask for the final draft report for review.
• Draft management responses and circulate to management for approval.
• Understand the follow-up process.
• Perform a post-audit evaluation to determine weaknesses in the process and potential changes to approach in the future.

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READ MORE>> rmas.fad.Harvard.edu: Preparing for an External Audit

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Grow Your Company Simply by Outsourcing Payroll Services

The #1 way to grow your business
is to be more efficient

Your business is either growing or dying, regardless of what payroll services you are using. The facts are in the pudding too, that one of the number one ways to grow your business is by becoming more efficient. One of the most efficient things you can do is simply outsourcing your payroll services completely.

Depending on the size of your company, it will probably be far cheaper in the long run outsourcing payroll services than bringing it in house. I mean, think about that for a second. If you brought the payroll services in house, you now have an employee completely dedicated to this service costing you some hefty wages. Then again, if you divide an employee's time between profit producing activities and payroll services, now you are just throwing mud in your water. Distracting someone from profit producing activities is the #1 thing you do not want to do.

Which is what makes outsourcing your payroll services such a fantastic idea.

Here are some of things that an outsourced payroll service can do:

• Handle direct deposit
• Check printing
• Withholding, time and attendance

Not to mention, outsourced payroll services are well versed in all related laws – local, state and federal tax laws and regulations. Even if you have the time and the resources to hire a full time staffer to do this job, you may still be better off outsourcing your payroll services. Since IRS penalties can be extremely strict and prohibitive of growing your business's revenues if you get dinged, this is in short just an easy (super cheap) way of covering your assets.

Call GBC Income Tax Services at 678-366-9232
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On the Effectiveness of the External Audit Process

Make the most of your annual audit.

It is important that the audit committee has an independent point of view on audit quality; assessing the effectiveness is a natural extension of the audit committee's activities.

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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Sample Questions for Evaluating an External Auditor

Maximize the effectiveness of your
annual external audit by interaction.

Each year, audit committees should evaluate the external auditor in fulfilling their duty to make an informed recommendation to the Board whether to retain the auditor.

The evaluation should encompass an assessment of the qualifications and performance of the auditor; the quality and candor of the auditor’s communications with the audit committee and the company; and the auditor’s independence, objectivity and professional skepticism.

FOLLOWING IS A LIST OF SUGGESTED SAMPLE QUESTIONS, AND ALSO A LIST OF ATTRIBUTES FOR COMPANY PERSONNEL TO RATE:

*Q1
Did the lead engagement partner and audit team have the necessary knowledge and skills (company-specific, industry, accounting, auditing) to meet the company’s audit requirements? Were the right resources dedicated to the audit? Did the auditor seek feedback on the quality of the services provided? How did the auditor respond to feedback? Was the lead engagement partner accessible to the audit committee and company management? Did he/she devote sufficient attention and leadership to the audit?

*Q2
Did the lead engagement partner discuss the audit plan and how it addressed company/industry-specific areas of accounting and audit risk (including fraud risk) with the audit committee? Did the lead engagement partner identify the appropriate risks in planning the audit? Did the lead engagement partner discuss any risks of fraud in the financial statement that were factored into the audit plan?

*Q3
If portions of the audit were performed by other teams in various domestic locations, or abroad by the firm’s global network or other audit firms, did the lead engagement partner provide information about the technical skills, experience and professional objectivity of those auditors? Did the lead engagement partner explain how he/she exercises quality control over those auditors?

*Q4
During the audit, did the auditor meet the agreed upon performance criteria, such as the engagement letter and audit scope? Did the auditor adjust the audit plan to respond to changing risks and circumstances? Did the audit committee understand the changes and agree that they were appropriate?

*Q5
Did the lead engagement partner advise the audit committee of the results of consultations with the firm’s national professional practice office or other technical resources on accounting or auditing matters? Were such consultations executed in a timely and transparent manner?

*Q6
If the company’s audit was subject to inspection by the PCAOB or other regulators, did the auditor advise the audit committee of the selection of the audit, findings, and the impact, if any, on the audit results in a timely manner? Did the auditor communicate the results of the firm’s inspection more generally, such as findings regarding companies in similar industries with similar accounting/audit issues that may be pertinent to the company? Did the auditor explain how the firm planned to respond to the inspection findings and to internal findings regarding its quality control program?

*Q7
Was the cost of the audit reasonable and sufficient for the size, complexity and risks of the company? Were the reasons for any changes to cost (e.g., change in scope of work) communicated to the audit committee? Did the audit committee agree with the reasons?

*Q8
Does the audit firm have the necessary industry experience, specialized expertise in the company’s critical accounting policies, and geographical reach required to continue to serve the company?

*Q9
Did the audit engagement team have sufficient access to specialized expertise during the audit? Were additional resources dedicated to the audit as necessary to complete work in a timely manner?

*Q10
Did the audit engagement partner maintain a professional and open dialogue with the audit committee and audit committee chair? Were discussions frank and complete? Was the audit engagement partner able to explain accounting and auditing issues in an understandable manner?

*Q11
Did the auditor adequately discuss the quality of the company’s financial reporting, including the reasonableness of accounting estimates and judgments? Did the auditor discuss how the company’s accounting policies compare with industry trends and leading practices?

*Q12
In executive sessions, did the auditor discuss sensitive issues candidly and professionally (e.g., his/her views on, including any concerns about, management’s reporting processes; internal control over financial reporting (e.g., internal whistle blower policy); the quality of the company’s financial management team)? Did the audit engagement partner promptly alert the audit committee if he/she did not receive sufficient cooperation?

*Q13
Did the auditor ensure that the audit committee was informed of current developments in accounting principles and auditing standards relevant to the company’s financial statements and the potential impact on the audit?

*Q14
Did the audit firm report to the audit committee all matters that might reasonably be thought to bear on the firm’s independence, including exceptions to its compliance with independence requirements? Did the audit firm discuss safeguards in place to detect independence issues?

*Q15
Were there any significant differences in views between management and the auditor? If so, did the auditor present a clear point of view on accounting issues where management's initial perspective differed? Was the process of reconciling views achieved in a timely and professional manner?

*Q16
If the auditor is placing reliance on management and internal audit testing, did the audit committee agree with the extent of such reliance? Were there any significant differences in views between the internal auditors and the auditor? If so, were they resolved in a professional manner?

*Q17
In obtaining pre-approval from the audit committee for all non-audit services, did the lead engagement partner discuss safeguards in place to protect the independence, objectivity and professional skepticism of the auditor?

Furthermore, another good way to get well-rounded feedback is to provide a simple questionnaire to the rest of the company staff in order for them to rate their experience. 

Here therefore, is a guide, divided into sections, to help:

OBTAINING INPUT ON THE EXTERNAL AUDITOR FROM COMPANY PERSONNEL 

QUALITY OF SERVICES PROVIDED BY THE EXTERNAL AUDITOR RATING

• Meets commitments e.g., by meeting agreed upon performance delivery dates, being available and accessible to management and the audit committee.
• Is responsive and communicative e.g., by soliciting input relative to business risks or issues that might impact the audit plan, identifying and resolving issues in a timely fashion, and adapting to changing risks quickly.
• Proactively identifies opportunities and risks e.g., by anticipating and providing insights and approaches for potential business issues, bringing appropriate expertise to bear, and by identifying meaningful alternatives and discussing their impacts.
• Delivers value for money e.g., by charging fees that fairly reflect the cost of the services provided, and being thoughtful about ways to achieve a cost-effective quality audit.

SUFFICIENCY OF AUDIT FIRM RESOURCES RATING

• Is technically competent and able to translate knowledge into practice e.g., by delivering quality services within the scope of the engagement, using technical knowledge and independent judgment to provide realistic analysis of issues, and providing appropriate levels of competence across the team.
• Understands our business and our industry e.g., by demonstrating an understanding of our specific business risks, processes, systems and operations, by sharing relevant industry experience, and by providing access to firm experts on industry and technical matters.
• Assigned sufficient resources to complete work in a timely manner e.g., by providing access to specialized expertise during the audit and assigning additional resources to the audit as necessary to complete work in a timely manner.

COMMUNICATION AND INTERACTION RATING

• Communicates effectively e.g., by maintaining appropriate levels of contact/dialogue throughout the year, effectively communicating verbally and in writing, being constructive and respectful in all interactions, and providing timely and informative communications about accounting and other relevant developments.
• Communicates about matters affecting the firm or its reputation e.g., by advising us on significant matters pertaining to the firm while respecting the confidentiality of other clients’ information, and complying with professional standards and legal requirements, including informing us when the company’s audit is subject to inspection by the PCAOB or other regulatory review and sharing the results of the review that are pertinent to the company’s accounting or auditing issues.

INDEPENDENCE, OBJECTIVITY AND PROFESSIONAL SKEPTICISM RATING

• Demonstrates integrity and objectivity e.g., by maintaining a respectful but questioning approach throughout the audit, proactively raising important issues to appropriate levels of the organization until resolution is reached, and articulating a point of view on issues.
• Demonstrates independence e.g., by proactively discussing independence matters and reporting exceptions to its compliance with independence requirements.
• Is forthright in dealing with difficult situations e.g., by proactively identifying, communicating and resolving technical issues, raising important issues to appropriate levels in the organization, and by handling sensitive issues constructively.

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READ MORE>> www.thecaq.org: Audit Committee Annual Evaluation of the External Auditor

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•     GBC Audit Services Website
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