Planning and Preparation Changes Continue to Impact
Audit Process By Dave Schmitt
Whether a public or privately owned company, if an audit is completed on your financial statements, you know the process has become more complex and costly. One way to help hold down the costs is through advanced planning and preparation for the audit.
The foundation of planning and preparation is a team effort between you and your audit firm. Start early with a planning meeting that includes the preparation of an “audit planning document” identifying all key aspects of the audit, including the completion date for each.
In the planning meeting, the audit firm should not only present the planning document, but also be ready to discuss any new major events that happened in the past year along with your presentation of how accounting was handled for these transactions. If a public company, you have addressed these issues for the first three quarters; however, now is a good time to cover the fourth-quarter issues.
With the recent changes brought about by Sarbanes-Oxley and the Public Company Accounting Oversight Board (PCAOB) independence rules, public companies can no longer rely on the audit firm to provide the accounting treatment consulting it has delivered in the past. This adds additional research time to determine the proper accounting treatment for any new or different events that have taken place in the past year and/or quarter. Advance planning is a must in these situations as you may need to seek additional outside help in determining the proper accounting treatment for these items.
For private companies, two new standards will impact your audit. Both are effective for years ending on or after December 15, 2006. The first is Statement on Auditing Standards No. 103 (SAS 103), Audit Documentation. The second is Statement on Auditing Standards No. 112 (SAS 112), Communicating Internal Control Related Matters Identified in an Audit.
SAS 103 requirements
The principal reason for issuing SAS 103 is to conform the documentation requirements for audits of nonpublic companies to those for public companies. The standard outlines minimum requirements for documentation to be included in audit files and establishes minimum periods that files must be retained. These requirements will have little visible impact on your audit.
SAS 103, however, also changes the rules for dating audit reports. Under existing auditing standards, reports are dated at the end of fieldwork, which is generally when auditors leave the client’s place of business and return to their offices. Under SAS 103, reports will be dated when sufficient evidence to support the report has been obtained. Generally, this will be a date very near when the report is released.
Auditing standards require auditors to perform certain updating procedures through or near the date of their report. These procedures include reading financial statements prepared since the end of the year, reading minutes of the board and audit committee, and making inquiries of the CEO regarding changes in the business that may have occurred. These procedures are collectively referred to as “subsequent events procedures” and were typically performed before the end of fieldwork, even though some audit evidence remained outstanding. Their purpose is to identify matters that might require disclosure or inclusion in the financial statements.
The subsequent events procedure must now be performed through or near the new report date. It is common for auditors to be waiting on key audit evidence even after they leave the client’s offices. Such evidence might include legal representation letters, debt covenant waivers and even analyses of accounts. Furthermore, legal representation letters must be dated or updated to within a short period of the date of the audit report. Under this new standard, the potential exists for repeating audit steps to update them while trying to bring everything together at or near the report date.
Working together
In order to avoid unnecessarily performing subsequent events procedures multiple times and increasing audit time, you must coordinate receipt of debt covenant waivers, legal representation letters (or updates) and any other significant pending items as the audit wraps up. Keep very close to your audit team’s progress and eliminate any obstacles that might cause delays.
The audit firm will need your help in contacting lenders or attorneys that are delinquent in responding to requests. In short, you will need to work together with your audit firm to minimize the impact of SAS 103 on your audit.
SAS 112 impacts
SAS 112 defines the terms control deficiency, significant deficiency and material weakness, which are used to describe the severity of internal control deficiencies. These terms collectively replace reportable condition and other terms used in existing auditing standards. The new terms and their definitions mirror those used for public companies.
Bottom line, SAS 112 may result in more control deficiencies being reported in your management letter than under existing rules. As a result, your management letter will have a different look. You may wish to prepare users of the letter, such as your audit committee and/or governing body (board of directors, etc.) and management.
The new risk assessment audit standard will be effective for 2007 audits. These standards will significantly affect the planning and performance of financial statement audits and is similar to the current requirements of the PCAOB. The standards are effective for all 2007 calendar year audits. Please contact your auditors for additional details.
Needless to say, addressing all these new standards in the advance preparation process will help eliminate surprises and make your audit go as smoothly as possible.
Author: Dave Schmitt is a partner and the firmwide manufacturing leader of BKD, LLP. He is located in the firm's Indianapolis office and may be reached at 317-383-4212 or dschmitt@bkd.com
Planning and Preparation