Boards of Directors or Trustees sometimes meet with the organization’s financial auditors as a group. Others elect to appoint a few members of their group to act as an Audit Committee that will deal directly with the auditors and report to the full Board. If you have been appointed to an Audit Committee, you may be wondering what information the auditors will normally provide and what additional questions you should ask.
There are certain “required communications” that an auditor should routinely provide to the Audit Committee as part of an audit conducted in accordance with generally accepted auditing standards (GAAS). These communications were established in Statement on Auditing Standards No. 114. In addition to these required communications, there are questions that you should ask to help assure your understanding of the audit process. This is the first part of a seven part series that presents a discussion of those communications.
Most Audit Committee members understand that they should meet with the auditors at the conclusion of the audit, but many do not realize that certain communications should occur before the audit begins. Some of the matters to be communicated at the beginning of the process are as follows.
- How does the auditor plan to address significant risks of material misstatement? When a financial auditor conducts an audit in accordance with GAAS, the object of the audit is not to verify that the financial statements, which have been prepared by management of the organization, are correct to the dollar. Auditors seek to form, and express, an opinion on whether the financial statements are fairly presented in all material respects. In other words, that they are free of material misstatements that prevent the financial statements from being fairly presented. So, what does the auditor consider to be the greatest risks in that regard and how does the auditor plan to address those risks?
- What is the auditor’s approach to internal control? Every organization has a system of internal controls put in place to, among other things, safeguard assets and promote the reliability of the accounting records and resulting financial statements. But, internal controls are not the same in every organization and some systems are better than others. So, what is the auditor’s evaluation of your organization’s controls and how will that evaluation affect audit procedures?
- How does the auditor address materiality in planning and conducting the audit? An auditor may be reluctant to reveal exact dollar amounts used in determining materiality for your organization’s audit, but the auditor should be able to tell you how materiality impacts risk assessments and tests to be performed.
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