What communication should occur between the audit committee/board of an organization and its auditor?

Generally Accepted Auditing Standards (GAAS) require various communications between the auditor and the audit committee or the board as a whole when there is no audit committee. Although these are requirements that must be met by the external auditor, the audit committee/board should also be proactive in its relationship with the external auditor.

  • Auditors are required to communicate issues related to the audit scope and plan to the audit committee/board.  We do this in our annual engagement letter; however, it is often done in a pre-audit meeting where the audit committee/board expresses any concerns or issues the members believe should be addressed and where clarification is communicated relevant to all records necessary to be made available to the auditor, any scope limitations to be placed on the auditor are disclosed, and the results of such scope limitations in the resulting opinion the auditor will be able to produce or the resulting fee adjustment that will have to be made to work around such scope limitations if possible.  The detail included in our annual engagement letter represents our attempt to communicate the required parameters of the performance of the audit for which we have been engaged and should not be viewed as any distrust of the management processes in place.
  • Auditors are required to confirm certain matters with the board of directors such as conflicts of interest and this requires direct communication in person or in writing and obtaining written evidence of such communication.  This communication should also not be viewed as a distrust of management, but as a required communication to those charged with governance.
  • Auditors are required at the completion of the audit to communicate in writing to the audit committee/board, either in writing or in person, a number of issues pertinent to the results of the audit.  When we are not requested or permitted to present our report in person, we are required to communicate a summary of such matters to the board in a letter regarding the overall audit.  Presentation of this communication to the committee/board should not be viewed as a negative report regarding the audit results, but rather as a required communication to those charged with governance of the organization.  This communication is required to address certain specific matters such as:
    • Our responsibilities under GAAS.
    • Scope and timing of audit procedures employed.
    • Significant audit considerations such as changes in accounting policies, practices, or processes concerning measurement, reporting, quantifying or estimating accounting transactions, as well as the timing and authoritative guidance for the handling of such items.
    • Difficulties encountered in performing the audit.
    • Corrected and uncorrected misstatements that were revealed during the audit.
    • Disagreements with management.
    • Management representations provided.
    • Known management consultation with other accountants about accounting and auditing matters.
    • Other findings or issues encountered.
    • Other procedures performed.

In carrying out its oversight responsibilities, the audit committee/board should:

  • Review with the president/executive director and the outside auditor the organization’s accounting and financial reporting controls and obtain annually in writing from the outside auditor a letter regarding the adequacy of such controls.  There is usually contained within our annual audit report presentation a formal letter regarding our review of the internal controls for the purposes of our audit and there is a management letter as well wherein we express matters observed that if revised would enhance internal controls.  These letters, when presented, are thus a required part of the reporting process and again the mere inclusion of such letters within our audit report presentation should not be viewed as a concern, but rather a report on items that individually may or may  not be a concern and, most importantly, an opportunity for the board to take positive action to enhance its internal accounting controls by consideration of changes intended to remediate any existing weaknesses that may be expressed therein.
  • Review with the president/executive director and the outside auditor all significant accounting and reporting principles, practices, and procedures applied by the organization in preparing its financial statements. This review is typically done in a planning meeting of the audit committee/board and the auditor.  It should include:
    • A discussion with the outside auditor of its judgments about the quality–not just the acceptability–of the organization’s accounting principles used in financial reporting, the risk assessment procedures the auditor will use to measure such judgments, and the report it will provide back to the committee/board regarding the results of the procedures it has employed to that end.
    • A review of the scope and general extent of the outside auditor’s annual audit to be assured that the audit is being conducted in accordance not only with GAAS, but also with accounting standards required by any oversight agency providing funding and with the requirements of any grant agreements and to the satisfaction of the requirements of the audit committee/board, who assume ultimate responsibility over the financial reporting of the organization.
    • A discussion with the outside auditors of the factors considered by the accountants in determining the audit scope, including the major risk factors. The outside auditors should confirm to the committee that no limitations have been placed on the scope or nature of their audit procedures, and if a scope limitation is to be placed on the audit, the results of such limitation on the audit opinion and other reports able to be expressed by the auditor should be explained.
    • When the specific audit process undertaken in a client engagement does not provide for these discussions to be conducted in person during the planning stage, we report on these matters after the fact. When we have not been requested or permitted to meet with the audit committee/board, we report on these matters via the management letter.  If we believe a scope limitation or audit result will require qualification of our audit opinion on the financial statements or our letter regarding the internal controls, then we request an opportunity to communicate this to the audit committee/board prior to issuance of our report.
    • Communicate openly with the auditor and meet upon request to discuss any issues the auditor believes may have a reporting impact on the financial statements of the organization, as well as any other matter that may have a detrimental effect on the organization.
    • Review with the president/executive director and the outside auditor the following matters at the completion of the annual audit:
      • Results of the audit of the financial statements, the related auditor’s opinion thereon and, if applicable, a report on changes during the year in accounting principles and their application.
      • Significant changes to the audit plan, if any, and serious disputes or difficulties the president/executive director encountered during the audit.
      • Cooperation received by the outside auditor during its audit, including access to all requested records, data, financial and compliance information, and third party contact information.
      • Disagreements with the president/executive director that, if left unresolved, could cause the auditor to issue a nonstandard report on the organization’s financial statements.

Links to independent websites with further information on oversight responsibilities of the audit committee of an organization are:

WEBSITE                                BLOG                             RESOURCES                                 CONTACTS

Roy & Associates, PC serves clients in western Pennsylvania located predominantly in Westmoreland County, Allegheny County, and Fayette County.

Advertisements