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SEC Insights - January 2010

 

Working Efficiently and Effectively With Your Auditors

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Everyone knows the old adage “time is money” which is particularly true when dealing with a professional services firm. However, many companies are not as effective and efficient as they could be in working with their outside auditors.

Plan your audit throughout the year

Auditors spend a great deal of time during the year-end audit process gaining an in-depth understanding of a company’s business processes and operations, key accounting issues and the relevant technical literature, and the significant transactions which occurred during the year. Therefore, it is essential that the company develop an effective line of communication with their outside auditors to increase the efficiency of the audit process (and save money).

Engaging in quarterly update meetings with your auditors can serve as a valuable tool in adding to the effectiveness of the year-end audit process. Periodic meetings throughout the year provide the auditors with the opportunity to remain current on recent developments and reduce the need at year-end to understand all of the yearly changes in the business during a limited period of time. When communicating with your auditors and especially when discussing complex transactions which may have transpired, these developments should be provided in a written summary clearly describing the activities or developments. If these transactions involve complex accounting guidance, the company should prepare and include in a written summary memo, the relevant accounting literature and its application to the company’s circumstances. When management takes the time to thoroughly document its significant accounting positions and delivers the information to its auditors in a summarized format, including key supporting documentation, the effectiveness and efficiency of the year-end audit process is greatly enhanced.

Match your accounting resource growth with your company growth

During periods of significant growth, companies do not always invest in expanding their internal accounting resources at a pace sufficient to match the overall growth and complexity of the company. This often results in costly audit inefficiencies during the audit process as accounting personnel struggle to respond to audit requests (in a limited timeframe) while managing their day-to-day workload. Management should evaluate its talent base and determine if all of its workload needs are being met or if individuals with alternative skill sets are needed. This process should take place sometime during the year. Alternatively, rather than hire added full time personnel, companies will generally hire part-time consultants with the necessary expertise to help the accounting department with the year-end audit process to alleviate immediate workload burden. Consultants can assist the company with particular technical analysis (significant accounting estimates, goodwill impairment, tax provision calculations, going concern assessments, etc) and could significantly add to the efficiency and effectiveness of the year-end audit process.

Provide complete documentation

Auditors are required by the auditing standards to exercise due professional care in the performance of the audit which requires the auditor to perform a critical assessment of audit evidence including and considering the competency and sufficiency of the evidence. Auditors often find that initial client requests for audit documentation have to be supplemented with additional information. As such, the more complete the company can be in providing documentation to support the auditors’ request, the more efficient the audit process will be.

All companies have a routine closing process which is typically more comprehensive during quarterly and annual period ends. However, many companies underestimate the value of performing account analyses on an ongoing basis throughout the year. The manner and format of preparing these account analyses can be very useful to the auditors and in many instances no additional information may be requested. By effectively communicating with its auditors, management can tailor its approach to maintaining certain routine account analyses, and design spreadsheets and analyses that are both useful to the company and useful to the auditors. This helps to reduce the need for the company to prepare similar information in multiple formats thereby increasing the efficiency of the overall audit process.

Manage the audit process

Management’s monitoring of the timing and completeness of the deliverables throughout the audit process via weekly staff meetings is an often highly effective means to adding to audit efficiency. Establishing bi-weekly meetings or status calls with your audit team to manage both the time when the audit team is in the field and post-fieldwork deliverables is an effective way to manage the engagement. Sometimes, a company may want to consider having their auditors visit before year-end to allow the audit team to become aware about new events that have transpired during the year and perhaps perform some limited year-end test work. These earlier visits are especially helpful for the auditors in performing tasks such as updating their understanding of internal controls, requesting confirmations, and testing transactions during the earlier part of the year (i.e., significant fixed asset additions, etc.).

Another important consideration which is effective in managing the audit process is for the company to designate one individual within the company’s accounting department to manage the year-end audit process and to coordinate and track the timeliness of agreed upon audit deliverables. This individual may also be responsible for reviewing all information prepared by company personnel before it is forwarded to the auditors to ensure its accuracy and thereby reduce the risk that work will be performed by the auditors on incorrect information and in turn increase audit fees. A proper review of information prior to providing it to your auditors may include ensuring that: a) account analyses agree to underlying accounting records (i.e. the general ledger); b) the format of the analyses is understandable and acceptable to the auditors; c) the information is mathematically correct; and d) the information appears to make sense compared to management’s expectations. All of these steps will help minimize audit follow up questions and maximize the efficiency of the audit process.

Provide the audit deliverables electronically

Providing audit deliverables prior to the start of the audit is important. This allows the auditors time to review the information and ensure its completeness and accuracy before the audit process begins and more importantly before the entire audit team travels to an out of town engagement. One easy and efficient method of transferring files to your auditors is through the use of a secure electronic file transfer protocol website (“FTP”) which allows the audit team to send and receive files from the company in an organized fashion rather than rely on “e-mails” back and forth. These FTP sites allow for a much higher degree of control and organization rather than the “old fashioned” e-mail process. The file transfer website also allows the entire audit team to access all client delivered documents simultaneously and minimizes duplicate requests from team members for information already provided to another team member. FTP sites are often designed and modeled to match the descriptions of the information requested by the auditors from the company. FTP sites are generally very easy to use, as all they typically require is for the company drag and drop the audit information to designated folders. Auditors are constantly increasing their reliance on computer assisted audit tools which often require client data to be provided in a specific format. During the audit planning process, the company should discuss with the audit team the required format of various audit data requests to again reduce and minimize duplicate efforts and the need to reproduce the requested information more than one time.

In summary, the lesson to be learned from the above discussion is that effective communication can lead to a more efficient audit. Practicing a few important "management principles" and striving to “communicate” with your outside auditors on a regular basis can result in a more efficient and effective year-end audit process.

 
 
 
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