Planning for Possible Changes in Your Audit Engagement

As you plan for your next financial statement audit, there are changes in auditing standards that may impact your engagement. Statements on Auditing Standards (SAS) Nos. 122-125(referred to as the Clarified Auditing Standards) introduce some changes that go into effect for financial statement audits for periods ending on or after December 15, 2012. For most companies, that means they’ll be effective for the year ending December 31, 2012 or later. We will be contacting our audit clients soon to discuss the changes that may specifically impact them, but we’ve provided a summary you can review to begin familiarizing yourself with the changes. Some of the changes will affect all audit engagements, while others only apply in certain circumstances. Our goal is ensure a smooth transition to the new audit requirements, so we’ll be reaching out personally to arrange a discussion specific to your company.

Some of the changes that may affect all audit engagements: 

  • Before the audit begins you can expect us to review the terms of the engagement annually with you and if the terms have changed, expect us to issue a new engagement letter. In addition, you will note that management’s responsibilities will be spelled out more clearly in the engagement letter as a result of the new standards, but management responsibilities are unchanged.
  • Expect our audit team to ask you more questions regarding your legal and regulatory framework and expect us to ask to review correspondence with licensing or regulatory agencies. These procedures will allow us to better understand the environment in which you operate and to better assess risk.
  • All confirmations are now required to be in writing. In some circumstances we may have relied on verbal confirmations; however, that is no longer an option. We may need your help to get cooperation from vendors, customers, etc. if they are not responding to our confirmation requests quickly.
  • Our communications to you regarding internal control deficiencies will now include a description of the potential effect of significant deficiencies or material weaknesses that we identify through our audit procedures. We won’t quantify the potential effect; we’ll just give a description. We will also inform you of other deficiencies that we believe are sufficiently important but that don’t rise to the level of significant deficiencies or material weaknesses. The expanded reporting is intended to enhance your ability to address internal control issues and reduce the potential risk of material misstatement or fraud.
  • The audit report has changed, with headings to distinguish each section and a more complete description of management responsibilities. In some circumstances, new paragraphs may be included in the audit report to address special situations. We will discuss the new report format with you and will let you know if any special report paragraphs may apply to your engagement.

There are additional changes that may not affect all audit engagements.

  • We may ask you more questions to ensure our understanding of any special circumstances in your engagement, such as if you report using an accounting method other than generally accepted accounting principles (GAAP), issue a single financial statement or issue summary financial statements.
  • If your company uses a service organization, such as an outside payroll processor or cloud computing provider, for example, expect us to ask you whether the service organization has reported any fraud, noncompliance with laws and regulations or uncorrected misstatements that could affect your organization. We may have to adjust our audit procedures accordingly.
  • If your company uses a service organization and we rely on the service auditor’s report as audit evidence, we will be required to evaluate the report in more depth. We may have to perform additional audit procedures depending on our evaluation.
  • If your engagement includes a disclosure of segment or division information, expect us to discuss with you the methods used to determine the information presented. We may be required to perform audit procedures that may not have been performed previously.
  • If your engagement includes group financial statements, there are significant changes in the way these engagements will be performed. The changes apply to both the auditors managing the overall audit and auditors reporting on components of a group.

There are some changes that may only apply in unusual circumstances, some of which are listed below. 

  • If you have engaged us to perform an audit for the first time, we will discuss with you the procedures required in an initial audit (or re-audit.)
  • If your company uses a financial reporting framework other than GAAP, we may perform additional procedures regarding related party transactions.
  • If there are material changes in financial statement classifications from previously issued financial statements, expect us to perform additional procedures to evaluate the changes and possibly highlight them in the auditor’s report.
  • If your company issues financial statements that have been prepared in accordance with a financial reporting framework generally accepted in another country for use outside the U.S., options for the auditor’s report have changed.

Some of thebenefits of the clarified auditing standards include enhanced communication between your team and ours, improved audit quality and increased confidence in the audited financial statements.

These changes and other new accounting pronouncements will be discussed with you throughout the audit process.  If you have any questions or concerns feel free to contact the partner in charge of your engagement.