The Independent Auditor, Part II

by Frank Stover, CPA/CFF/CGMA, CFE

Audit Manager at Atchley & Associates, LLP

DO’S AND DON’TS

What auditors do

The independent auditor is engaged to render an opinion on whether an entity’s financial statements are presented fairly, in all material respects, in accordance with a particular financial reporting framework (GAAP, GASB, FASB, regulatory basis, etc.) The audit provides users, such as the bond counsels and agents, regulatory bodies, and the general public, with a degree of confidence in the financial statements. An audit conducted in accordance with GAAS and relevant ethical requirements enables the auditor to form that opinion.

To form an opinion, the auditor gathers appropriate and sufficient evidence and observes, tests, compares and confirms until gaining reasonable assurance. The auditor then forms an opinion of whether the financial statements are free of material misstatement, whether due to fraud or error.

Some of the more important auditing procedures include:

  • Inquiring of management and others to gain an understanding of the organization itself, its operations, financial reporting, and known fraud and error
  • Evaluating and understanding the internal control system
  • Performing analytical procedures on expected and unexpected variances in account balances or classes of transactions
  • Testing documentation supporting account balances or classes of transactions
  • Observing the physical inventory count
  • Confirming bank accounts, receivables, and other accounts with a third party

At the completion of the audit, the auditor may also offer objective advice for improving financial reporting and internal controls to maximize a company’s performance and efficiency.

What auditors don’t do

For a clear picture of the role of independent auditors, it helps to understand what you should not expect auditors to do. Emphasis is placed on “independent.”

Firstly, your independent auditors do not take responsibility for the financial statements on which they form an opinion. The responsibility for financial statement presentation rests with management and those charged with governance of the entity being audited.

Auditors are not a part of management, which means the auditor will not:

  • Authorize, execute or consummate transactions on behalf of a client
  • Prepare or make changes to source documents
  • Assume custody of client assets, including maintenance of bank accounts
  • Establish or maintain internal controls, including the performance of ongoing monitoring activities for a client
  • Supervise client employees performing normal recurring activities
  • Report to the board of directors on behalf of management
  • Serve as a client’s bond or escrow agent or general counsel
  • Sign payroll tax returns on behalf of a client
  • Approve vendor invoices for payment
  • Design a client’s financial management system or make modifications to source code underlying that system
  • Hire or terminate employees

Stated briefly, the auditor may not assume the role and duties of management.

Speaking as a practical matter, there are a number of tasks you should not expect your independent auditor to perform:

  • Analyze or reconcile accounts
  • “Close the books”
  • Locate invoices, etc., for testing
  • Prepare confirmations for mailing
  • Select accounting policies or procedures
  • Prepare financial statements or footnote disclosures
  • Determine estimates included in financial statements
  • Determine restrictions of assets
  • Establish value of assets and liabilities
  • Maintain permanent records, including bond or loan documents, leases, contracts and other legal documents
  • Prepare or maintain minutes of the entity’s governance committee meetings
  • Establish account coding or classifications
  • Determine retirement plan contributions
  • Implement corrective action plans
  • Prepare an audit for audit

An audit is NOT a fraud examination, you may engage an audit firm to perform a forensic examination which is performed under different professional standards.

Your independent auditor may assist in the performance of some of these duties under some restrictive guidelines of the American Institute of CPAs, Department of Labor, Government Accountability Office, Securities and Exchange Commission or Public Company Accounting Oversight Board. However, these very same guidelines may also preclude the auditor from performing some of these functions.

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