Posting by John Merchant

If you have been appointed to an Audit Committee, you may be wondering what information the auditors will normally provide and what 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). 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 third part of a seven part series that presents a discussion of those communications.

Once the auditor has completed evidence gathering and is ready to issue an opinion on the financial statements the Audit Committee should meet again with the auditor to gain insight into the conduct of the audit and certain points that will not be covered in the basic auditor’s opinion letter. Again, many of these points are part of the “required communications” that an auditor will routinely make in accordance with GAAS, but in many organizations these communications are made only through a letter from the auditor. We recommend that the Audit Committee meet face to face with the auditor to promote a clear understanding of these matters. The following are some of the questions that should be addressed.

  • Has the organization adopted any accounting policies that the auditor considers unusual? The significant accounting policies used by the organization are normally detailed in the notes to the financial statements. But, even though the auditor has accepted those stated accounting policies, the Audit Committee should know whether the auditor considers any of them acceptable but also somewhat out of the ordinary.
  • What are the key estimates used in preparing the financial statements? The preparation of financial statements generally requires management to make estimates about items such as the collectability of receivables, the useful lives of fixed assets for depreciation purposes, the amount of obligations for pension benefits and other significant amounts reflected in the financial statements. The Audit Committee should be clear about which items were subject to estimation and which estimates are particularly significant to the financial statements.
  • Are the disclosures in the financial statements adequate, consistent and clear? Generally, an auditor will not express an unmodified opinion on financial statements with disclosures that are not consistent and clear, but the Audit Committee should confirm this point and should also inquire as to whether the auditor believes any additional disclosures should have been made.

Part 4 of this series will present additional questions to ask the auditors upon completion of their work.

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