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). These communications were established in Statement on Auditing Standards No. 114. 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 sixth 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. The following are some of the questions that should be addressed.

  • Did management have consultations with other accountants? Sometimes management will discuss an issue with the auditor in advance of the audit and be less than satisfied with the information provided or the conclusions drawn. As a result, management may decide to present the issue to other accountants and get their opinion on the matter in question. If such consultations occur, the auditor should be informed by management and should inform the Audit Committee.
  • Is the auditor independent with regard to the organization, members of management and members of the Board? An auditor is prohibited by professional standards from expressing an audit opinion in situations where the auditor is not independent in both fact and appearance. However, the Audit Committee may wish to know whether there are any relationships between the auditor and the parties described above, even relationships considered insignificant and irrelevant to determining independence.
  • Were any significant issues discussed by management and the auditor prior to the audit? It is not unusual for management to contact the auditor and discuss unusual transactions or unique situations prior to the audit to assure that management and the auditor are in agreement on the proper handling and presentation in the financial statements. The Audit Committee should inquire into the occurrence of such discussions. While such conversations are generally routine, we will discuss in Part 7 of this series a situation where such a conversation can be totally inappropriate.

Part 7 of this series will present the final, and perhaps the most important, of the questions to be asked of the auditor.

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