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 final 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 is the final, and perhaps the most important, of the questions to be addressed.

  • Were any significant issues discussed by management and the auditors prior to the audit and presented by management as a condition to retention of the auditor?  As noted in Part 6, management will often discuss issues with the auditor prior to the audit.  This is part of a normal professional relationship between management and auditor.  However, management will sometimes go beyond the normal and engage in what is known as “opinion shopping”.  If management decides to adopt unusual accounting policies or handle transactions or situations in a way that appears inappropriate to the auditor, management may elect to terminate the auditor and shop for a new auditor who will agree.  If any issue is ever presented to the auditor by management with an advisory that the auditor’s position will determine the auditor’s retention, the situation should be reported to the Audit Committee and the Audit Committee should take appropriate action.  This is a management action that should be regarded as both inappropriate and intolerable.

The questions in this series cover the basic issues that should be of importance to any Audit Committee, but they are not all-inclusive.  If you have any other questions or concerns, present them to the auditor.   One of the responsibilities of Audit Committee members is to be informed and gain an appropriate level of understanding about the financial statements and the audit.  If you have a question, ask it.

If you have any questions regarding any of the inquiries or issues raised in this series, please contact us at (301) 272-6000.

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