Audit season is right around the corner for calendar-year entities. Here\u2019s what your auditor is doing behind the scenes to prepare \u2014 and how you can help facilitate the audit planning process.
\nThe big picture
\nEvery audit starts with assessing \u201caudit risk.\u201d This refers to the likelihood that the auditor will issue an adverse opinion when the financial statements are actually in accordance with U.S. Generally Accepted Accounting Principles or (more likely) an unqualified opinion when the opinion should be either modified or adverse.
\nAuditors can\u2019t test every single transaction, recalculate every estimate or examine every external document. Instead, they tailor their audit procedures and assign audit personnel to keep audit risk as low as possible.
\nInherent risk vs. control risk
\nAuditors evaluate two types of risk:
\n1. Inherent risk. This is the risk that material departures could occur in the financial statements. Examples of inherent-risk factors include complexity, volume of transactions, competence of the accounting personnel, company size and use of estimates.
\n2. Control risk. This is the risk that the entity\u2019s internal controls won\u2019t prevent or correct material misstatements in the financial statements.
\nSeparate risk assessments are done at the financial statement level and then for each major account \u2014 such as cash, receivables, inventory, fixed assets, other assets, payables, accrued expenses, long-term debt, equity, and revenue and expenses. A high-risk account (say, inventory) might warrant more extensive audit procedures and be assigned to more experienced audit team members than one with lower risk (say, equity).
\nHow auditors assess risk
\nNew risk assessments must be done each year, even if the company has had the same auditor for many years. That\u2019s because internal and external factors may change over time. For example, new government or accounting regulations may be implemented, and company personnel or accounting software may change, causing the company\u2019s risk assessment to change. As a result, audit procedures may vary from year to year or from one audit firm to the next.
\nThe risk assessment process starts with an auditing checklist and, for existing audit clients, last year\u2019s workpapers. But auditors must dig deeper to determine current risk levels. In addition to researching public sources of information, including your company\u2019s website, your auditor may call you with a list of open-ended questions (inquiries) and request a walk-through to evaluate whether your internal controls are operating as designed. Timely responses can help auditors plan their procedures to minimize audit risk.
\nYour role
\nAudit fieldwork is only as effective as the risk assessment. Evidence obtained from further audit procedures may be ineffective if it\u2019s not properly linked to the assessed risks. So, it\u2019s important for you to help the audit team understand the risks your business is currently facing and the challenges you\u2019ve experienced reporting financial performance, especially as companies implement updated accounting rules in the coming years.
\n\u00a9 2019<\/p>\n","protected":false},"excerpt":{"rendered":"
Audit season is right around the corner for calendar-year entities. Here\u2019s what your auditor is doing behind the scenes to prepare \u2014 and how you can help facilitate the audit planning process. The big picture Every audit starts with assessing \u201caudit risk.\u201d This refers to the likelihood that the auditor will issue an adverse opinion […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13],"tags":[],"class_list":["post-14275","post","type-post","status-publish","format-standard","hentry","category-aa"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14275","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=14275"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14275\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=14275"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=14275"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=14275"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}