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How to Navigate Around Potential Audit Pitfalls

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Jan 20th 2017
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A new Thomson Reuters Checkpoint report on how to avoid audit and attest deficiencies likens the potential for trouble to hiking on slippery, wet rocks.

Whether or not you agree with the metaphor, 4 Ways to Avoid Audit and Attest Deficiencies offers pointers on the “wet rocks that could be lurking on your audit and attest trail and help you navigate around or over them.”

So, grab your backpack and poles, and let’s go.

1. Learn from the problems that others have faced. Practices that do audit and attest engagements must have peer reviews every three years. The American Institute of CPAs (AICPA) compiles peer reviews and publishes common deficiencies.

The report cites the following issues and deficiencies that are found in most audit engagements:

  • Failure to document and perform planning procedures.
  • Inadequate documentation of the preliminary analytical procedures.
  • Nonattest services must comply with ET 1.295 of the AICPA’s Code of Professional Conduct to remain independent. Such services include preparing tax returns, bookkeeping, and consulting.
  • Failure to document consideration of the group audit standard when a component unit was audited.
  • Inadequate risk identification and assessment, and development of a detailed audit plan.
  • Failure to develop an audit program that is pertinent to a specific client.
  • Accounting errors, such as incorrectly classifying long-term debt and accounting for a transaction.
  • Omission of disclosures about related-party transactions, valuation allowances, debt terms and maturities, income tax issues, and major concentrations.
  • Reporting that doesn’t conform to auditing standards or has other mistakes. This can include failing to disclose GAAP departures and reporting on supplementary information.

2. Plan the audit engagement. Planning involves a strategy, and that varies with the size and complexity of the organization and the auditor’s understanding of it. The plan also should always include a risk assessment, which “may provide audit evidence about relevant assertions related to account balances, transaction classes, or disclosures,” the report states.

3. Be aware and cautious of new requirements. The report cautions that the AICPA’s Statement on Standards for Attestation Engagements (SSAE) 18, which was issued in April 2016, includes “significant changes for nontraditional engagements, such as agreed-upon procedures engagements and examinations.”

SSAE 18 will be effective for reports dated on or after May 1. It also affects engagement letters for reports dated on or after May 1, even if the engagement letters are issued before then, the report states. So, before beginning an engagement, consider when the report is expected to be issued.

Also, auditors need to be aware of the approximately 30 new standards issued by the Financial Accounting Standards Board in the past 18 months. Several of these accounting standards have delayed effective dates, such as revenue recognition and leases.

“While those standards don’t apply to audits this year, you need to learn at least the main provisions of the Accounting Standards Updates so that you can start assessing their effect on your clients,” the report states. “You may want to start considering the clients that will be most impacted by the new standards, such as clients with significant operating lease commitments (especially if they have debt with covenants that might not be met if a large liability is recorded on the balance sheet) and industries with complex contracts with customers that will be most affected by the revenue recognition standard.”

4. Use available resources. If you provide audit and attest services, you should use the appropriate resources that are available to you, the report states.

“With busy season approaching, it is critical that auditors are aware of these risk areas and are well-prepared to address them effectively,” Scott Spradling, CPA, vice president of the Audit and Accounting segment within the Thomson Reuters Tax & Accounting business, said in a prepared statement.

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