Can Owner/Manager Controls Be Audited?

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Many auditors believe that owner or manager controls are unauditable because their performance is usually not documented. Interestingly, new risk assessment standards in 2007 identified inquiries and observations as acceptable procedures for testing controls. For example, obtaining a copy of a bank statement and asking a business owner how she approaches its preliminary review before reconciliation may provide evidence that the assessed level of risk of material misstatements for cash is less than high. This procedure will produce reliable evidence when the integrity of management is high.

An auditor’s evaluation of management’s integrity as high has at least two significant affects on small audits. First, a strong control environment reduces risk at the financial statement level. Lower risk mean less evidence is required to reach a conclusion on the financial statements as whole. Second, high management integrity means higher reliance can be placed on responses to inquiries in tests of key controls, thereby reducing the amount of other substantive evidence necessary at the assertion level.

The answer to the headline question above is yes, owner/manager controls can be audited. Not only are they auditable, selecting and serving clients employing management personnel with good character and high integrity can increase both engagement and firm profits! What has been your experience? Post your comments and questions below.


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