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By Phil Cowperthwaite
Illustration: Blair Kelly
Discussion with your clients is vital and the new Canadian auditing standards are a communicator’s dream
How many jokes are there about the inability of accountants to communicate? But the stereotype of a CA stuck under a green eyeshade is way out of date and largely inaccurate. Successful accountants are successful communicators. It is just that often what they communicate is not what the other person wants to hear.
Enter the new Canadian auditing standards (CAS) that are in effect for audits of reporting periods ending on or after December 14, 2010. These newly drafted standards are a communicator’s dream. Throughout, the standards stress communication with clients, with those charged with governance, and with and among the audit team and many others. What was always a best practice has now been incorporated into standard day-to-day audit practice. But is it overkill to put so much emphasis on communication in audits of very small (micro) entities? Will it place an undue burden on the practitioner and hence unreasonably drive up the cost of audits?
If the practitioner makes communication a part of the day-to-day audit procedures, does not treat it as an afterthought and uses common sense along the way, the answer is no. Here are a few practical steps for each phase of the audit that seem to work well with micro-entity clients. They serve to reduce the audit risk, increase the client’s satisfaction, improve audit quality and increase recoveries.
Client acceptance and continuance
Some accountants like to issue an engagement letter every year and certainly one will be required on every audit this year under the new CAS (CAS 210.10 and .13). If you use audit software on all audit engagements, this practice is relatively painless. First, update a master letter annually for any changes required. Make sure that customized changes are fully programmed. For example, the clients’ names, addresses and year-end date fields are programmed automatically in the audit software so that when the master letter is imported into the file, further customizing is not needed. Having programmable fields makes it easy to customize the letter further by referring to a client as “organization,” “foundation” or “society,” for example.
This is probably a good time to make a call to management or those charged with governance or, if necessary, pay them a visit to see if there is any reason to believe the preconditions for audit may not be met (CAS 210.06). If the entity is unauditable, it’s much better to find out now than after you have formally accepted the engagement. Think of the savings in time and aggravation if you deal with this up front, and not halfway through the audit.
You can repeat the engagement-letter process with the letter outlining the planned scope and timing of the audit each year (CAS 260.15). Import these letters into your audit software package. In the case of a very small engagement, this of course assumes you have taken the time to call management to ask whether there are circumstances pointing to new significant risks or requiring a change in your approach to internal control for this particular audit (CAS 210.A13).
So, in very small entities you can be ready to start fieldwork with one phone call or visit and two letters. Now it’s time to go on site to do the fieldwork.
Communication during fieldwork
Every audit requires the auditor to “identify and assess the risks of material misstatement...through understanding the entity and its environment, including the entity’s internal control...” (CAS 315.03). In a very small audit it pays to have a more senior auditor, preferably the person who performed the engagement the year before, have the “what’s changed?” discussion on site with management and other appropriate client personnel. This is an efficient way to update your knowledge of the organization and to spot problems that require fine tuning of the audit response. This is especially the case when the documentation from last year’s audit has been rolled forward into this year’s file and just needs to be updated. Having a senior person involved in this communication process reduces the need to pass that information up the chain of audit command and back down again, and it reduces the risk that something critical will be missed or misunderstood. In one fell swoop you can reduce your audit risk, save time and, hopefully, have a happy client. That’s a bonus all around.
Many auditors consider the management letter to be the bane of their existence. The financial statements have long been finalized, the file is sitting on the floor just waiting for the letter to be written, and you have forgotten the exact details of the burning issue. If this sounds familiar, change your approach and write the management letter right on site at your client’s office. This is fairly easy to do if you have your laptop with you and your management-letter template is loaded in your audit software. Keep the points simple and easy to understand. What is the problem or issue you want to bring to the attention of management or those charged with governance (CAS 260.13(c) (iii); CAS 265.09)? What could go wrong if the point is not addressed? What do you recommend the client do to address the problem? You can even pass the wording by management on site, if appropriate, to make sure you have your facts straight. Presto, the management letter is ready before you leave your client’s office. Again, time has been saved and you have a happy client.
Forming an opinion and reporting
In audits of micro-entities where management and those charged with governance are one and the same, communication need not be a complicated affair in this phase of the audit. This is especially true when most of the audit work has been done on site by a senior auditor and issues were raised and resolved as the audit progressed. The management letter is complete, and any changes to the audit report in addition to those explained in the acceptance phase (CAS 210.10(e)) will have been communicated on site during the fieldwork. The other significant findings from the audit will also have been communicated to the client (CAS 260.16). All these comments need to be made in writing to the client only if, in your professional opinion, oral communication would not be adequate (CAS 260.19). Now it’s time to issue your final audit report and send out the bill.
In audits of micro-entities where management and those charged with governance are not one and the same, communication requirements are more complicated, as more people are involved. Though the same issues and points need to be reported, you may want your communications to be more structured or formal when you report to those charged with governance. In this case it is often prudent to run your comments past management first to make sure you have your facts straight. Clients rarely get upset over the numbers or facts themselves. It is the manner in which the information is delivered that can cause outrage. This is very true in any audit of a micro-entity, since the success of an engagement depends as much on communicating with the people as on reporting on the presentation and disclosure of the financial position and results of operations.
An important part of forming your opinion is evaluating whether the two-way communication process has been adequate for the audit’s purpose (CAS 260.22). This evaluation applies not just to the effectiveness of communication from the client to you, but also from you to the client. If you conclude that either of the processes was inadequate, you should probably extend your evaluation beyond this year’s audit opinion. What could you suggest to improve the communication process next year? How could you diplomatically make suggestions so they will be heeded? Is the communications process so flawed that future audits are likely to be unmanageable? If it is, the time to resign is at the end of this year’s engagement, not in nine months’ time.
Wrapping it up
The CAS has numerous requirements for communication that, in addition to being mandatory, are useful in reducing audit risk and increasing client satisfaction. Taking advantage of audit software and ensuring your micro-entity audits are properly staffed can go a long way toward making the mandatory communication a natural outgrowth of your audit procedures and save you valuable time in the process.
Phil Cowperthwaite, FCA, is a partner of Cowperthwaite Mehta in Toronto
Technical editor: Ron Salole, vice-president, Standards, CICA