Audit committees face many challenges. As the economy rebounds from the COVID-19 pandemic, there are new dimensions to the oversight roles and responsibilities of the audit committees. Consider taking these following four steps to fortify your committee’s effectiveness.

Once you’ve wrapped up the financial reporting process for this fiscal year, take the time to revisit goals and expectations to develop an agenda for next year that directs the audit committee’s attention back to the basics. The committee is responsible for oversight of the following key areas:

Each agenda item before the audit committee should ideally relate to one of these areas.

Periodically, it’s appropriate to assess the level of financial expertise that each member of the committee possesses, especially if the composition of the group has recently changed. If the company anticipates significant changes in the regulatory environment under the Biden administration, now may be the time to add suitably qualified members to the audit committee. At least one member of the audit committee should possess in-depth financial expertise. (Publicly traded companies have specific “financial literacy” requirements.)

Today, companies are increasingly recognizing the value of adding gender and racial diversity to decision-making bodies, including audit committees. These companies believe diversity is a strength that leads to better-informed decisions and fresh perspectives.

Your company’s risk profile may have changed during the pandemic. For example, you may have temporarily cut staff or deferred capital investments to preserve cash flow during uncertain times.

However, these crisis-driven decisions may adversely affect the company’s long-term financial performance. The audit committee should consider asking management to review significant operational decisions made in the last year to determine if excess risk was created and whether it’s time to change course.

In addition, operational changes and increased financial pressures on accounting staff may expose the company to increased risk of internal and external fraud. And remote working arrangements could lead to cyberattacks and theft of intellectual property. It’s a good time to request that internal auditors commission a fraud and cyber-risk assessment. Proactively assessing these issues can dramatically reduce the probability of losses occurring.

The pandemic also may have affected certain suppliers and customers, especially those located overseas or in states with COVID 19 restrictions on business operations. The audit committee should evaluate whether management has identified the company’s material relationships and the potential financial and operational impact if any of those businesses close or file for bankruptcy.

By taking proactive measures, your audit committee can help improve your company’s performance as the economy returns to full capacity. Contact us to help position your company to minimize risks and maximize value-added opportunities in 2023 and beyond.

As many businesses are closed or are limiting third-party access due to COVID-19 surges across the United States, auditors will be less likely to visit in person in 2021. Many services, such as year-end inventory observations, management inquiries, and audit testing, must be performed remotely.

You may have already worked remotely with your auditor on your audit, review, or compilation during the pandemic. However, if you haven’t had that pleasure, you will want to consider the tips below to ensure your audit, review, or compilation goes smoothly this year.

Unlike past years, you will not have the pressure of knowing the “auditors” will be here on “x” date. Set a reminder appointment on your calendar when your audit, review, or compilation will be performed. Discuss with your auditor what time of the day works best for everyone before fieldwork begins. Schedule 30-minute check-in calls each day during fieldwork to go over minor questions from both teams and to discuss general progress so everyone is on the same page.

As you most likely will not get the pleasure of seeing your auditor in person during your upcoming engagement, it will be important to know how best to communicate and let your auditor know this upfront. Communication will be the key to keeping your engagement together. Timely responses from you and your team will be even more important in this remote environment. If you know you communicate best with your auditors through email, tell them that. If you prefer phone calls, tell them that. Determining this upfront will help reduce stress later on.

Video meetings, like Zoom, will be the primary way to communicate during your upcoming engagement. Your accountant will use video calls to screen share and ask questions. They may also use video to perform walkthroughs of internal controls with you and your team. You might be asked to share your screen to show how a particular process operates in real-time. If you are new to video conferencing, please let your auditor know, and they can schedule a meeting to walk you through how to use video tools during your upcoming fieldwork best.

In past years, you may have dropped huge piles of testing support in front of your auditors. However, ensure you are well versed in scanning your documents to your computer this year. Unless there is a specific reason you cannot scan documents for your auditor, your auditor will be asking you to scan and upload everything to a secure portal for review. If there is a reason that warrants not scanning, work with your team to get those documents sent via postal mail to the accounting office. However, this should be avoided to reduce the risk of records getting lost during transit.

Most inventory observations completed this year will have to be done remotely. However, there may be other options open to you, and if you have concerns, discuss them immediately with the manager or partner on the engagement. The key to having these observations go smoothly is a strong wireless internet connection throughout your warehouse and having two employees involved in the observation (one to hold the camera and one to physically count the items in the video). Your audit team can schedule a video conference test run to try things out before the big day to ensure things will run smoothly.

This year will be a learning experience for us all, but have confidence that together you and your audit team can make this transition as seamless as possible. For questions about working remotely with your auditor, contact us.

Recent hard times are causing private companies to re-evaluate the type of financial statements they should generate. Some are considering downgrading to lower levels of assurance to reduce financial reporting costs — but a downgrade may compromise financial reporting quality and reliability. Others recognize there are additional risks, leading them to upgrade their assurance level to help prevent and detect potential fraud and financial misstatement schemes.

When deciding what’s appropriate for your company, it’s important to factor in the needs of creditors or investors, as well as the size, complexity and risk level of your organization. Some companies also worry that major changes to U.S. Generally Accepted Accounting Principles (GAAP) and federal tax laws in recent years may be overwhelming internal accounting personnel — and additional guidance from external accountants is a welcome resource for them to rely on while implementing the changes.

In plain English, the term “assurance” refers to how confident (or assured) you are that your financial reports are reliable, timely and relevant. In order of increasing level of rigor, accountants generally offer three types of assurance services:

Reviewed statements always include footnote disclosures and a statement of cash flows. But the accountant isn’t required to evaluate internal controls, verify information with third parties or physically inspect assets.

The Securities and Exchange Commission requires public companies to have an annual audit. Larger private companies also may opt for this service to satisfy outside lenders and investors. Audited financial statements are the only type of report to include an express opinion about whether the financial statements are fairly presented and conform with GAAP.

Beyond the analytical and inquiry steps taken in a review, auditors perform “search and verification” procedures. They also review internal control systems, tailor audit programs for potential risks of material misstatement and report on control weaknesses when they deliver the audit report.

Not every business needs audited financial statements, and audits don’t guarantee against fraud or financial misstatement. But the higher the level of assurance you choose, the more confidence you’ll have that the financial statements fairly present your company’s performance. Contact us to learn more about which of the three levels of assurance is right for your business or for more information on our risk assurance services.

Audit season is right around the corner for calendar-year entities. Here’s what your auditor is doing behind the scenes during the risk assessment process — and how you can help facilitate the planning process.

Every audit starts with assessing “audit risk.” 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 (GAAP) or (more likely) an unqualified opinion when the opinion should be either modified or adverse.

Auditors can’t test every 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.

The auditor’s role is to attest to your company’s financial statements. Specifically, your audit firm assures that your financial statements are “fairly presented in all material respects, compliant with GAAP, and free from material misstatement.”

Unqualified (or clean) audit opinions require detailed substantive procedures, such as confirming accounts receivable balances with customers and conducting test counts of inventory in the company’s warehouse. Generally, the more rigorous the auditor’s substantive procedures, the lower the likelihood of the audit team failing to detect a material misstatement.

Auditors evaluate two types of risk:

Separate risk assessments are done at the financial statement level and then for each major account — 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).

New risk assessments must be done yearly, even if the company has had the same auditor for many years. That’s 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’s risk assessment to change. As a result, audit procedures may vary yearly or from one audit firm to the next.

The risk assessment process starts with an auditing checklist and, for existing audit clients, last year’s work papers. However, auditors must dig deeper to determine current risk levels. In addition to researching public sources of information, including your company’s 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.

Audit fieldwork is only as effective as the risk assessment. Evidence obtained from further audit procedures may be ineffective if it’s not properly linked to the assessed risks. So, it’s important for you to help the audit team understand the risks your business is currently facing and the challenges you’ve experienced reporting financial performance, especially as companies implement updated accounting rules in the coming years.

Contact us to get help with your risk assessment process.

In July, the (PCAOB) published two guides to help clarify a new rule that requires auditors of public companies to disclose critical audit matters (CAMs) in their audit reports. The rule represents a major change to the brief pass-fail auditor reports that have been in place for decades. One PCAOB guide is intended for investors, the other for audit committees. Both provide answers to frequently asked questions about CAMs.

CAMs are the sole responsibility of the auditor, not the audit committee or the company’s management. The PCAOB defines CAMs as issues that:

Examples might include complex valuations of indefinite-lived intangible assets, uncertain tax positions and goodwill impairment.

Critical audit matters aren’t intended to reflect negatively on the company or indicate that the auditor found a misstatement or deficiencies in internal control over financial reporting. They don’t alter the auditor’s opinion on the financial statements.

Instead, CAMs provide information to stakeholders about issues that came up during the audit that required especially challenging, subjective or complex auditor judgment. Auditors also must describe how the CAMs were addressed in the audit and identify relevant financial statement accounts or disclosures that relate to the CAM.

CAMs vary depending on the nature and complexity of the audit. Auditors for companies within the same industry may report different CAMs. And auditors may encounter different CAMs for the same company from year to year.

For example, as a company is implementing a new accounting standard, the issue may be reported as a CAM, because it requires complex auditor judgment. This issue may not require the same level of auditor judgment the next year, or it might be a CAM for different reasons than in the year of implementation.

Disclosure of CAMs in audit reports will be required for audits of fiscal years ending on or after June 30, 2019, for large accelerated filers, and for fiscal years ending on or after December 15, 2020, for all other companies to which the requirement applies.

The new rule doesn’t apply to audits of emerging growth companies (EGCs), which are companies that have less than $1 billion in revenue and meet certain other requirements. This class of companies gets a host of regulatory breaks for five years after becoming public, under the Jumpstart Our Business Startups (JOBS) Act.

Critical audit matters may change from year to year, based on audit complexity, changing risk environments and new accounting standards. Each year, auditors determine and communicate CAMs in connection with the audit of the company’s financial statements for the current period.

A significant event — such as a cybersecurity breach, a hurricane or the COVID-19 pandemic — may cause the auditor to report new CAMs. Though such an event itself may not be a CAM, it may be a principal consideration in the auditor’s determination of whether a CAM exists. And such events may affect how CAMs were addressed in the audit.

For more information on critical audit matter reporting contact us.

Auditors must test the effectiveness of internal controls before signing off on your financial statements. But it’s impossible to analyze every transaction that’s posted to the general ledger, due to time and budget constraints. Instead, auditors select and analyze a representative sample of transactions to make assertions about the entire population. Here’s more on how sampling works — along with the pros and cons of using it during internal control testing.

Auditors may use statistical techniques to develop a sample of transactions to test. For example, an auditor might select enough transactions to represent a specific percentage of 1) the total transactions in an account, or 2) the company’s total assets or revenue. Alternatively, a sample of transactions may be pulled randomly using statistical sampling software.

Auditors also can use nonstatistical sampling techniques based on a dollar threshold or professional judgment. These techniques tend to be more effective when the CPA has many years of audit experience to ensure that the sample chosen is representative of the population of transactions.

Before analyzing a sample, your auditor has expectations about the number of “exceptions” (such as errors and omissions) that will appear in the sample. If the actual exceptions exceed the auditor’s expectation, he or she may need to perform additional procedures. For instance, your auditor might expand the sample and conduct more testing to assess the degree of noncompliance.

Ultimately, your auditor might conclude that your internal controls are ineffective. If so, he or she will perform more work to estimate the magnitude of the control failure.

Sampling helps keep audit costs down by streamlining the internal control testing process. It also reduces disruptions to business operations during audit fieldwork. When applied correctly, the results of sampling are theoretically as accurate as if the audit team had analyzed every transaction posted to the general ledger. But, in practice, sampling can sometimes cause problems during internal controls testing.

For example, sampling presumes that controls function consistently across the whole population of transactions. If an exception doesn’t appear in the sample — because the sample was too small or otherwise unrepresentative of the entire population — your audit team could reach the wrong conclusion about the effectiveness of your internal controls.

There’s also a risk that your internal audit team could rely too heavily on nonstatistical sampling. Relying more on judgment than statistical methods could result in errors, especially if an auditor lacks professional experience.

You can help maximize the benefits of sampling by providing the audit team with document requests in a timely manner and following up on your auditor’s management points at the end of each year’s audit. It’s frustrating to both auditors and business owners when internal control weaknesses recur year after year. Our auditors have extensive experience testing internal controls, and we’d be happy to answer any questions you have on testing and sampling techniques. Contact us to get started.

Whether you’re a business owner or an individual planning for the future, knowing the right questions to ask your accountant gives you a powerful advantage. Having a list of both current and future questions to discuss during your time together will help keep you efficient, prepared, and on track to meet your financial goals. Here is our list of Top 40 Questions to Ask your Accountant.

1. How does the legal structure of my business affect my taxes?

2. Am I on track for my growth goals?

3. What are the industry-specific tax regulations that I should know about?

4. What can I cut down for better cash flow?

5. Do you have any recommendations on collection policies for faster sales?

6. Should I consider seeking equity or debt financing?

7. Do I need an employee benefit plan audit?

8. Do you have referrals for lenders and investors?

9. Do I need a financial statement audit?

10. Do I qualify for R&D credits?

11. How can I avoid red flags or mishaps with my returns or audit?

12. What are my best choices for valuing inventory for tax purposes?

13. When do I need to start paying estimated taxes?

14. What accounting software do you recommend?

15. What is my breakeven point?

16. How can I be prepared for the upcoming tax season?

17. How long do I need to keep my business records?

18. What qualifies as a business deduction?

19. How is my business impacted by the 2017 Tax Reform Act?

20. Am I required to collect sales tax?

1. What information and/or records should I keep, what can I toss, and how long should I hold on to the retained documents?

2. How will the 2017 Tax Reform Act affect me?

3. Can I deduct my car for any of my business purposes?

4. What direct business expenses can I deduct and are there any limitations?

5. How much of my household bills and/or equipment is deductible as a business expense?

6. When should I set up my estate and trust?

7. Should I consider charitable donations as a transfer of wealth?

8. How many dependents can I claim?

9. Are there any deductions that I am not currently claiming that I should?

10. How often should I consult with you about my taxes?

11. Can you help me estimate my taxes for the upcoming year?

12. Should I increase my 401(k) contributions?

13. Should I change my tax withholding?

14. Do you have recommendations for a financial advisor?

15. Am I on track for my retirement goals?

16. What is the best way to pass my wealth to my children?

17. What can I do to protect my dependents from tax implications upon my death?

18. What sort of events in my life are important for you to know?

19. I own my business, what steps should I take to separate my business and personal expenses?

20. What can I do to maximize my deductions better?

Have questions for us? Contact us for help.

Here is a simplified comparison:

While the list above displays their differences, there are also similarities. The first similarity is that both plan their audit effort around the areas that pose the highest risk to the achievement of company objectives. The second similarity is that both types of audits assess internal controls to determine if they are in place and working to ensure the reliability of financial data. Internal audits, which have a heavier focus on controls, usually add coverage of controls that help ensure effectiveness and efficiency of operations, compliance with laws and regulation, and safeguarding of assets. A third similarity is that both types of audits are performed in accordance to certain professional standards — such as the Statement on Auditing Standards for external audits and the International Standards for the Professional Practice of Internal Auditing for internal audits.

With all their similarities and differences, both types of audit services can play an important role in creating an effective governance structure and can help contribute to the company’s success. If you have questions about the internal or external audit process, please contact us.