As a member of a Board of Directors, sometimes referred to as a Board of Trustees, you are part of a group that is responsible for the organization’s governance, strategic direction and financial well-being. While accounting may not be your particular area of expertise, it is important to understand the purpose of a financial statement audit; how the process works and who is responsible for what in the process. One of the Board’s responsibilities is to engage the independent auditor. The independent auditor’s role is to perform the audit and express an opinion on whether the financial statements are presented, in all material respects, in accordance with Generally Accepted Accounting Principles (GAAP).
What to expect
The audit takes time. That’s why it’s important to begin the audit process well in advance of any critical reporting deadlines. Typically, a pre-determined portion of the audit work is performed as an interim stage of the process with the remainder of the work completed after the accounting records for the year have closed, accounts have been reconciled and management has prepared the annual financial statements.
During the interim or preliminary stage, the auditor will update and document an understanding of the organization’s accounting systems, internal controls, governance and financial reporting. The auditor will ask the Board, Management and Staff to provide information concerning the day to day processing of transactions and activities that support the organization’s financial reporting function. These inquiries help facilitate the auditor’s insight into risks associated with the financial reporting process. The auditor will then communicate with those charged with governance, usually the Board or Audit/Finance Committee, to discuss the scope and objectives of the audit.
This initial stage allows the auditor to perform required risk assessment (looking at the organization and determine where errors, omissions or fraud may occur) and establish the audit approach to address risk. Risk factors include the complexity of transactions, relevant knowledge of the individuals performing accounting procedures and the ease of misappropriation.
During the final stage of the audit process, the auditor completes the remaining audit procedures including tests of balances and financial assertions, as well as continued updates to risk assessment and audit approach. Ultimately, the auditor develops an opinion on the financial statements taken as completely. In addition, auditors may confirm account balances, observe assets owned, and perform tests and procedures over transactions. At the conclusion of the audit, the auditor will meet with management and the Audit/Finance Committee or Board, to discuss the results of the audit, review any difficulties or concerns encountered including any significant deficiencies or material weaknesses.
Concluding on the audit
An auditor may conclude on the financial statements in a number of ways. An unmodified opinion indicates the financial statements are free of material misstatement and stated in accordance with Generally Accepted Accounting Principles (GAAP). An unmodified opinion is often referred to as a “clean” opinion. This is, of course, the standard which all entities strive to meet.
A modified opinion indicates the financial statements contain one or more departures from GAAP or components upon which that the auditor could not form a clean opinion. A disclaimer occurs when the auditor was not able to form an opinion on the financial statements in conformance with GAAP.
The auditor/management relationship and responsibility
A key point to understand in the audit process is the differentiation of responsibilities between the auditor and the organization’s management. The role of the auditor is to form an opinion on the financial statements. The role of management is to provide the content of the financial statements. Auditors may not assume a management role that would impede independence. In other words, auditors may not take responsibility for or make decisions for management.
Auditor independence is a core concept in the auditor-client dynamic. The CPA renders an “Independent Auditor’s Report” and must remain independent in fact and appearance. The requirement for independence often precludes auditors from performing consulting services for their audit clients, so do not be surprised when an auditor indicates a particular service is not permissible.
Consider the audit your organization’s annual financial health check-up
An audit is like an annual checkup for your organization’s financial health; a bit like a visit to your doctor. Just as your physician is not responsible for your physical well-being and good decision-making, there are certain things that an auditor is not responsible. For example, an audit is not designed to find fraud. This is a point that many organizations are often unaware. If material fraud is identified during the course of the audit procedures, the auditor is required to report such information to the appropriate level of financial leadership. Fraud and forensic auditing is a completely separate process requiring specialized expertise and procedures.
Talk to your independent auditor
All Board members must understand the financial condition of the organization in order to serve and protect it. The independent auditor can offer a wealth of information and provide you with a clear picture of your organization’s financial status. The time you spend discussing key questions with your organization’s auditor is not only a good investment, it is a necessity for you to meet he Board’s fiduciary responsibility.
Gail McIntyre is a partner based out of our Syracuse, NY office.