Using audit standards to your advantage

Accountants who perform audits gain a wealth of information about their clients – information that they can use to the benefit of businesses and themselves.

Accountants who perform audits gain a wealth of information about their clients, their clients' industries and business in general. In fact, the professional requirements in the Canadian Auditing Standards (CAS) require auditors to become aware of much more than just the contents of the statements they audit. Accountants can use this information to their advantage in a number of ways to both the benefit of businesses and themselves.

This is especially true for those practitioners fortunate to have a practice of small- and medium-sized clients. Smaller entities can most often take advantage of the reporting and general business expertise that every experienced, professional auditor has. By using this knowledge to benefit clients, practitioners can:

  • increase their clients' satisfaction with the audit process;
  • develop their industry expertise, enhance their reputation, specialize in a practice area and grow their practice;
  • increase revenue by performing special projects for existing assurance clients (as long as independence requirements are not breached of course);
  • increase revenue by performing consulting projects for non-assurance clients; and
  • add spice and variety to their day-to-day practice.

Gathering knowledge

So how is this knowledge gathered in the audit process? There are a number of the requirements that result in information accumulation:

  • Quality of communications: in every audit, the auditor is required to evaluate the quality of communication as it relates to the audit process (CSA 260). The practitioner is usually aware of much more than just communication between themselves and the entity's board of directors. For example, does management communicate well with directors, employees, major funders and creditors? Performing the work on-site can give the audit team a unique perspective on the style of day-to-day communications, especially as operations flow around them during the audit. This is not just limited to financial matters, but includes communication in other aspects, such as day-to-day operations and monthly communications with directors.
  • Knowledge of the business and operations: the practitioner is required to gain an understanding of, among other things, ownership and governance structure, relevant industry, regulatory and other external factors, a client's objectives, strategies and performance factors, internal controls relevant to the audit, the entity's risk assessment process (CAS 315). And the list goes on. This wealth of knowledge is often added to with each successive audit, especially in the audit of micro-entities where the engagement partner or senior staff person usually has had a hands-on role in the on-site fieldwork.
  • Fraud risk factors: every audit requires the practitioner to consider whether there are fraud risk factors and to ask management about its view of the susceptibility of the entity to fraud (CAS 240.25). While an audit applying CAS is not a forensic audit, experienced practitioners still have an understanding of the internal controls required to mitigate the risk of fraud (CAS 240.27; CAS 315.25). This expertise can be very beneficial to clients.
  • Going concern issues: annual requirement to assess the ability of the entity to continue as a going concern requires the auditor to be aware of conditions or situations that can threaten the very existence of the entity (CAS 570).

In short, the auditor develops a wealth of knowledge about every client. Smaller clients often look to auditors for advice in financial and other matters. So how do you best harness that information and focus it for the benefit of your client and your firm?

Audit knowledge helps clients

There are three areas where your audit knowledge could help clients increase the effectiveness of both corporate governance and management.

1. Improving quality of communications: communication between management, employees, the governing body and those external to the reporting entity is essential for success. Auditing on-site usually allows the auditor to take the pulse of the organization in areas beyond financial reporting, especially if the client is a micro-entity. Indications that communication may need improvement include:

  • Unexpected delays in replies to questions: does management take ages to get back to you? Are answers left to the last minute, creating problems in completing the audit?
  • Lack of competence: does management have sufficient understanding to be effective and do directors have the requisite knowledge to oversee management?
  • Evasive answers: are directors and/or management trying to conceal an issue? This is especially alarming if noted during the course of an audit.

Communication problems can simmer for an extended period of time until a crisis brings them to a boil. Identification of an issue by an impartial observer often triggers a response that can avoid a crisis before it occurs. If you come across communication concerns during the audit, then you likely have a significant matter that needs to be communicated to the governing body and management, as appropriate (CAS 260.19 and CAS 265.10). Your recommendations can be the beginning of resolution of a problem that management and those charged with governance can talk about and resolve.

To address communication issues, try talking with the parties involved instead of just writing a letter. Focus on the important issues and help your clients understand the benefits of better communication.

2. Improving the quality of financial management: small and micro-reporting entity management often does not have formal management training. There can be confusion as to how and when to do budgets, what record keeping is required and how best to evaluate results. Financial management is a core competency of our profession; accountants can add value, especially at the micro-entity end of the spectrum where the entities cannot often afford full-time expertise.

The auditor typically comes face-to-face with budgeting in every audit when, for example, developing an understanding of the entity, identifying risks of material misstatement and evaluating management's assessment of the going concern assumption.

This familiarity can be used to provide advice in the following areas:

  • Budgeting: advice to clients can go well beyond the physical mechanics of budget preparation. Areas for advice include:
    • clarification of the objectives of a budget (e.g. solvency, performance by revenue or expenditure category such as donations, salaries or capital expenditures);
    • timing of budget preparation and the period covered (monthly, quarterly, annual etc.); and/or basis of presentation and format (cash basis, GAAP, a special purpose framework).
  • Record keeping: as noted, there is often confusion in micro-entities as to who should be responsible for what (i.e. management or the directors). For example:
    • who should be responsible for day-to-day record keeping if bookkeeping is outsourced?
    • what and how long should documents be retained?
    • should the directors receive monthly or quarterly reports from management and in what degree of detail?

These are not so much control issues as mechanics of preparation of financial information and its communication.

  • Evaluation of results: budgets and accurate records are important only if the information generated is used; they are not an end in themselves. Who compares actual to budgeted results and who is responsible for taking action when the two depart?

Auditors can assist management to develop a financial management checklist covering responsibilities for recordkeeping tasks from the weekly (payroll, petty cash) to the annual (T4 and other compliance functions). The checklist can also cover budgeting and results evaluation; it need not be complex.

Providing recommendations is the easy part. Going the extra step to help develop a system for implementation and followup is critical. As always, assurance practitioners must ensure that taking an extra step does not impair their independence.

3. Improving the stewardship of entity resources: how to control resources to make sure they are used only for approved purposes is often a black box for small clients lacking management expertise. On top of that, many accountants incorrectly assume that micro-entities cannot implement appropriate controls as there are too few people involved. For example, in many very small entities, some control functions are carried out very effectively by board members. This is an excellent opportunity for practitioners to leverage their understanding of the design and implementation of controls in areas of financial reporting (such as fraud and related parties, to name just two) and their specialized knowledge of micro-entity operations.

Try starting by explaining to clients that controls need not be implemented for their own sake; they are only a means to ensure resources are used as intended. First, help the client determine the objective of the control (e.g. that all salary levels are appropriately authorized). Then, recommend controls proportionate to the entity. Remember: every SMP is an SME, so controls appropriate for your firm can also well work for your client.

Independence considerations

Auditors must always remain independent. Providing advice to audit clients may result in threats to the auditor's independence, especially when recommendations relate to financial reporting. This does not mean, however, that the auditor cannot recommend improvements to controls and other aspects of a client's business. In fact, reporting significant matters is a requirement in any audit.

Safeguards, however, must be put in place to ensure that making recommendations does not cross the line of impairing independence and this requires professional judgment.

Wrap up

You develop a wealth of knowledge about your clients and their industry with every audit. You can leverage that knowledge and use your experience to add even more value, especially to small and micro-entities in the areas of communication, financial management and stewardship of resources. Doing so can result in an increased industry reputation, reduced client turnover and increased fees. Try it. You just might be surprised with the results.