Audit and Accounting Update

7/27/2019 Audit and Accounting Update

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Accounting and Auditing Update

Understanding the Financial Statement Audit

The accounting profession is very highly regulated and CPA firms that perform

audits and issue audit opinions are subject to various professional standards,

rules and regulations. Although there is a significant amount of judgment

involved by the auditor in determining high risk areas, audit scopes and

procedures based on identified risks, the concept of an audit and many of the

procedures are based upon rules and requirements from regulators.

We will take you through the basic steps involved in conducting your company’s

(or organization’s) audit so that you understand the process and are prepared,

where and when called upon, to furnish the necessary documentation and

input to your audit team.

Planning

Under current auditing standards, auditors are required to perform certain

planning and risk assessment procedures as part of the annual audit, prior to

conducting detailed tests, in specific areas including: internal controls, fraud,

preliminary analytical review and risk identification and assessment. A

summary of some of the procedures in these planning areas are as follows.

Internal Controls

An understanding of the company’s systems of internal controls must be

obtained by the auditors. These systems can vary depending on the

company’s operations and may include the following areas:

Completion of an auditors’ questionnaire relative to the company’s

internal controls, including the names and titles of the individuals

performing the functions noted

• Financial statement preparation procedures

Company memoranda relating to internal control procedures, including

narratives and standard operating procedures detailing and/or

addressing the following functional areas:o Cash receipts and revenue recording

o Cash disbursements

o Payroll

Based upon the auditors’ planned risk assessment levels, they may decide

to test the company’s internal controls in order to determine the level of

reliance that can be placed on such controls. Based upon the testing

Contact:

New York, NY

(downtown)

212.867.8000

New York, NY

(midtown)

212.286.2600

Harrison, NY

914.381.8900

Stamford, CT

203.323.2400

Paramus, NJ

201.712.9800

New Windsor, NY

845.220.2400

Wethersfield, CT

860.257.1870

January 2013



results, the auditor will then determine the nature and amount of

substantive testing to be performed on account balances and transactions.

Fraud

Fraud can exist through misappropriation of assets or an intentional

misstatement of the financial statements. Your auditors will assess, basedupon their review of the materials listed above as well as prior experiences

and industry observations, where potential threats of fraud could exist in

the company’s operations that may result in a material misstatement of the

financial statements. They may also interview various members of the

company’s accounting staff, management and those individuals charged

with governance to obtain a better understanding of the company’s

internal controls and possible fraud risk areas.

Preliminary Analytical Review

Your auditors will request from management the current year-end, or

interim, financial statements. These financial statements may be analyzed

and compared to the prior year’s audited financial statements, budgeted

information, and/or industry averages or expectations. Based upon these

preliminary analytical procedures, the auditors may make additional

inquiries of management and will begin to design their planned substantive

audit procedures.

Risk Identification and Assessment

After obtaining an understanding of the company’s controls, the current

year’s operations and, based upon discussions with management and the

results of preliminary analytical review procedures and, where applicable,

experience in prior year’s/s’ audits, your audit team will assess where the

risk of material misstatement of the financial statements may exist. Based

upon this assessment, the auditors will then design their further audit

procedures. Major risk areas in a financial statement audit will vary from

company to company and generally include: significant account balances,

complex or unusual transactions, related-party activity, revenue

recognition policies, and any transactions or account balances that require

significant estimates or judgments.

Preparing for the Audit

In addition to the internal control materials and other items listed above, the

audit team will request from company management various documents to

support the financial statement account balances and transactions. Such

requests from your auditors should sensitize your staff to the need for financial

and other records to be maintained on a timely and accurate basis during the

entire year. Some of the more common document requests are as follows:

• Office and warehouse leases

• Equipment leases and contracts



• Employment contracts

• Loan and mortgage agreements

• Bank reconciliations

• Bank statements for all accounts as of the company’s year-end and through

current date

• Accounts receivable aging report, including analysis of bad debts

• Detail of inventory on hand together with invoices, to test costing of

specified inventory items

• Memorandum or narrative stating how the inventory count is performed

and how inventory is valued

• Reconciliation of inventory detail to year-end inventory count

• Fixed asset and depreciation schedules

• Analysis of current and deferred taxes

• Variance analysis between current year’s operations compared to prior

year and/or budget

• Detail of revenue and the company’s revenue-recognition policy

During the Audit Process

Effective audit procedures require the audit team to be skeptical and make

inquiries of, as well as challenge, management on all unusual or significant

transactions and on account balances that require significant estimates and

judgments. Some of these areas may include:

• Allowance for doubtful accounts

• Inventory reserves

• Realization of deferred tax assets

• Fair value disclosures

• Recording of contingent liabilities

• Revenue recognition

Management should expect to discuss these matters with the audit team and

provide underlying documents or other supporting evidence. It should also be

expected that additional information for testing during the fieldwork, including

random selections of specific transactions, will be made.

As the time approaches to prepare the financial statements and note

disclosures, management should consider the following:

• Assessing going concern considerations

• Impairment of goodwill, intangible assets, and any other long-lived assets

• Revenue-recognition policies

• Related-party transactions

• Subsequent events

Any original documents that you provide to your auditors should be returned to

your company by your auditors. It would be to your advantage to maintain a

control list of any original records given to them and to monitor subsequent

return.



# # #

The auditors are required to maintain a workpaper file that is well documented

and supports the audit opinion which states that the financial statements are

fairly presented. The need for the auditors to obtain underlying documents and

other supporting items, including third party confirmations, is integral to

completing the workpaper file and complying with the required documentationstandards. Knowing what to expect and cooperating with your auditors to the

extent possible can ensure that your company receives a timely and complete

audit.

If you have any questions about this subject, please contact the partner in

charge of your account, or John Haslbauer, an audit partner and member of the

Firm’s Accounting & Auditing Committee. He can be reached at 212-867-8000

or [email protected].

About Our Practice:

PKF O'Connor Davies a division of O’Connor Davies, LLP, is a full service Certified Public Accounting and

consulting firm that has a long history of serving clients both domestically and internationally and

providing specialized professional services of the highest quality. With roots tracing to 1891, seven

offices located in New York, New Jersey and Connecticut, and approximately 400 professionals including

70 partners, the Firm provides a complete range of accounting, auditing, tax and management advisory

services. O’Connor Davies is ranked as number 39 in Accounting Today's 2012 "Top 100 Firms" in the

United States. The Firm is also among the 20 largest accounting firms in the New York metropolitan area

according to Crain's New York Business and the Westchester and Fairfield County Business Journals.

O’Connor Davies is a member firm of the PKF International network of legally independent member

firms, the tenth largest global network in 2011, with 440 locations in 125 countries around the world.

PKF International does not accept any responsibility or liability for the actions or inactions on the part of

any other individual member firm or firms.

IRS CIRCULAR 230 DISCLOSURE: To comply with IRS regulations, we are required to inform you that

unless expressly stated otherwise, any discussion of U.S. federal tax issues in this correspondence

(including any attachments) is not intended or written to be used, and cannot be used, (i) to avoid any

penalties imposed by the Internal Revenue Code, or (ii) to promote, market, or recommend to another

party any transaction or matter addressed herein. Our firm provides the information in this e-newsletter

for general guidance only, and it does not constitute the provision of legal advice, tax advice, accounting

services, investment advice, or professional consulting of any kind.

The information provided herein should not be used as a substitute for consultation with professional

tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you

should consult a professional adviser who has been provided with all pertinent facts relevant to your

particular situation.

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