What to Expect After the Auditor Leaves
The conference room is free and your paperwork is once again neatly filed — that must mean the auditors have completed their fieldwork. So, what’s next? The following is what you can expect for the second stage of your audit and how you can keep the process on track to receive timely financial statements.
Answer Follow-Up Questions Promptly
It is not unusual for the auditor to have follow-up questions after fieldwork. Perhaps information was not readily available on site, details are needed for financial statement note disclosure or the partner has some additional questions after reviewing the workpapers. Whatever the reason, be prepared to answer follow-up questions and provide information and documentation within a day or so of the request. Your prompt response will keep the job on schedule and prevent delays. If you are unable to respond quickly, let the auditors know when you will get back to them or consider delegating the response to another individual if possible.
Review the Drafts
Within a few weeks, the auditor should be ready to provide a draft of the financial statements. Typically, a PDF document with a watermarked “DRAFT” across all pages is emailed to the CFO, along with the final trial balance, journal entries and a financial grouping report. The financial grouping report shows which individual accounts are contained in financial statement line items. For instance, it shows which bank account balances are included in cash and cash equivalents and which are included in temporary investments.The financial grouping report should be reviewed closely, especially if there have been new accounts added to the trial balance in the past year, to verify that accounts are grouped and reported accurately.
A draft of the management letters should also be provided.
- The management representation letter is addressed to the CPA firm and signed by members of management, normally the CEO and CFO. The letter is management’s acknowledgement of their responsibility for the financial statements, as well as the information provided to the auditors, and is required under auditing standards. The signed letter must be received by the auditors before they can release the final financial statements.
- The governance letter is addressed to the board, signed by the auditor and is also required by professional standards.The governance letter communicates whether there were any significant audit findings, points out material estimates and key disclosures, describes if there were any difficulties or disagreements during the audit, and outlines any other matters significant to the audit engagement.
- If warranted, a significant deficiencies letter may also be issued by the auditors. This letter is addressed to the board and management to communicate any problem areas uncovered during the audit and the level of severity of those issues.
Final approval of the draft can be communicated verbally or, preferably, by email. Let the auditor know how many final copies will be needed and whether you would also like an electronic copy. Return the signed management representation letter, so that the final copies can be released.
Schedule an Exit Conference
Often the board or finance committee will request an exit conference with the auditors. This is a great opportunity for board members, who may not be present during fieldwork, to personally interact with the auditors. During an exit conference, the auditors typically will review the financial statements, explain key areas of the statements, provide an analysis of financial results and highlight significant changes in activities and disclosures. It is a good time to discuss upcoming accounting pronouncements that may affect future financial statement presentation. An exit conference also provides an opportunity to discuss certain matters that the board has not considered or failed to address. If you have not had an exit conference with your auditors in the past, consider scheduling one every few years, if not annually.
Obtain Federal and State Filings
Finally, your engagement may also include preparation of federal and state filings. Typically, these filings are not prepared until after the audit has been approved, so as to avoid errors and revisions. Due dates for these filings depend on your entity status and may be extended upon request. Be aware that there is often other information required to accurately complete these forms that was not necessary for audit procedures, so be prepared to provide additional details as needed.
Suzanne T. Heller
Suzanne Heller, CPA, PSA, FCPA, is an audit manager with Holman Frenia Allison, P.C. She is a member of the NJCPA Nonprofit Interest Group and can be reached at firstname.lastname@example.org.
This article appeared in the January/February 2019 issue of New Jersey CPA magazine. Read the full issue.