Did you know that it is not automatic – or, more correctly, it shouldn’t be automatic – that an auditor will say yes to doing an audit? In fact, if you’ve got an auditor who’s been auditing for any time longer than a football match and hasn’t thought about whether – other than because of money, distance or business – they should say yes to an organisation who wants an audit, then I’d suggest you should worry. This is because there are some pretty serious conditions that should be met before they agree to do business. And it’s not unusual for a couple of them to be a challenge.
The first hurdles are in their document called Framework for Assurance Engagements[i]. The annual statutory audit, one type of such ‘assurance engagements’, will normally exhibit the required characteristics to allow the auditor to accept the engagement; however, ‘relevant ethical requirements’ may mean they have to (should) decline. For instance, most people would think that if one of the auditor’s staff – especially in a small firm – is married to one of the directors of the organisation who has asked for an audit, then independence would be violated[ii]. Or if the organisation has complex arrangements overseas and the last time the auditor looked at foreign currency translation was at university, then perhaps ‘professional competence’ wouldn’t get a tick.
Having survived the tests in the Framework, auditors may have to say no to you when they come to apply Auditing Standard ASA 210 Agreeing the Terms of Audit Engagements[iii]. There are two hurdles here: (1) the presence of certain ‘preconditions’ for an audit, and (2) confirming a common understanding between you and the auditor about what is to happen and who is responsible for what.
The first precondition is that the ‘financial reporting framework’ you have chosen is acceptable. For example, if you have chosen to prepare a special purpose report where objectively a general purpose report is required, and the auditor is up-to-date with his reading, then unless you change he would be obliged to decline the engagement.
The second precondition, that you give an acknowledgement of your responsibilities, is not likely to stop the audit if you sign what they ask you to sign. (However, can I suggest that you carefully read this acknowledgement? Two of the things in it are heavy contributors to what they call the ‘audit expectation gap’: first, that the preparation of the financial report – all the statements and the Notes – is your responsibility, not the auditor’s, and second, if you haven’t got the proper internal controls in place, then again that’s your fault, not the auditor’s.)
So when you want an audit by all means ask away, but if the auditor says yes without any investigation, then be concerned.
P.S. Business by The Book exists to provide accounting, audit and governance services, for no fee if necessary, to not-for-profits who are themselves serving those who are the cultural equivalents of the Bible’s fatherless, widows and aliens.
[i] Auditing and Assurance Standards Board (AuASB), 2010, paragraph 17.
[ii] Independence is so cherished by the accounting profession that they have issued a comprehensive Independence Guide (Joint Accounting Bodies, 2013).
[iii] AuASB, 2011.