What Are an Auditor’s Duties Under AS 1015?
Understand the framework of AS 1015, which structures the essential dialogue between auditors and audit committees to ensure effective financial oversight.
Auditing standards from the Public Company Accounting Oversight Board (PCAOB) require auditors of public companies to act with due professional care and professional skepticism. Due professional care means exercising the skill and diligence a reasonably prudent auditor would use, while professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. These principles ensure the audit is planned and performed to obtain reasonable assurance that the financial statements are free from material misstatement. A component of these responsibilities is the auditor’s duty to communicate specific matters to the company’s audit committee, fostering a transparent examination of a company’s financial reporting.
Matters Related to the Company’s Accounting
An auditor’s communication with the audit committee must cover the company’s significant accounting policies and practices. These are the specific principles and methods a company uses to record and report financial transactions. The auditor is required to discuss the initial selection of, and any changes in, these policies, providing insight into their appropriateness. This conversation includes an evaluation of the qualitative aspects of these policies, helping the committee understand how they impact the overall presentation of the financial statements.
The dialogue must also extend to what are known as critical accounting policies, practices, and estimates. A policy or estimate is considered critical if it requires management to make particularly complex or subjective judgments and is highly consequential to the company’s financial condition. For example, estimating the value of inventory that may become obsolete or calculating the liability for product warranties involves significant assumptions. The auditor must communicate their assessment of management’s process for developing these estimates and the reasonableness of the final figures presented.
Another area of required communication involves significant unusual transactions. These are transactions that are outside the normal course of business for the company or that otherwise appear to be unusual due to their timing, size, or nature. The auditor has a duty to understand the business rationale for such transactions to assess whether they have been accounted for properly and are not being used to obscure the company’s true financial performance. This discussion helps ensure the audit committee understands the purpose and financial impact of these non-routine activities.
Matters Related to the Audit Process and Results
The auditor must inform the audit committee about any significant difficulties they encountered while performing the audit. These challenges could include management-imposed restrictions that limited the scope of the work, unreasonable deadlines, unexpected extensive effort required to obtain sufficient audit evidence, or an inability to access key personnel.
Communication is also required regarding any disagreements with management over accounting and financial reporting matters. These disagreements might concern the application of accounting principles, the reasonableness of accounting estimates, or the adequacy of disclosures. Even if the disagreement is ultimately resolved, the auditor must still report the matter to the audit committee to ensure it is aware of where the auditor’s judgment differed from management’s.
The auditor is responsible for communicating all misstatements accumulated during the audit. This includes both corrected misstatements, which are errors management has fixed, and uncorrected misstatements, which management has chosen not to adjust. The auditor must also discuss the basis for determining that any uncorrected misstatements are immaterial to the financial statements, providing the committee with a clear view of the errors found and their potential impact.
Finally, the auditor provides an evaluation of the overall quality of the company’s financial reporting. This goes beyond simply stating whether the financial statements are presented fairly. The auditor communicates their perspective on the qualitative aspects of the company’s accounting practices, including any potential for bias in management’s judgments, which helps the audit committee fulfill its oversight responsibility.
Procedures for Communication
Communication between the auditor and the audit committee can be conducted orally or in writing, but it must be documented. While oral discussions are common, significant findings are often provided in a written format for clarity and a formal record. The documentation should note the date and the substance of the matters discussed.
A defining requirement for these communications is their timing. All specified matters must be communicated to the audit committee in a timely manner and before the company’s annual audit report is issued. This timing allows the audit committee sufficient opportunity to consider the information, ask questions, and take any necessary actions based on the auditor’s findings.
The communication process is structured to encourage a two-way dialogue throughout the audit. Auditors may communicate with the audit committee chair or the full committee as significant issues arise, rather than waiting until the end of the process. This ongoing interaction can lead to a more efficient resolution of potential problems.