HIDDEN VALUE IN AN AUDIT ENGAGEMENT

It sometimes happens that we as auditors arrive to meet a new client and one of the first things they say is, “I hope you’re not as scary as the previous auditor’’. Granted it is said in a slightly joking tone, and it’s not to suggest that is the reason why the predecessor no longer holds the position, however one has to wonder what kind of value-add the client was getting from the audit. Perhaps none. In all likelihood the auditor saw his duty to be simply that of identifying misstatements and the client that of defending their work.

An audit falls into a broader type of engagement called an assurance engagement. The Glossary of Terms included in International Standards on Auditing defines the purpose of an assurance engagement as “an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users”. This is conveyed through the issue of an audit opinion, which is included in the set of annual financial statements. Although a lot of work is documented to support the audit opinion, the client often does not see this and ends up paying a lot of hard earned money for what is perceived as a few pieces of paper containing the audit opinion which they can then include in the annual financial statements.

For many companies the requirement to have an audit has fallen away with the implementation of the new Companies Act. Thankfully many of these companies which we service have continued to opt for voluntary audits. However, the issue of how to achieve more value from an audit than just issuing an audit opinion continues to be as relevant as ever.

The most important way to achieve value-add is to build mutual respect between the client and auditor and to have buy-in to the audit process from both parties. The auditor should take the time to explain to the client what the audit involves, why certain documents are being requested and why additional audit adjustments are being proposed. At the same time, the more a client can assist the auditor in understanding the business, processes and controls, the more focused, efficient and meaningful the audit will be.

The auditor, coming into the business as an independent 3rd party with specialised knowledge, can sometimes be best placed to identify the risks relating to the client’s business. At the conclusion of an audit such risks can then be conveyed through the issue of a report to management which summarises the most important audit findings along with suggested recommendations. It is not a requirement to issue this report. However, by summarising the potential issues as meaningfully as possible, it is just one way in which we can try to add value to a client’s business.

As auditors we also tend to raise the same reoccurring audit journals year on year with the excuse that the client does not raise these as part of their monthly processing. Taking the time to explain the audit journals to clients not only assists in obtaining the client’s buy-in to the audit process, it also means that the client will be able to raise these journals in future. This would not only benefit the client through improved knowledge, but also potentially improve future audit efficiency, resulting in reduced audit fees. An additional benefit to the auditor is enhanced independence from the client’s own processing of accounting records.

In conclusion, a mutually beneficial approach whereby the client and auditor work together to add value to the business will no doubt lead to a successful and long-lasting relationship.

By Chris Flynn

Audit Manager, Cape Town, RSM

12 February 2016

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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