Manufacturers & Distributors ARTICLE -
Getting to Know You
Risk-based Audit Standards Raise Financial Reporting Bar
Target Audience: Manufacturers and Distributors, M&D Companies, Manufacturing Companies, Distribution Companies
Risk-based auditing standards take effect for the 2007 fiscal year, and manufacturers should be prepared to undergo heightened scrutiny of their companies and the people who run them.
To improve the quality and effectiveness of audits for private companies and nonprofit organizations, the Auditing Standards Board released eight risk assessment standards last July. Auditors now are required to understand and identify the risks of material misstatement in their clients’ financial reports.
Looking back to look ahead
To understand your manufacturing company, auditors must be familiar with diverse areas such as capital structure, how you’re affected by government regulations, your senior management team’s business background and how you process transactions. Armed with such knowledge, they can determine the risks you face from error or fraud.
An auditor may find, for example, that some products in your inventory are in danger of becoming obsolete, and thus creating a risk of misstatement of inventory amounts and an attendant risk with the value assertion for the account. Or the auditor might determine that your company is at risk because one or more owners have little business experience — a risk that could affect many accounts.
The auditor will use different strategies to address such disparate risks, but he or she will inevitably require supporting documentation and bulked-up risk management and internal control procedures from you. Even though the changes that result from the new standards will be more dramatic for auditors than for their clients, be prepared for a significantly stronger examination of every aspect of your operations.
Unlike traditional audits, which often involve a standardized, largely sequential approach, risk-based auditing is customized. Auditors must constantly adjust their procedures to respond to risks that emerge as they accumulate information. Additionally, they must assess the internal controls you have in place and have some evidence that they are being used properly across the organization.
Seeing is believing
An auditor may request a “walk-through” of your procedures, as well as more formal documentation of your controls. When auditing smaller companies, he or she also may require an assessment of the role senior managers play in monitoring controls. Auditors must observe or re-perform the controls or see documentary evidence of management’s dedication to excellence.
Some audit procedures will remain unchanged. For example, auditors will still confirm your receivables and observe your inventory. But the days when you could track expenses on a cash basis and then record an accrual of outstanding payables at year end are likely to be over. Auditors will now consider the risk that such accruals will be materially incorrect and design substantive procedures to ensure proper statement of payables.
Feeling more secure
At first, the new standards may mean more work — and more thought — for both you and your auditor. In the end, though, you’ll benefit from better risk assessments and more comprehensive internal controls.
Moreover, because auditors now are required to provide reasonable assurance that your financial statements are free of material misstatement, you can be more confident that your financial reports won’t raise eyebrows.
Find out how our accountants and consultants can add value to your business. Email us or call us at 1 (888) 875-9770.
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