What are the Required and Other Desirable Communications That Audit Committees Should Have with the Auditors?

Required Communications

Auditors are required to communicate the following matters to the audit committee:

• The auditors’ responsibility under generally accepted auditing standards (GAAS). This essentially covers the nature and limitations of an audit.
• Critical accounting policies and practices used by the organization
• Alternative accounting treatments within GAAP related to material items that have been discussed with management
• Other material written communications between the accounting firm and management (e.g., management representation letters, engagement letters, etc.)
• Overview of the planned scope and timing of the audit
• Significant findings from the audit, which include:
  • Accounting policies*
  • Management judgments and estimates*
  • Corrected and uncorrected material misstatements
  • Other information in documents containing audited financial statements. This refers to auditors’ limited responsibility for other information containing audited financial statements (e.g., selected financial data, data collection forms, annual reports, etc.).
  • Disagreements with management. These include accounting or auditing matters, whether resolved to the auditors’ satisfaction or not. This is a particularly important area because it can shed light on the aggressiveness of executives in attempting to manage the change in net assets or the true financial picture of the organization.
  • Consultation with other accountants. This involves evaluation of the appropriateness of management seeking a second opinion on significant accounting or auditing issues
  • Major issues discussed with management prior to retention. This requirement is aimed at detecting whether management might be prone to “opinion shopping.”
  • Significant difficulties encountered in performing the audit. This area may encompass such issues as delays in providing information to the auditors and lack of cooperation.
  • The quality, not just the acceptability, of the entity’s accounting principles as applied in its financial reporting*
  • Representations requested from management
  • Illegal acts
  • Fraud*
  • Internal control matters – specifically, significant deficiencies and material weaknesses*

*Refer to further, more in-depth discussions below.

BDO Insight

In regard to the planned scope and timing of the audit, we feel that communications should occur on a timely basis prior to the start of fieldwork and include discussion of the auditors’ approach to risk, materiality and internal control as well as the extent of interaction between the external and internal auditors, if any, to better equip those charged with governance to more fully understand the scope of the work to be performed and determine whether adjustments to this scope may be required, as necessary.

As required by AICPA Statement of Auditing Standards (SAS) 114, auditors are further required “to participate in open and frank discussions with the audit committee about auditors’ judgments of the quality, not just the acceptability, of the organization’s accounting principles as applied in its financial reporting throughout the audit.” This includes “such matters as the consistency of the organization’s accounting policies and their application, and the clarity and completeness of the organization’s financial statements, which include related disclosures… also includes items that have a significant impact on the representational faithfulness, verifiability, and neutrality of the accounting information included in the financial statements.”

BDO Insight

Accounting rules are not always precise. Quite often there is great latitude in the judgments that produce financial statements. These quality discussions present a great opportunity for the audit committee to ask direct questions about how different issues are handled by the organization and should be an integral part of the communications process with the auditors.

Refer to the Appendix for a tabular listing of Auditor Required Communications with Audit Committees and reference to applicable technical guidance.

UP NEXT: What Should Audit Committees Be Focused on in Consideration of Reliable and Transparent Financial Reporting?

GO BACK: Effective Audit Committee Guide