The accounting profession has been dealing with what we call the “expectation gap” probably for as long as audits have been performed. There have been many attempts to bridge that gap but it has been a very slow and tedious process.
The accounting profession has many audit standards that address the expectation gap but unless you are an auditor in public accounting I doubt you have ever read any of them. The latest attempt to bridge the gap is in how the auditor’s opinion now appears where there are specific sections on the auditor’s responsibilities versus management’s responsibilities.
Basically the underlying premise is that management is responsible for the books and records, maintaining a control structure that safeguards assets, and proper financial reporting. The books and records and the financial statements belong to management even if you hire a public accounting firm to help with some functions.
Auditors are responsible for designing audit procedures and tests to obtain ”reasonable” assurance that the financial statements materially represent the organization’s true financial picture. Auditors accomplish that by “testing” various items in the books and records. Unfortunately, because we can’t possibly review every transaction, there is always the possibility that something may be missed.
When dealing with financial audits we run into a problem when there is one set of audit standards that applies to two different financial worlds. The standards are written to make sure the financial statements are fairly presented. In simple terms that means assets, equity and income are not overstated and liabilities and equity are not understated. These are extremely important to public companies because there can be pressures to hit certain expectations to keep the markets happy and stock values up. They are also important because the financials are made available to anyone who wants them for investing purposes, and if something isn’t disclosed properly you can’t have 10,000 people calling the CFO to ask questions. Because of this, financial statements are more like books and have so much information it’s hard to distinguish the information that really impacts someone’s decision.
On the other hand we have the nonpublic world, where financial statements usually have very limited distribution. Users can usually ask questions if they have any. There is more of a concern with safeguarding of assets than there is with financial statements being overstated, yet the financials are the main focus of the audit. As auditors we have to understand the system of controls in place but we do not actually test the controls unless we feel it can reduce procedures in other areas.
What You Should Expect From An Audit
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An audit should provide reasonable but not absolute assurance the financial statements are fairly stated.
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While the audit cannot detect any and all fraud that may occur, audit procedures are designed to look for material misstatements or errors.
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If an auditor encounters situations where they believe there are material weaknesses or significant deficiencies, they must report them to you.
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If an auditor encounters areas that are not true material weakness or significant deficiencies, but are comments that can help improve efficiencies in operations, they should communicate those to you as a “value added service.”
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An auditor can help address any areas of specific concern by designing special procedure engagements outside of the audit to help management achieve its goal of having a finely-tuned financial organization.
It’s essential for board members to understand they can never fully delegate away their responsibilities of being on the board, but they need to know the most effective way to manage that responsibility through the use of various services of CPA firms.
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