Every year, the Center for Audit Quality releases a list of “Select Auditing Considerations” that auditors should follow while auditing public companies. For those who are unfamiliar, the Center for Audit Quality is an organization based in Washington, D.C. that is “dedicated to enhancing investor confidence and public trust in the global capital markets by fostering high-quality performance by public company auditors.” By creating more effective and objective auditors, the Center for Audit Quality seeks to give investors and stakeholders a better sense of a public company’s accounting and finances. In other words, the CAQ’s Select Auditing Considerations are most applicable to large, publicly traded companies and the auditors that assess their accounting books. However, any enterprise can learn something about how financial audits work from looking at the 2015 list. Ahead of the 2015 tax season, a source like this is particularly valuable.
Shortly following the release of the CAQ’s Select Auditing Considerations for 2015, Accounting Today published an article that breaks down a few of the key points and explains them in an easier-to-understand fashion. While you can read the full Center for Audit Quality list right here, the Accounting Today piece is more digestible—both because it is considerably shorter and because the language is a bit more in layman’s terms.
The Key Points of the CAQ’s “Select Auditing Considerations” (And What Your Business Can Learn from Them)
The Center for Audit Quality’s Select Auditing Considerations list for 2015 is 17 pages long and covers a broad range of audit recommendations in depth. In the interest of brevity and relevance, we are going to take in-depth looks at two of them and what they mean for your business, with a specific focus on your company’s document management policies. These two auditing considerations are professional skepticism and internal control over financial reporting.
Professional Skepticism
With this auditing consideration, the Center for Audit Control is essentially warning auditors not to accept questionable or incomplete documentation when looking over a company’s finances or tax records. The CAQ defines professional skepticism as “an attitude that includes a questioning mind and a critical assessment of the appropriateness and sufficiency of audit evidence.”
The key here is that auditors always need to take what their clients are saying or reporting with a grain of salt. In other words, when an auditor looks at your finances, they are probably thinking somewhere in the back of their mind that someone in your organization could be embezzling money, misreporting finances, or committing tax fraud. They are skeptical, in other words, that your financial situation is what it seems to be on the surface.
The recommendation for professional skepticism among auditors should tell companies that they need to play defense when it comes to tracking finances or preparing for the 2015 tax season. The CAQ says that auditors are responsible for “critically evaluating all evidence regardless of whether it corroborates or contradicts management’s assertions.” As a result, your business needs to have ample evidence for every earnings claim, use of capital spending, or tax write-off, to satisfy an auditor’s professional skepticism that you are legally meeting all compliance standards.
Internal Control over Financial Reporting
Every company has a different path of how money flows through the organization and how financial transactions are reported. Along the way, every business also has controls or safeguards set in place to ensure that financial figures are reported accurately, without intentional or accidental misstatement. In a situation where an auditor identifies a financial misstatement, the Center for Audit Control recommends a full test of the appropriate internal controls to determine whether or not those controls are adequately preventing errors and delivering accurate financial information.
If the auditor determines through testing that the internal controls were adequate, but there are still errors, that can sometimes be a sign of fraud or intentional misstatement. If the auditor determines that the controls are faulty, such a finding can assist the organization in crafting better financial reporting strategies in the future.
The message here is that it is very important for a business to be consistent and precise with its flow of transactions and financial reporting policies. Identifying the roles that different people or departments play in this pipeline can make it easier to determine where mistakes or intentional misstatements are coming from, which can protect your company financially and avoid audits in the future.
How Document Management Comes into Play
In both of these auditing considerations, strong document management policies (and perhaps more importantly, a great piece of DMS software) can help. On one hand, a DMS makes it easier to manage a considerable bulk of files, or to find a specific document on short notice. This speed and convenience factor makes it easier to prepare for any kind of audit, and can absolutely help your business present the kind of comprehensive evidence needed to satisfy an auditor’s “professional skepticism.”
On the other hand, a good DMS will also include an audit trail function, which will allow you to keep track of who in your organization is accessing certain files, when they accessed those files, and what changes or additions they made. For accounting or financial records, having an audit trail would provide a chronological record of updates and reporting, making it easier to identify errors or intentional misstatements.
Are you interested in reading the Center for Audit Quality’s Select Audit Considerations for 2015? Click here to see the full list.