Whether it’s the banking crisis, the pandemic, or environmental disasters, we’ve been operating through constant upheaval and uncertainty over recent years. Each of these issues has caused problems for all businesses so auditors have had to adapt at rapid pace.
The regulatory bodies sometimes make changes to audit requirements. However, we must also recognise that there are other factors that impact the performance of an audit, including an issue or crisis that has affected the firm.
I have worked in the audit of financial statements through these crises. To improve the effectiveness of your own audit, it is important to ask what actions to take to avoid issuing inappropriate or misleading audit reports.
Addressing these five questions will help you to engage with your auditor and help to ensure that you are receiving an appropriate audit report.
1. What risks are facing my business?
It is crucial to have a handle on the issues facing your business and consider whether or not you are ready to respond. Therefore, establish a robust risk register and update this each year, documenting developments within this before discussing it with your auditor. This is likely to change over time and is especially important during a crisis.
Your risk register should not be limited to simple matters, such as issues relating to cashflow. It should be granular enough to consider every input and output required to provide your products or services.
Which staff have tacit skills or knowledge that is not readily replaceable? What level of insurance cover do you have for fire or flood? Are your IT systems robust enough to support remote working? Are your accounting records or stock stored securely to allow for recovery in the event of an emergency? Are your Directors or Trustees actively involved in safeguarding your assets? Be honest with your auditors about the difficulties you are facing and any that you foresee.
2. What is our environmental impact?
Regularly review your environmental impact and the potential publicity surrounding this. Firms now need to be ready to meet changing legislation, such as the plastic packaging tax, Streamlined Energy and Carbon Reporting and working towards zero carbon.
To take advantage of significant cost and marketing opportunities – and simply because it’s the right thing to do - you may choose to go further than simply meeting the minimum standards.
3. How can we get the most out of our audit?
Taking an active role in the performance of the audit means you will get the most out of it. An audit should not simply be a compliance exercise. Instead, it should provide you with useful insights on how the business is doing and highlight changes that need to be made. This is always a good mindset to adopt but is absolutely vital if your business is dealing with difficult issues or a crisis.
Discuss what will be needed and when. Be ready to provide forecasts and budgets and management accounts that extend beyond the end of the period. Provide evidence that allows the auditor to understand what assumptions you have made or how you have calculated your estimates.
4. Do we know what to expect from our audit?
It is important to understand what an audit provides. An audit is not a part of your internal control environment. The auditor cannot ensure that your organisation or financial statements are completely free from error or misstatements due to fraud.
This has been an increasing issue during the current pandemic.
The swift change to home working in the UK has meant that many businesses have had to adopt IT adjustments that do not provide the level of security necessary to adequately protect businesses against cyber attacks. Ransomware, hacking, email interception, mandate fraud, and a plethora of other fraudulent activity has been on the rise since the first lockdown in March 2020.
Engage your auditors in the discussion around your own cyber security and crisis management policies so that they can help to advise from an independent perspective.
5. Can we provide the right data?
Forecast, budget, monitor, and repeat.
In uncertain times, a robust projection and review process is the only way to ensure that you are taking the steps required to solidify the business’ future. On top of this, to receive an unmodified audit opinion, it is a requirement for Directors or Trustees to provide forecasts and budgets to the auditors that cover a period of 12 months from the date of signing the financial statements.
If you have been through difficult times, your figures may have changed considerably. It may also be more challenging to predict the future. You may therefore need to spend more time reviewing and reflecting on your figures.
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