The audit is over. You can finally check that tedious task off your to-do list. You’ve received the required audit report and financial statements with expected results and are free to breathe a sigh of relief that your audit responsibilities for the year are taken care of, right? After all, now that the audit is over you likely won’t hear from your auditor again until next year, right? Not so fast!
Just about the time you are ready to move on to a new task, you discover another strange document in your mailbox. What is it? And why are you receiving it?
What It Looks Like to You
Words. It’s full of words. And not just any words, oh no! It looks like a standard, very specific set of words. Is this accounting jargon? Legal jargon? Should I get an accountant or an attorney on the phone?!
What You Likely Plan To Do With It
After a brief “freak out” moment, you may start along a new train of thought. Something along the lines of: We don’t need to call our attorney only to get billed for clarifying what looks to be a standard document. It doesn’t have a signature line, so clearly we aren’t required to sign anything. We won’t throw this away, but we will simply file it away with everything else …
FULL STOP RIGHT THERE!
Allow me to shed some light on the document you just received.
What This Document Actually Is
It is formally called a “SAS 114 Letter: The Auditor’s Communication with Those Charged with Governance.” However, it’s usually titled something much more friendly. Yours may be called: “Report to the Board” or “Report to the Trustees.”
Why You Are Receiving This Document
The Auditing Standards Board originally drafted its auditing guidance in the form of Statements on Auditing Standards (abbreviated as “SAS”). The communication you’ve received was originally established as required communication in SAS 114, thus the formal name mentioned above. The Auditing Standards Board has since completed a clarification process of its auditing guidance (effective for audits of financial statements for periods ending on or after Dec. 15, 2012) and has changed references to where the specific guidance is now located. But the requirement for this communication remains.
Why This Document Is Important
The purpose of the report is to directly communicate, to those individuals charged with governance (A.K.A = you), matters that they should be aware of as part of their oversight responsibility for the financial reporting process.
This document addresses non-earth shattering items such as the division of responsibilities between the auditor and those charged with governance, any new accounting policies that were adopted and the specific accounting estimates that were used in preparing the financial statements. However, it also includes details of any audit adjustments that were required to be made, disagreements the auditor had with management and significant difficulties the auditor faced while performing the audit.
As part of the communication, the audit team often will attach additional letters. These additional letters include documentation of deficiencies noted within the internal controls processes (especially if the audit team has determined these deficiencies to be significant deficiencies or material weaknesses). They can also include additional comments from the audit team related to compliance issues and errors noted during testing.
Most, if not all, of the matters discussed within this additional report cannot be gleamed solely by reading through the audit report and associated financial statements. Without this additional communication, it’s likely that you will never hear about these matters.
What You Should Do with This Document
READ IT! This report could hold the key to improving your overall processes and compliance and its review should be documented as part of demonstrating your fiduciary responsibility.
The Auditing Standards Board called for this communication to be made in all audits with a purpose. So, whether the report was mailed to you or is being formally presented by the audit team, make sure you ask questions until you fully understand everything it’s telling you.
Get the help you need before, during and after the audit process. Email Rea & Associates to speak with a member of our Retirement Plan Audit Services team.
By Kimberly Veal, CPA (Lima office)