JofA Article
By Bob Dohrer, CPA, CGMA, with Ken Tysiac
The coronavirus pandemic has raised a number of questions about how to properly audit financial statements when internal controls have changed due to dramatic changes in an entity’s business volume and activities.
The auditing standards (GAAS) require the auditor to obtain an understanding of controls that are relevant to the audit and assess whether they are designed effectively to prevent or at least detect and correct material misstatements that might be made in the financial statements. Then the auditor is required to determine whether they’ve been implemented. Please note that this article addresses audits performed under generally accepted auditing standards (GAAS) and not audits under PCAOB standards.
GAAS requires auditors to identify where and how the financial statements may possibly carry a higher risk of being materially misstated. The auditor uses that understanding to help design what further audit procedures might be effective in detecting any material misstatement that may exist.
Those further audit procedures can either be tests of controls or substantive audit procedures. I’ll come back to tests of controls later, but it’s important in this environment for auditors to be creative and innovative in their audit approaches. That may involve performing procedures remotely, and it is predicated on understanding how the client is processing and controlling its financial accounting processes and working transactions through the financial statements.
The auditor needs to understand the entity’s internal control before determining whether procedures that might be performed remotely would truly be effective.