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In one of our previous articles, we have read about how to effectively plan an audit program. Economic uncertainty and political instability had turned the market upside down. Various audit committee members are bracing for unforeseen risks in 2017 and urging their companies to ramp up risk management programs, according to a new survey by the consulting group KPMG.

Audit challenges

1. Engagement letter

It had always been a challenge to draft an almost perfect engagement letter. It is a pre-requisite to comply with various accounting standards. Agreeing the terms of audit engagements is one of the requirements. It ensures a clear understanding and communication of the responsibilities of the auditor and the duties of the management.

2. Revenue recognition

This proves to be one of the most complicated and sensitive areas of audit for the most obvious reasons. Sometimes, the audit evidence turns out to be weak or too vague. Thus, auditors conduct a substantive test for completeness. Documents like sales invoice etc are verified in order to be sure of the authenticity. Analytical procedures help them generate sufficient evidence on the basis of various proofs and detailed testing helps generate the required levels of confidence to support the assertions.

3. Fraud

The auditor as well as the management is responsible if a blatant fraud is ignored unless proven otherwise. It may arise due to management override of internal controls. The auditor has to set aside all assumptions and apply professional skepticism when carrying out their audit. The appropriateness of journal entries will ensure that there are less chances of collusion. Segregation of duties should be in place. Any inappropriate or unusual activity should be flagged. Any provision or accounting estimates should be thoroughly checked for fraudulent intentions and biases. Hence, a retrospective review of management judgments and assumptions related to significant accounting estimates is important.

4. Inventory

Some companies “get done” with stock takes on the grounds that it is inconvenient or too costly to do so. Also, they think it is an hindrance in the regular workflow. Also, audit firms are known to have failed to address the relevant assertions where stock take attendance is concerned. Hence, the auditor should check the existence and condition of the inventory by performing test of controls. Last but not the least, one should obtain necessary and sufficient audit evidence to confirm the reliability of management’s stock taking procedures.

5. Written representations

Written representations can never be sufficient and appropriate audit evidence. They can support an audit evidence. Also, accounting standards specify a few areas where written representations are needed.

VComply

6. Documentation

“How much documentation is enough?”
To answer that question, one can safely say that there is no ‘hard and fast’ rule where audit documentation is concerned. Yet, accounting standards on audit documentation specify that the auditor must make a judgement based on the objective contained in that particular standard. It should be sufficient and appropriate record of the basis for the auditor’s report. Hence, it should act as an evidence that the audit planning and performance is in accordance with the necessary financial standards.

7. Audit report

Various dedicated paragraphs in the audit report hold significance for the investors to judge a company. Eg. The emphasis of matter paragraph specifies certain matters of significance which the auditor might want to highlight. Thus, it indicates that there is no modification in auditor’s opinion in respect of the matters therein. But, it is important to know that particular fact.

Conclusion

This article has tried to highlight major areas of an audit process which serve as common pitfalls for both, the company and the auditor. They can avoid it by using tools like VComply which enable them to work on a single platform. VComply has a compliance workroom which enables the company to post the proof of compliance. One can  access, monitor and review it from time to time. A good review process by the audit firm may also flag any additional areas as  deficiencies in the process. Thus, ensuring robust internal controls and timely compliance shall help the company to emerge victorious in such scenarios.

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