A beginner’s guide to understanding your Audit – Part 1: General

“Why does my auditor want all these documents?” “What does the auditor want from me?!” “Is that material?”

Being under audit can be a challenging period for both the auditor and audit client. This article aims to assist entities new to the audit process and address issues and queries which regularly occur between the audit team and the respective client and attempt to give meaningful solutions or guidance in order to streamline the audit process and help you manage your audit efficiently.

Why does my auditor want all these documents?

An auditor will provide a list of items they need to complete the audit. This list contains requests for documents or evidence to support the financial balances that the auditor is testing. An auditor is required to document their audit procedures to provide sufficient and appropriate evidence for the audit conclusion. It is essential to note that different types of evidence hold different weights. Client-provided documents and statements do not provide auditors with as much evidence as 3rd party documentation such as independently obtained confirmations and expert valuations. If the information the audit client provides is not sufficient to provide the necessary evidence behind the balances, the auditor may make further requests for additional information. It is important to ask your auditor for further explanation if you do not understand what they are asking for or why.

What does the auditor want from me?!

In many cases, audit clients struggle to understand the purpose of an audit and what documents the auditor requires. In essence, auditors are appointed in order to express an opinion regarding the fair presentation of an entity’s financial statements. In order to do this, an auditor is required to obtain evidence to support and corroborate an entity’s financial position for a particular financial period. To start the auditor will obtain the entity’s trial balance and financial statements and determine what accounts need to be further tested. Once the auditor has identified accounts that require further elaboration, they will contact the audit client and request further explanation and documents which support the figures provided in the entity’s accounts. If you are unsure as to why an auditor requested a document, look at the trial balance, look at the account in question and provide documentary evidence which mirrors the figures provided in the account. If the document is not clear, consists of many pages, or has numerous figures, it is always helpful to highlight the item identified and to reference it back to the account in question.

?Is that material?

People who have worked in audits or who have worked with auditors before will know the term “materiality”. This amount refers to a threshold, which is determined annually by the auditor, which will detail which accounts the auditor considers material and require audit testing. Accounts can be either quantitatively material or qualitatively material. Quantitative material is when an account balance exceeds the numerical value of the materiality threshold derived by the auditor. Qualitatively material is when an account is material due to its nature. Some examples of this include if the balance requires significant judgment by the management of the audit client or if the account is a related party income, expense or balance. If you are concerned that an account is being tested and are unsure if it is material, you should communicate with your auditor to obtain an understanding of why they have scoped in the balance for testing.

Conclusion

If you are able to establish clear lines of open communication with your auditor, provide a trial balance with supporting documentation that traces back to the accounts in the trial balance, and assist with the contact details of third parties from whom 3rd party confirmations can be obtained and timeously respond to auditor requests, then you should be able to get through your audit in a timely and efficient manner and minimize any frustration from either side.?