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generally accepted accounting principles or (b) that the entity filed the Form 10-Q or
Form 10-QSB before the completion of the review. In such circumstances, the ac-
countant should communicate the matter(s) to the appropriate level of management
as soon as practicable.
If, in the accountant™s judgment, management does not respond appropriately to the
accountant™s communication within a reasonable period of time, the accountant
should inform the audit committee or others with equivalent authority and responsi-
bility (hereafter referred to as the audit committee) of the matters as soon as practi-
cable. This communication may be oral or written. If information is communicated
orally, the accountant should document the communication.
If, in the accountant™s judgment, the audit committee does not respond appropriately
to the accountant™s communication within a reasonable period of time, the accoun-
tant should evaluate whether to resign from the engagement to review the interim fi-
nancial information and as the entity™s auditor. The accountant may wish to consult
with his or her attorney when making these evaluations.
When conducting a review of interim financial information, the accountant may be-
come aware of fraud or possible illegal acts. If the matter involves fraud, it should be
brought to the attention of the appropriate level of management. If the fraud involves
senior management or results in a material misstatement of the financial statements, the
accountant should communicate the matter directly to the audit committee as described
in SAS No. 99, Consideration of Fraud in a Financial Statement Audit (AICPA, Pro-
fessional Standards, vol. 1, AU sec. 316.79“82). If the matter involves possible illegal
acts, the accountant should assure himself or herself that the audit committee is ade-
quately informed, unless the matter is clearly inconsequential.a (See SAS No. 54, Ille-
gal Acts by Clients [AICPA, Professional Standards, vol. 1, AU sec. 317.17].)
When conducting a review of interim financial information, the accountant may be-
come aware of matters relating to internal control that may be of interest to the audit
committee. Matters that should be reported to the audit committee are referred to as
reportable conditions. Reportable conditions are matters coming to the accountant™s
attention that, in his or her judgment, should be communicated to the audit commit-
tee because they represent significant deficiencies in the design or operation of in-
ternal control that could adversely affect the organization™s ability to initiate, record,

19
In its 1987 report, the National Commission on Fraudulent Financial Reporting recommended that
“the audit committee™s oversight responsibilities undertaken on behalf of the board of directors extend
to the quarterly reporting process. The audit committee should review the controls that management
has established to protect the integrity of the quarterly reporting process. This review should be ongo-
ing” (p. 48). As noted earlier, SAS No. 100 provides the agenda items for the audit committee™s review
of quarterly reporting. Such a review will help minimize opportunities for managing earnings through
improper revenue recognition or deferred expense recognition.
Other Reports of the Auditors 385


summarize, and report financial data consistent with management™s assertions in the
interim financial information. The accountant also may wish to submit recommen-
dations related to other matters that come to the accountant™s attention.b
When conducting a review of interim financial information, the accountant also
should determine whether any of the matters described in SAS No. 61, Communica-
tion With Audit Committees (AICPA, Professional Standards, vol. 1, AU sec. 380), as
amended, as they relate to the interim financial information, have been identified. If
such matters have been identified, the accountant should communicate them to the
audit committee or be satisfied, through discussion with the audit committee, that
such matters have been communicated to the audit committee by management. For
example, the accountant should determine that the audit committee is informed about
the process used by management to formulate particularly sensitive accounting esti-
mates; about a change in a significant accounting policy affecting the interim finan-
cial information; about adjustments that, either individually or in the aggregate,
could have a significant effect on the entity™s financial reporting process; and about
uncorrected misstatements aggregated by the accountant that were determined by the
management to be immaterial, both individually and in the aggregate, to the interim
financial statements taken as a whole.c
The objective of a review of interim financial information differs significantly from
that of an audit. Therefore, any communication the accountant may make about the
quality, not just the acceptability, of the entity™s accounting principles as applied to
its interim financial reporting generally would be limited to the effect of significant
events, transactions, and changes in accounting estimates that the accountant con-
sidered when conducting the review of interim financial information. Further, in-
terim review procedures do not provide assurance that the accountant will become
aware of all matters that might affect the accountant™s judgments about the quality of
the entity™s accounting principles that would be identified as a result of an audit.
If the accountant has identified matters to be communicated to the audit committee, the
accountants should attempt to make such communications with the audit committee, or
at least its chair, and a representative of management before the entity files its interim
financial information with a regulatory agency (such as the SEC). If such communica-
tions cannot be made before the filing, they should be made as soon as practicable in
the circumstances. The communications may be oral or written. If information is com-
municated orally, the accountant should document the communications.20

a
The accountant may have additional communication responsibilities pursuant to SAS No. 54,
Illegal Acts by Clients (AICPA, Professional Standards, vol. 1, AU sec. 317); Section 10A of
the Securities Exchange Act of 1934; and SAS No. 99, Consideration of Fraud in a Financial
Statement Audit (AICPA, Professional Standards, vol. 1, AU sec. 316).
b
SAS No. 60, Communication of Internal Control Related Matters Noted in an Audit (AICPA,
Professional Standards, vol. 1, AU sec. 325), provides guidance on communicating reportable
conditions related to internal control.
c
The presentation to the audit committee should be similar to the summary of uncorrected mis-
statements included in or attached to the management representation letter that is described in
paragraph 24(h) of this Statement.


20
SAS No. 100, pars. 29“36. More recently, the New York Stock Exchange reaffirmed both the Blue
Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees and the National
Commission on Fraudulent Financial Reporting position on quarterly reporting. (See SEC Release
No. 34-47672, April 11, 2003.)
386 Independent Auditors™ Reports


The two technical accounting pronouncements related to interim financial re-
ports are Accounting Principles Board Opinion No. 28 and Financial Accounting
Standards Board Statement No. 3. Audit Committee members may wish to review
these pronouncements prior to their meetings with the independent auditors. In
particular, they should inquire about the methods of recognizing revenues and ex-
penses and how the annual operating costs are allocated to the interim periods. The
major objective is to identify and comprehend management™s methods of report-
ing interim financial information because the stockholders use the information to
predict earnings for the year.
An example of a report on reviewed interim financial information presented in
a quarterly report is illustrated below.

Independent Accountant™s Report
We have reviewed the accompanying [describe the interim financial information
or statements reviewed] of ABC Company and consolidated subsidiaries as of
September 30, 20X1, and for the three-month and nine-month periods then ended.
This (These) financial information (statements) is (are) the responsibility of the
company™s management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial data
and making inquiries of persons responsible for financial and accounting matters.
It is substantially less in scope than an audit conducted in accordance with gener-
ally accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial information (statements) for it (them) to be
in conformity with accounting principles generally accepted in the United States
of America.
[Signature]
[Date]21


Special Reports
According to the Auditing Standards Board, special reports apply to:

• Financial statements that are prepared in conformity with a comprehensive
basis of accounting other than generally accepted accounting principles (e.g.,
cash-basis statements)
• Specified elements, accounts, or items of a financial statement (e.g., working
capital position)


21
Ibid., par. 38.
Sources and Suggested Readings 387


• Compliance with aspects of contractual agreements or regulatory requirements
related to audited financial statements (e.g., restrictions relative to a bond
indenture).
• Financial presentations to comply with contractual agreements or regulatory
provisions (e.g., restrictions relative to dividend payments, such as maintaining
specified financial ratios)
• Financial information presented in prescribed forms or schedules that require
a prescribed form of auditor™s report (e.g., filings with a regulatory agency)22

Of particular importance to the audit committee are the second and fourth items in
the preceding list, because the committee may request the auditors to report on
royalties, sales for the purpose of computing a rental fee, employee profit partici-
pation, or the adequacy of the provision for taxes. Moreover, the auditors may
issue a special report in connection with a proposed acquisition, the claims of
creditors, or management™s compliance with contractual agreements. While such
reports may be appropriate under the preceding circumstances, it is suggested that
the committee give consideration to the cost/benefit advantages from such reports.
As indicated earlier, the committee should give strong consideration to the inter-
nal auditing staff regarding its request for special reports.
It is evident that the auditors™ professional opinion on the financial statements
augments the integrity and objectivity of management™s representations in such
statements. In addition, the audit committee should be familiar with the auditors™
reports because each member has an obligation to provide the impetus to ensure
that the proper audit opinion is rendered. Accordingly, the committee should re-
view the audit report during the postaudit review period to determine the audit
opinion on the financial statements for the current fiscal period. If an opinion
other than an unqualified opinion will be issued, the committee should review and
discuss the matters in question with the independent auditors and the senior ac-
counting officers to obtain their concurrence on the auditors™ exceptions. Such re-
view meetings may be conducted on a separate or joint basis, depending on the
attendant circumstances. The major objective is to identify the particular excep-
tions and to advise the board of directors in a timely manner of the audit opinion
regarding such exceptions so that the board may deal with them.


SOURCES AND SUGGESTED READINGS
American Institute of Certified Public Accountants, Professional Standards, U.S. Auditing
Standards/Attestation Standards, Vol. 1 (New York: AICPA, 2003).
Ellingsen, John E., Kurt Pany, and Peg Fagan, “SAS No. 59: How to Evaluate Going Con-
cern.” Journal of Accountancy, 168, No. 1 (January 1989), pp. 24“31.



22
Statement on Auditing Standards No. 62, “Special Reports” (New York: AICPA, 1989), par. 1. With
respect to agreed-upon procedures engagements, see Section 501 of Statement of Standards for Attes-
tation Engagement No. 10” (New York: AICPA, 2001).
388 Independent Auditors™ Reports


National Commission on Fraudulent Financial Reporting, Report of the National Commis-
sion on Fraudulent Financial Reporting (Washington, DC: NCFFR, 1987).
Robertson, Jack C., “Analysts™ Reactions to Auditors™ Messages in Qualified Reports.” Ac-
counting Horizons 2, No. 2 (June 1988), pp. 82“89.
Roussey, Robert S., Ernest L. Ten Eyck, and Mimi Blanco-Best, “Three New SASs: Clos-
ing the Communication Gap.” Journal of Accountancy 166, No. 6, (December 1988), pp.
44“52.
Statement on Auditing Standards No. 58, “Reports on Audited Financial Statements” (New
York: AICPA, 1988).
Statement on Auditing Standards No. 59, “The Auditor™s Consideration of an Entity™s Abil-
ity to Continue as a Going Concern” (New York: AICPA, 1988).
Statement on Auditing Standards No. 62, “Special Reports” (New York: AICPA, 1989).
Statement on Auditing Standards No. 100, “Interim Financial Information” (New York:
AICPA, 2002).
Chapter 14
The Audit Committee™s
Report and Concluding
Observations

The audit committee of the board of directors is elected by the board in order to
allow committee members to focus their attention on corporate accountability
matters in greater depth than would be practical for the full board. Furthermore,
the board of directors sets forth the duties and responsibilities of the audit com-
mittee in the committee™s charter. It is therefore incumbent on the committee to
report regularly to the board of directors that it is properly performing its respon-
sibilities as set forth in the charter. An illustrative audit committee charter was pre-
sented in Chapter 2. At this point, the reader may wish to revisit the components
and narrative discussion in charter.
The manner in which audit committees report varies from board to board, but,
as noted by The Conference Board,1 substantially all audit committees report to
the board at least annually and often more frequently. In addition, as noted in
Chapter 2, the Securities and Exchange Commission has required that registrants
provide in their proxy statements a report from the audit committee to the share-
holders. Likewise, the New York Stock Exchange has set forth a reporting re-
quirement to the board of directors.
The purpose of this chapter is to provide guidance to the chair and members of
the audit committee with respect to their reporting responsibilities to the board,
following each committee meeting, or in a written format as outlined herein.
This chapter also presents the author™s concluding observations and some per-
spectives on future developments.


PURPOSE OF THE AUDIT COMMITTEE™S REPORT
The audit committee™s report is the basis for reporting on the board of directors™
charge to the committee. It should be addressed to the full board of directors and


1
The Conference Board found that “almost every audit committee in the survey (98 percent, or 664
companies) gives a formal accounting of its activities at least once a year,” a finding essentially un-
changed from the 1978 survey. However, the frequency of reports to the board has risen, from a me-
dian of two for all companies in 1978 to three reports in 1987; just 14 percent report only once a year.
See Jeremy Bacon, The Audit Committee: A Broader Mandate, Report No. 914 (New York: The Con-
ference Board, 1988), p. 17.


389
390 The Audit Committee™s Report and Concluding Observations


explain their findings and recommendations concerning primarily the overall ef-
fectiveness of both the internal and external auditing functions and other areas
within their original jurisdiction as defined by the board. In addition, the report
should be based on their participation in the audit planning process as well as their
monitoring activities, discussed in the preceding chapters. Such a report is criti-
cally important to the board for these reasons:

• It communicates to the board financial, accounting, and auditing matters of
particular interest that were noted in the audit directors™ reviews and discus-

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