Written by: Adam Bergstrom, CPA
Over the past few years, the number of requests and requirements for financial statement audits have noticeably increased and many institutions have begun to question this trend. Although the answer isn’t the same for all, there are some common factors that have been consistent among most organizations. Below, we discuss these factors, including the impact of remote audits, new and upcoming accounting standards, and enhanced internal control over financial reporting (ICFR) focus.
Impact of Remote Audits
One of the most significant factors impacting financial statement audits is an all-remote environment. The pandemic catapulted firms around the world from conducting audits entirely (or mostly) in person to 100% remote. Although we have adapted in recent years, the all-remote environment naturally creates additional steps and procedures that must be followed to allow auditors to obtain sufficient and appropriate audit evidence. These additional steps include:
- Scanning and uploading more supporting documents to secure file-sharing sites. Normally, these documents would be provided in person.
- More frequent emailing, phone calls, and video conferencing call scheduling. In the past, in person audits would allow auditors to simply walk into the client’s office with questions or discussion items.
- Additional procedures to gain comfort over the completeness of certain reports, specifically those that are system generated. An example of this may include setting up a video conference call to screen share and observe the client entering the report parameters into the system to generate the report provided.
New and Upcoming Accounting Standards
Below, we detail two new standards that recently became effective for both private and public companies and had a significant impact on the existing accounting rules:
- ASC 842 – Leases: This standard requires the recognition of a right-of-use asset and corresponding lease liability on the balance sheet for all leases with a remaining term of greater than 12 months. It was required to be adopted for private companies and effective for all periods beginning after December 15, 2021 (periods beginning after December 15, 2018, for public companies). In the year of adoption, there was an increase in auditor requests such as initial calculations, corresponding lease agreements, support behind discount rates used, and more. Accounting for lease modifications also requires additional review of supporting documentation from audit teams.
- ASC 326 – Financial Instruments-Credit Losses: This standard is also known as CECL (current expected credit losses) and requires a change in methodology from the traditional incurred loss model of the allowance for loan losses to a forward-looking calculation called the allowance for credit losses. The adoption date for smaller reporting companies (SRC) and non-public institutions was the fiscal years beginning after December 15, 2022, while it was effective for SEC filers (excluding SRCs) for fiscal years beginning after December 15, 2019. Auditors have been requesting support ahead of adoption, including initial calculations and supporting documentation, questionnaires for clients to document rationale behind the model selection and implementation process, etc. As this standard results in a significant change in an institution’s allowance, many auditors are trying to gain these initial understandings ahead of time.
Enhanced Focus on Internal Controls over Financial Reporting (ICFR)
Institutions may have also noticed auditors are asking more questions and requesting additional support related to testing of internal controls. This can be partially attributed to auditors performing this testing remotely (as discussed above), but also contributing to this is an increase in comments by the PCAOB on audit firms as part of their inspections. In a 2023 report, The CPA Journal noted the following in relation to PCAOB findings through 2021 audit inspections:
- Adverse ICFR auditor attestations for accelerated filers increased from 153 to 197 between 2020 and 2021, which was a 28.8% increase.
- The number of adverse attestations represents 5.8% of all auditor attestations for 2021, which is an increase from 4.8% in 2020.
- The number of companies filing first-time auditor attestations that disclosed ineffective controls increased from 20.9% in 2020 to 28.4% in 2021, which was a 35.9% increase.
It is also noted that the PCAOB is seeing an increase in comments for 2022 audit inspections, including deficiencies related to the sufficiency of appropriate audit evidence obtained by auditors. These facts indicate problems with ICFR as of late and driving the PCAOB’s focus on improving audit quality, which also includes emphasizing its enforcement on firms.
Preparedness
Considering the factors discussed above, it is more crucial than ever to be prepared for an audit from the start or before it begins. The key to a smooth and effective audit is always preparedness as well as thorough communication to ensure that the client and auditor are consistently on the same page. This will ensure that any new requests resulting from the factors listed above are expected by the client and addressed without confusion.
If you are struggling to stay up to date with the most recent changes to your audit requirements, Wolf’s Audit team is here to assist you.
