Will Controls Modified for Remote Work Arrangements Pass External Audit Scrutiny?
For much of 2020, internal audit departments have tested controls using attributes to facilitate work-from-home (WFH) arrangements. As the year and internal audit work for many organizations comes to a close, reconciling if the controls adjusted for remote work arrangements will pass external audit scrutiny is top of mind for many CFOs and internal audit professionals.
With all the other conversations CFOs may be having about the many ways that COVID-19 may have affected the organization, internal and external audit considerations may be lower on the priority list. The following are some ways to include the implications for financial statement audits and other compliance areas as part of the larger conversation about COVID-19 impact.
Set a Preliminary Meeting with the External Audit Team
A meeting between accounting and external audit teams is a step to take now to help successfully address potential issues with WFH controls in the external audit. Facilitating a conversation between the two parties helps determine if the changes in controls and alternative testing strategies for testing the control structure in a remote environment during COVID-19 were effective will help resolve issues before they arise and lay the groundwork for remediation dialogue.
Evaluate Controls for Top Risk Factors
Remote testing has created a number of challenges for external auditors’ typical review of internal audit’s work. Three key areas in particular are emerging as challenges, and the following examples exemplify those issues:
- Instances where wet signatures (documents physically signed) have been replaced by email sign offs indicating the review is complete
- In-person meetings where robust conversations around “month and quarter end entries and accruals” were had are now occurring over email or video conference
- Overall lack of documentation available for review and auditing
Adjustments made to internal audit controls during WFH may have worked well enough in practice, but external auditors may question whether the adjustments made are evidence of protection from financial reporting and fraud risks. Ultimately, WFH audit adjustment may affect external audit’s ability to rely on the work done by the internal audit team.
Prepare for Some Additional Challenges
A secondary factor affecting this conversation between internal accounting teams and external audit teams relates to changes that external auditors have enacted. For public companies, the testing of internal controls continues to be an area where audit failures have been identified through inspection processes of external auditors. The inherent challenges in testing internal controls, combined with the impact of WFH on the internal control processes and methods available to testing internal controls, will continue to make internal controls a key focus of audit firms. This may mean a more thorough approach and expansive scope for the current year, particularly for fourth quarter work. While this seems inconvenient and late in the year, changes to the audit should be on the radar for internal audit teams and finance management teams.
Plan for the Financial Statement Audit Impact
We are seeing great interest between audit committees and the C-suite in holding these conversations around how the 2020 financial statement audits may be different in years past. Early meetings often spark year-end audit discussions around timeframe and obstacles. Even teams that have collaborated together for a long time can disagree on what is sufficient in terms of scope, evidence, and information. Having preliminary meetings can help eliminate issues early and help avoid obstacles that could ultimately delay the issuance of audited financial statements.
For more information about how internal audit teams and CFOs can prepare for conversations with external auditors, please contact Mike Gallagher or a member of our team. Published on November 03, 2020