April 28, 2023

Differences of Opinion

How to Address an Audit Disagreement

It happens: Differences of opinion can sometimes arise within an audit engagement team. So, what to do if there’s disagreement between the engagement partner and the quality control reviewer — or any members of the team?


Rule number one is that the engagement team should follow the firm’s policies and procedures for dealing with and resolving any differences of opinion. Here are some key steps to take to properly resolve and document an audit disagreement:


Step #1 – If a difference of opinion arises within the engagement team, the disputed issue should first be discussed by members of the engagement team and the partners. Hopefully, the team can resolve the issue swiftly. If both agree that the issue is resolved, no further action is necessary; however, if the issue is not resolved, additional consultation will be required.


Step #2 — If additional consultation is deemed necessary, the issue should be escalated to an individual at the firm who has the appropriate knowledge, seniority and experience regarding the issue in question. Those who are consulted should be given all the relevant facts that will enable them to provide informed advice. If they are able to resolve the issue, no further action is necessary.


Step #3 — If the issue is not resolved by taking this additional step, the issue should be reviewed by an individual outside of the firm who has relevant specialized expertise, such as CPAs at other firms, the AICPA Technical Hotline, AICPA Audit Quality Centers, IFAC and other professional and regulatory bodies that provide quality control services. Again, those consulted with should be given all the relevant facts that will enable them to make an informed decision. In some cases, certain audit or attestation engagements may require the firm to consult with specialists such as actuaries, appraisers, attorneys or engineers. When such consultations are necessary, CPAs must follow the guidance in AICPA Professional Standards and IFAC. If outside experts are able to solve the dispute, no additional action is required.


Step #4 — Keep in mind that consultations that involve contentious or difficult issues should be sufficiently documented to facilitate understanding of the issue for which the consultation was needed; the results of the consultation; the decisions made and the basis for those decisions; and how those decisions were implemented. In addition, it should be noted that the conclusions resulting from the consultation were understood by all the parties involved.


Step #5 — If the difference of opinion is not resolved after all the above steps have been taken, the matter must be brought to the attention of the quality control director (or equivalent), who must resolve the dispute regarding the proper course of action to be taken by the firm on the issue in question. The conclusion reached by the quality control director should be documented in accordance with professional standards.


Step #6 — The firm must not release the report until any differences of opinion are resolved. In addition, any party who disagrees with the final conclusion may document their disagreement with the resolution of the matter.

 

It’s important to note that the engagement partner is responsible for ensuring that appropriate consultation is undertaken on contentious matters. This person needs to ensure that all members of the team follow the firm’s consultation policies during the course of the engagement; the nature and scope of the consultation are agreed upon; the final conclusions are understood by the party consulted; and such conclusions are implemented properly.

 

If you’re unsure of how to handle an audit disagreement, there’s no need to go at it alone. Collemi Consulting leverages more than two decades of experience to provide trusted technical accounting and auditing expertise when you need it the most. To schedule an appointment, contact us at (732) 792-6101.


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By Jennifer Ruf March 24, 2025
As audit season is in high gear, it’s important for auditors to step back and plan how they are going to audit a client’s books and records. What are the red flags you’re looking for when it comes time to throw open the books and look through a huge swath of journal entries to pluck out the ones that are questionable, and need to be questioned? First off, it’s important to understand how journal entries are created at the company being audited. For an auditor, that means looking at the internal control environment to understand how a journal entry is created: Who’s authorized to create one and who can create one. You have to understand the process. How does it start and how is the entry eventually recorded onto the financial reporting system? Once you know that, you can determine whether someone can come in and override the system, or if someone can pretend to be someone else and start recording journal entries onto the system. That will help you figure out what to look for to decide what entries to pull out and ask management to get back up information to support and validate those entries. Finding the needle The key here is not to just go through the mechanics, but to really go through the exercise so you can determine if management is playing games in the recording of those transactions. You have to be able to get comfortable with that, and that means you need to be able to document what you’re looking for. Because what the auditor is really doing is looking for a “needle in the haystack”, to identify the transactions that don’t look right, that don’t make sense in the ordinary course of business. For example, if the business is not open on weekends, are transactions being posted on a Saturday or Sunday, or even on holidays? If you see rounded numbers or accounts that are seldom used, those can be red flags as well. Sometimes it can be as simple as asking managers and others like accounting, data entry and IT personnel if they’ve observed any unusual accounting entries. Depending on the size of the company and scope of the work, you might need to use computerized audit software program — some of them with AI built in — that can scan the entries to identify anomalies. Red flags When an auditor is looking for evidence of management override of controls, they can look for some of these 12 red flags indicators: ● Top-side entries ● Entries made to unrelated, unusual or seldom-used accounts ● Entries made by individuals who typically don't make entries. ● Entries recorded at the end of the period ● Post-closing entries with no explanations ● Entries made before or during the preparation of financial statements with no account numbers ● Entries that contain rounded numbers or a consistent ending number ● Entries processed outside the normal course of business ● Accounts that contain transactions that are complex or unusual in nature ● Accounts that contain significant estimates and period-end adjustments ● Accounts that have been prone to errors in the past ● Accounts that contain intercompany transactions When testing non-standard journal entries and other adjustments, you should look for documentary evidence indicating that they were properly supported and approved by management. Finally, remember that while most fraudulent entries are made at the end of a reporting period, you shouldn't ignore the rest of the year  Collemi Consulting leverages nearly three decades of experience to provide trusted technical accounting and auditing expertise when you need it the most. We regularly work with CPA firm leadership to help them reduce risk and maximize efficiencies. To schedule an appointment, contact us at (732) 792-6101.
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