3. Risk Response

The audit team spends much of this phase performing the procedures outlined in the risk assessment phase. This involves obtaining confirmations, performing substantive tests, analytical procedures and inquiring with management. The auditor should have provided you with an information needs list prior to coming for the year-end visit. This list itemizes schedules and working papers required by the auditor for each financial statement component and the scheduled completion date.
In addition, we suggest that:

  • Each schedule be assigned to specific employees to make the process easier to manage.
  • Schedule and working paper formats be determined and agreed upon by yourself and the auditor to minimize staff time spent assembling information and revising material.
  • The schedules and documentation identified in the information needs list are assembled in a well-structured financial statement file.

Well-Structured Financial Statement Files

An effective file supports the preparation of financial statements and decreases questions and information requests by the auditor. A good file:

  • Supports numbers in the financial statements and notes
  • Includes schedules and reports used to compile the financial statement numbers
  • Contains schedules and reports that tie directly to the accounting records, and that illustrate accounts in the trial balance have been completely included in the financial statements
  • The organization of the file is driven by the financial statement components. (e.g., the file could be organized in order of assets, liabilities, revenues and expenses)
  • An analysis of significant variances from year to year

Analytical Review

Analytical review is a valuable tool for understanding the nature of changes in the balances and transactions of an organization and in evaluating the reasonableness of the numbers.

 A good analytical review incorporates a description of:

  •  the nature of the component (i.e., what is it comprised of); and
  •  what occurred during the year and whether the variance between years is reasonable.