We Are Required To Talk With Each Other
It happens. From time to time, company management will decide to replace their current auditor. It can be for good reasons, wrong reasons, or no real reason at all. The predecessor auditor may be a repository of information that may be important to a potential successor auditor. Therefore, auditing standards require that before a new auditor can accept the engagement, they must inquire about certain matters of the predecessor auditor.
In June 2022, the Auditing Standards Board of the AICPA issued Statement on Auditing Standards 147, Inquiries of the Predecessor Auditor Regarding Fraud and Noncompliance With Laws and Regulations. SAS 147 amends AICPA, Professional Standards, AU-C Sec. 210 – Terms of Engagement. The amendments to AU-C Sec. 210 are effective for audits of financial statements for periods beginning on or after June 30, 2023.
SAS 147 provides guidance regarding auditor inquiries made of a predecessor auditor about matters that will help the auditor decide whether or not to accept the engagement. These inquiries may be either written or oral. SAS 147 adds more teeth to the inquiry and requires the predecessor auditor to respond. These auditor inquiries must be made after management authorizes the predecessor auditor to respond to such inquiries. Below is a snapshot of what the auditor must do before accepting an engagement for an initial audit when a predecessor auditor exists. And what the predecessor auditor must do.
- The auditor should request management to authorize the predecessor auditor to respond fully to the inquiries.
- The auditor should inquire about the following of the predecessor auditor:
- Fraud or suspected fraud involving management, employees with significant internal control roles, or others when fraud resulted in a material misstatement of the financial statements.
- Matters involving noncompliance or suspected noncompliance with laws and regulations.
- The predecessor auditor must timely respond to the auditor (absent unusual circumstances and unless prohibited by law.) If the predecessor auditor decides not to respond fully, they must clearly state that the response is limited. The important thing here is that they must respond under the revised standard. The standard states that limited responses are expected to be rare.
- The auditor should evaluate the response (or limited or no response) to determine if they will accept the new engagement.
- If the engagement is accepted, the auditor should document:
- The inquiries of the predecessor auditor, and
- Results of those inquiries.
Additionally, the auditor may choose to inquire about the following:
- Integrity of management
- Disagreement with management about accounting policies, auditing procedures, or similar significant matters
- Significant deficiencies and material weaknesses in internal control communicated to management and those charged with governance
- The predecessor auditor’s understanding of the reason for the change in auditors
- The predecessor auditor’s understanding of the company’s relationships and transactions with related parties and significant unusual transactions.