The Inherent Risks in All Financial Statement Audits

Cynthia Gordon-Floyd, C.P.A., C.F.E.

During a General Board meeting, when the Department of Retirement Services loss was discussed, many sitting near me were asking how this loss could happen when the department was audited. As an auditor (and a Christian), the immediate answer in my spirit discerned that what should have been audited was not audited by a reputable accountant.

Here are a few of the risks of financial statement audits:

Independence – The most significant risk to the reader of an audited financial statement report is auditor independence. The A.I.C.P.A. (Association of International Certified Public Accountants) defines independence as “the state of mind that permits an accountant to perform the audit without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism.” Therefore, if an accountant has a personal relationship, receives too much of their revenues from the auditee or affiliates, or other factors that can cloud the auditor’s judgment, you cannot rely on the conclusions reached in the audit report.

Engagement Letters – Engagement letters are required for all audit engagements but are strongly encouraged for all services an accountant provides. The engagement letter details what the auditor will and will not provide. It is the only source of understanding the scope of what the auditor has been asked to do. Without knowing the content of this communication, the audit report reader will not know the basis of the conclusions reached.

Statistical Sampling – Auditors do not review all transactions during an audit. They are only required to review a sampling of transactions determined by assessing the risk of material misstatement. In the audit engagement letter, the auditor states, “Our engagement cannot be relied upon to identify or disclose any financial statement misstatements, …errors or fraud or to identify or disclose any wrongdoings within the entity.” The auditor does not review most transactions; therefore, an audit cannot be relied upon to disclose fraud, errors, or misrepresentations.

Sound internal controls are required to avoid fraud and mishandling at all levels. It’s only then that we can deter bad actors and detect breaches of control before major losses occur. Audits must be controlled by independent audit committees that are properly trained to ensure effective audit processes. Review my YouTube training session “How to Read and Understand Audit Reports” for further discussion at  https://youtu.be/sAWke8h1Ti8.

Cynthia Gordon-Floyd is a certified public accountant and a certified fraud examiner. She is the founder of Willing Steward Ministries, LLC. Willing Steward Ministries (www.willingsteward.com) is a financial consulting and accounting firm for churches and other faith-based non-profits, specializing in Bible-focused financial practices, pastoral compensation issues, IRS compliance, and other financial needs specific to churches. Cynthia is a graduate of Lake Forest College and holds her MBA in Accounting from DePaul University. She teaches a certificate program in Church Financial Management at Turner Theological Seminary in Atlanta, Georgia.