assurance
From interim to year-end
assurancenews

By RichaRd E. WoRtmann

Through 2009, interim reviews of non-is-suers followed Statement on Standards for Accounting and Review Services for reviews and Statement on Auditing Standards for the year-end audit.

However, the Auditing Standards Board’s SAS 116, Interim Financial Information, which amends SAS 100 of the same name, now requires reviews of interim financial information to be performed under the audit standard if the prior year-end financial statements were audited and the firm has been engaged, or expects to be engaged, to audit current year-end financial statements.

Concurrent with the issuance of SAS 116, the American Institute of CPAs issued SSARS 18, which includes a provision that SSARS is not applicable when the above situation exists.

Practitioners must be aware of some additional considerations apart from what is done under SSARS. The CPA should have sufficient knowledge of the entity’s business and its internal controls, since both relate to the preparation of annual and interim financial information. The understanding of internal controls is more in-depth than that required under SSARS. The CPA should gain enough understanding of the internal controls to be able to recognize the types of potential misstatements and the likelihood of their occurrence. This understanding is integral to the design and selection of inquiries and the analytical procedures to be performed. They provide the CPA with a basis to communicate if they are aware of any material modification that should be made to conform to the applicable reporting framework (such as U.S. GAAP, IFRS or OCBOA).

If the CPA is also the continuing auditor,
the additional work required is likely to be
limited to an understanding of the controls
applicable to interim reporting. An example
of a control that may be different at interim,
as opposed to year-end, may be the pro-
cesses relating to sales cut-off or inventory
balances. The documentation for this un-
derstanding is not likely to be onerous. If
the CPA is a successor auditor, however, the
understanding that needs to be obtained at
the time of performing the review is more

the rules have changed for firms that perform interim reviews
and year-end audits of client financial statements.
New SAS 116 links interim reports to the audit

One of
the most
significant
differences
from SSARS
is that the
entity may
present
condensed
interim
information.

Richard E. Wortmann, CPA, is owner of RW Group LLC in Landenberg, Pa. Reach him at rewortmann@rwgroupllc.com.

extensive. It may include procedures to determine if controls are in place, which could consist of walk-throughs or similar procedures. Since SAS 116 contemplates the CPA performing the year-end audit, these procedures can be used in the audit and may only need to be updated if there are changes in processes or controls.

In limited situations, the CPA can perform
the review and not issue a report. However, if
the interim financial information is included
in a report, document or written communica-
tion, and the entity states that the informa-
tion has been reviewed by an independent
public accountant, then the CPA should
issue a report. This report is different from
the SSARS review report, and an example is
included in the professional literature. The
written engagement letter, which is required,
should specify if a report is going to be issued
or not.

AUDITORS NEED TO FOCUS
ON INTERPERSONAL SKILLS

VILLANOVA, PA. — Internal auditors who combine likable personality traits with well-presented arguments do better at influencing managers’ accounting judgments and financial reporting estimates than auditors who are rude and provide information in a jumbled way, according to a new study by Professors Kirsten Fanning of the Villanova School of Business and David Piercey of the University of Massachusetts, which recently won the Outstanding Emerging Scholars Award at the American Accounting Association’s Accounting Behavior & Organizations Research Conference.

Contrary to the assumption that internal auditors only need to use numbers and relevant accounting information to support their position, the study shows that how they present themselves and their information is just as important.

The authors recruited 133 managers and business professionals from an executive training program at the University of Massachusetts, and had them all read case information as managers of a hypothetical firm trying to make a determination about inventory obsolescence. Participants were divided into groups that read different versions of the case. In one, the internal auditor was portrayed as “ likable” (easy to be around, down to earth, nice, and understanding), and in another as “dislikable” (hard to be around, arrogant, a jerk, and condescending).

Different versions of the case also varied whether the information was more or less supportive of the internal auditor’s preferred position, and whether it appeared in an “argument format” or a “list format.” The “argument format” was arranged in logically organized paragraphs that could help recipients better understand and process the implications of that information. The “list format” placed exactly the same sentences in a randomized bullet point list to remove the argument’s thematic flow.

Managers were more persuaded by the internal auditor when they used an argument format and good interpersonal skills. Neither argument format nor good interpersonal skills alone had any effect.