Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Children in school as illustration for management’s responsibility over financial statements – a word picture for SSARS 19

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How can management be response for financial statements and internal control for preparation of the financials when the accountant prepares them?  That is what the second paragraph in the compilation and review report say.  See thumbnail picture of the reports here.  See sample reports here and here.

In a webcast on August 31, 2011, Mr. Michael Glynn, CPA, from the AICPA, gave a fantastic word picture for how management can be responsible for the report and internal control.

This is especially challenging in a compilation where management hands the trial balance to the accountant, or far more likely sends a backup copy of the QuickBooks database.  Or in a more extreme illustration, has the accountant access the on-line QuickBooks data and extract what is needed. 

Next thing management knows, a compilation report arrives via e-mail.  How can the content and preparation of those financial statements be their responsibility?

Mr. Glynn uses the analogy of parents’ responsibility for educating their children.  Here is my version of his word picture:

The responsibility for education belongs to the parents. Period.

How does a parent carry out that responsibility?

Does a parent have to buy textbooks, sit down and teach the child?  Every day?  Doe the parent prepare quizzes and administer a final exam? For every class?

No.

(Well, some parents do that – kudos to them!  Those abilities are not in the skill set for my family.  For the rest of us it’s a very different story from homeschoolers.)

How then does a parent carry out that responsibility to educate a child?

By making sure the child is enrolled in school. Making sure that the child goes to school. Every day. Checking on homework and making sure it gets done. Following up on major projects and finals.  Encouraging.  Nagging when needed.  Coordinating with teachers so the parents understand what’s going in the classroom and the teacher knows what’s going on at home, all with the goal of making sure the child succeeds and that the teacher and parents can present a united front.

So, does the parent do the teaching and educating?  No.  But the parent is still responsible for it and makes sure it happens.

It is the same thing with management of the company being responsible for preparing financial statements, according to the fantastic illustration provided by Mr. Glynn.

Management gets the sales data accumulated.  They approve disbursements and get that data accumulated into the accounting records.  Management finds a competent CPA that will work well with the company at a reasonable price.  Management gets the data to the accountant.  Questions from the accountant are answered promptly and accurately. When the report arrives, management looks at it to see it makes sense. Management is not looking to make sure that the latest change to GAAP or the tax law was properly interpreted and applied. What they are looking for is that it generally makes sense in relation to what they already know.

So, does management convert the trial balance into financial statement format, prepare a cash flow statement, and adjust the notes so they properly comply with GAAP?  No. B ut management is still responsible for it and makes sure it happens.

I think the same word picture applies to the audit environment.

Written by Jim Ulvog

September 2, 2011, 6:22 am at 6:22 am

Posted in Audits, Compilations & reviews

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