The Center for Audit Quality has developed a series of video vignettes for use in the classroom that provide insights into the types of conversations that occur between audit team members as well as auditors and preparers. The discussions captured in the videos can also be used in other teaching situations as they highlight communications and interviewing techniques, professional skepticism, and how to navigate conversations on difficult and sensitive issues.
As a companion to the vignettes, the CAQ offers teaching notes to help experienced trainers and educators lead an interactive discussion. The teaching notes are specially designed to facilitate discussion around the auditing issues addressed in the videos. If you have experience teaching auditing or leading learning and development programs, and wish to request a free copy of the teaching notes, please register here.
The vignettes are the following:
- Vignette 1: Evaluating Management Review Controls over a Goodwill Impairment Estimate
- Vignette 2: Evaluating Root Cause and Severity of a Control Deficiency
- Vignette 3: Auditing Is a People Business
In these vignettes, the focus is on breakdowns in review controls and steps external auditors take in order to evaluate the design and effectiveness of controls. The audit manager is evaluating the management review control over goodwill impairment estimates.
Vignette 1 (a): A Meeting between the Audit Manager and the Company Controller
The auditor has scheduled a meeting with the controller to get information about the data and the assumptions the company used to arrive at their goodwill impairment estimates. This video illustrates the challenges faced by both auditors and preparers in explaining, evidencing, and documenting a management review control. Management review controls usually include management estimates and subjectivity which are difficult to evidence. Review controls are highly dependent on the competencies of the individuals performing the control. The auditor is required to evaluate the competency of the individuals, and this can prove to be a source of tension between the auditor and management.
Vignette 1(b): A Meeting between the Audit Manager and the Engagement Partner
The audit manager is briefing the engagement partner about his recent meeting with the company controller. This video illustrates the challenges faced by the auditor as he tries to piece together evidence that the control operated effectively in situations where he is not able to simultaneously re-perform management’s review. The partner focuses on the need for the auditor to ensure the completeness and accuracy of the information that management used to reach its conclusion. Clearly, questions remain. How far must the auditor go to evidence management’s review control? What role does substantive testing play when evaluating the effectiveness of management’s controls?
In these vignettes, the audit team’s substantive testing detected an error in a prepaid insurance account; the company didn’t record amortization on a prepaid insurance arrangement. In the first vignette, the partner, the manager and the senior associate are discussing the design of the control over the account, how it was operationalized, and why the control failed to detect the error. As they try to determine the root cause of the error, it becomes clear that additional information is needed before they can reach a conclusion.
Vignette 2(a): Evaluating Controls Over a Pre-Paid Insurance Account
The audit manager, senior associate, and engagement partner discuss how the internal control over the pre-paid insurance account failed to detect a non-material error that was discovered through substantive testing. They are discussing the design of the control over the account and how it was operationalized. As they try to determine the root cause of the error, it becomes clear that additional information is needed before they can reach a conclusion. This video illustrates the decision process that the audit team goes through to determine the root cause of the error.
Vignette 2 (b): Assessing the Severity of the Control Deficiency
After gathering additional information, the manager and senior associate draft a memo that concludes that the control did not operate effectively, but that it did not rise to the level of a material weakness or a significant deficiency. In this second video, the partner walks through the factors that auditors need to consider when evaluating the severity of a control deficiency, even in the absence of a material error to the financial statements.
In this vignette, the audit team has identified a potential error in the income statement. On Monday evening, the engagement team realized that the income statement analytic showed a decrease in marketing expenses for the quarter and the year. However, the engagement team’s expectation was that the company would have an increase in marketing expense because of additional spending. The company’s earnings call is scheduled for Thursday morning, and the senior manager wants to get to the issue resolved well before then. The video illustrates two different approaches that the audit team could employ, each ending in very different ways.