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?