10C — July 2023 — Owners, Developers & Managers — M id A tlantic Real Estate Journal
www.marej.com
O wners , D evelopers & M anagers
By Nick Ottum, CPA, MBA, Withum What is Required Audit Communication?
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ou’re a private rental real estate entity. You may own one build-
Section 260 as “The person(s) or organization(s) (for exam- ple, a corporate trustee) with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity. This includes overseeing the financial re- porting process. Those charged with governance may include management personnel; for example, executive members of a governance board or an owner-manager.” It is impor- tant to note here that those charged with governance may or may not include members of management. Sometimes all of those charged with gov- ernance are also members of management; other times only some members of management are included, and then there are also instances where this group is completely separate from management. These distinctions are important because those charged with governance must receive cer- tain communications from the auditor, not just management. Objectives AU-C Section 260 lays out four main objectives of the auditor as it relates to the auditor’s communication with those charged with governance: 1. Communicate clearly with those charged with governance the responsibilities of the au- ditor regarding the financial statement audit and an over- view of the planned scope and timing of the audit. 2. Obtain from those charged with governance information relevant to the audit. 3. Provide those charged with governance with timely observations arising from the audit that are significant and relevant to their responsibility to oversee the financial report - ing process. 4. Promote effective two-way communication between the auditor and those charged with governance . These objectives provide guidelines for establishing and nurturing communica- tion between the auditor and those charged with governance . These four objectives will in- evitably be tackled in a variety of ways through discussions (in person or over the phone), emails, and written communi- cation letters. The combination of communication methods will differ, but the ultimate goal is to facilitate an efficient and effective audit process. The
objectives also help establish the key required communica- tion areas of an audit. Requirements Throughout the course of an audit, the auditor is required to communicate certain mat- ters to those charged with governance . The timing of these communications is key as well. During the planning stages of an audit, the audi- tor should communicate the specific responsibilities of the auditor as it relates to the financial statements, manage - ment’s responsibility for the financial statements, and the planned scope and timing of the audit, which includes the significant risks identified by the auditor. These preliminary communications set the foun- dation of the audit and build expectations for both sides of the relationship. Effective communication by the auditor and understanding of those communications by manage- ment and those charged with governance is important to the audit process as a whole. How are these matters com- municated? The matters are communicated in a few differ- ent ways: the engagement let- ter, discussions, emails, and/ or a communication letter. The engagement letter covers some, but not all, of the required ar- eas, so typically there will be another communication, which can be oral through a discus- sion with those charged with governance , through email or a communication letter, or through a combination of both. One example combination is an engagement letter, a communi- cation letter addressed to those charged with governance , and then a follow-up conversation to address any questions or emphasize any matters. After the commencement of audit fieldwork through the date of issuance, the auditor should keep an open line of communication with manage- ment and those charged with governance as necessary. By the end of the audit, the audi- tor is required to communicate any audit findings vital to the responsibility of those charged with governance over the fi - nancial reporting process, including: • The auditor's views about qualitative aspects of the entity's significant account - ing practices, including ac- counting policies, account- ing estimates, and financial
statement disclosures; • Significant unusual trans - actions, if any; • Significant difficulties, if any, encountered during the audit; • Disagreements with man - agement, if any; • Circumstances that affect the form and content of the auditor’s report, if any; • Noteworthy matters that are difficult or contentious for which the auditor consulted outside the engagement team; • Other noteworthy findings or issues, if any; • Uncorrected misstatements accumulated by the auditor and the effect they may have on the opinion in the auditor’s report, the effect of these misstate- ments on prior periods, and the possibility of the matters under- lying the misstatements having an impact on future periods; • Material corrected mis - statements; • Significant findings or is - sues arising during the audit; • The auditor’s views about significant matters that were the subject of management’s consultations with other ac- countants, if any; • Internal control deficien - cies, including material weak- nesses, significant deficien- cies, and other internal control deficiencies not rising to the level of a material weakness or significant deficiency; and • Written representations the auditor is requesting. How are these matters com- municated? These matters can and to determine the depth of concrete where repairs or addi- tional slabs had been installed over time. Finally, steel samples were extracted from exposed rebar in several locations to test for tensile strength and determine section loss. Reinforcing steel bars of different sizes show- ing varying stages of corrosion were sampled. Structural diagnostics en- abled engineers to advise the client on how to design and engineer the building for its new, intended purpose. Making the case for structural diagnostics Structural diagnostics is an important method used to paint an overall picture of the
be communicated through a few different methods. A man- agement representation letter serves for the communication of the written representations the auditor requires of man- agement and those charged with governance . These writ- ten representations are ac- knowledged by those charged with governance through the signing of the management representation letter by one or more individuals charged with governance. The rest of the matters in the list above are typically communicated ei- ther orally, or when oral com- munication is not determined to be adequate, through one or more written communica- tion letters. For example, one communication letter may be sent if no internal control defi - ciencies were identified by the auditor, but if internal control deficiencies were identified, the auditor may elect to send a second communication letter to highlight these matters. When all is said and done, communication throughout the audit process will result in multiple discussions, dozens of emails, and many written com- munication letters. This can feel overwhelming at times, so understanding what is commu- nicated, why it is communicat- ed, when it is communicated, and how it is communicated will help you get the most out of your audit experience. Nick Ottum, CPA, MBA is audit senior at Withum. MAREJ condition of a structure. It can also be used to pinpoint singu- lar issues and provide informa- tion to remedy them. Without assessing the structure and getting into the different lay- ers, valuable information and potential issues can be easily missed, making it difficult to re - pair or design effective projects. Simply put, hiring an experi- enced firm staffed by seasoned professionals who are skilled at applying specialized tools offers the opportunity to non-destruc- tively peel back a structure’s layers and dive deeper to iden- tify potential issues, providing the analysis and information required to remedy them. Frank Cox is Facilities Associate III at ECS Mid Atlantic. MAREJ
ing and have two investors or hundreds of buildings with a hun- dred invest- ing partners. The build- ings you own may be com-
Nick Ottum
mercial, residential, or both. Whatever the case may be, you may need an audit of your financial statements. This could be by the request of your investors or even re- quired by your lending institu- tion as part of your loan cov- enants for that large mortgage on your books. If you have been tasked to communicate with the auditors, you are aware of the many emails, phone calls, and documents that flow back and forth from the beginning to the end of the audit. If this is your first audit, then you will become accustomed to the buzzword documents before too long – most namely, the en- gagement letter, management representation letter, and the audited financial statements. Why these three documents? The first two require signa- tures from high-level individu- als in your organization, and the last is the final deliverable that you will distribute to relevant parties (e.g., your in- vestors or lending institution). Your attention will be drawn to these items, as it should be, but there are other important communications that often get lost in the weeds along the way. This article focuses on these communications as a whole, which are known as the auditor’s communication with those charged with governance. The Auditor’s Communication With Those Charged With Governance The American Institute of Certified Public Accountants (“AICPA”) AU-C Section 260 is a comprehensive guide for the auditor’s communica- tion with those charged with governance covering many Statements on Auditing Stan- dards (“SAS”) related to audit communications, which give guidance to auditors on Gener- ally Accepted Auditing Stan- dards (“GAAS”). Who are those charged with governance? Those charged with gover- nance are defined under AU-C
continued from page 5C Peeling Back the Layers: A Look at Structural . . .
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