Auditors as Business Advisors: Logical Extension of SAS 55

By Temple, Raymond M. | The CPA Journal, January 1992 | Go to article overview
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Auditors as Business Advisors: Logical Extension of SAS 55

Temple, Raymond M., The CPA Journal

When SAS 55, "Consideration of the Internal Control Structure in a Financial Statement Audit," hit the street in 1988, many auditors viewed the document with some degree of skepticism due to its length, complexity, and, most of all, the additional audit effort required for implementation. Estimates of additional audit time ran as high as 25% for first-year implementation. However, many auditors have found that not only does SAS 55 enhance audit effectiveness, but the information obtained in gaining an understanding of client internal control structures provides an opportunity to expand services to audit clients and develop additional marketing niches as well.

This article shares some of the experiences auditors have obtained by implementing the new standard and in spotting additional services as a result of leveraging off the audit work completed to comply with the requirements of SAS 55, namely to obtain an understanding of the control environment, the accounting system, and control procedures.

A seasoned auditor brings to the table many technical skill sets that come into play during the audit process and provide a natural link to business advisory services. Conducting walk-throughs and preparing flow charts and systems narratives are the same tools used by many MAS consultants in conducting full-blown operational reviews.

Clients expect auditors to detect weaknesses in internal controls even if such weaknesses do not directly affect the financial statements. For example, if a weakness in the credit sales system results in underpricing invoices, the financial statements may not be directly affected. In effect, that client has sold its product at a discount. Clients look to their auditors to provide them with necessary feedback on such matters.

SAS 55 requires the auditor to understand what the relevant policies and procedures are for each control structure component and whether they have been placed in operation. An effective method for obtaining this understanding is the cycle review or "walk-through" approach, generally consisting of: * Inquiry of entity employees; * Observation of the application of each policy and procedure; * Inspection of entity-produced records; and * Re-performance of the procedure.

As business advisors, auditors using this approach obtain a unique perspective on a client's business that gives them insights into a business rarely seen by others. Audit questionnaires now include business advisory check-off items that blend into each area of the engagement. As a result, this insight can provide many practice development opportunities for the CPA firm.


The auditor must obtain sufficient knowledge to understand management's attitude, awareness, and sensitivity concerning the control environment. As a result, auditors consider management's philosophy and operating style by reviewing a broad range of characteristics, including management's attitude toward financial reporting. In this process, the auditor may discover the company lacks a budget or profit planning structure necessary for planning and controlling operations. In addition to considering the audit implications, the auditor could discuss the fundamentals of budgeting with appropriate client personnel. Budgets, often viewed as "straightjackets" by management, are crucial in today's economy for all businesses. A simple illustration of the break-even concept is often enlightening to the non-financial-oriented owner of a small business. An effective presentation could lead to expanded services for the auditors by allowing them to assist in developing strategic business plans, creating responsibility accounting systems and procedures encompassing budgeting and variance analysis. Many such clients respond favorably to the cash forecasting suggestions made by auditors after their review of cash management techniques.

SAS 55 places additional requirements on the auditor to review the organizational structure of an enterprise and consider the form and nature of an entity's organizational units, and related management functions and reporting relationships.

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Auditors as Business Advisors: Logical Extension of SAS 55


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