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From The AICPA Audit Committee Toolkit.
Copyright © 2005 by the American Institute of Certified Public Accountants,
Inc., New York, New York.
| Purpose of This Tool. This tool is to be used by audit committees in considering significant issues, estimates, and judgments that may have a material impact on the organizations financial statements, among other concerns. Management should be encouraged to use this tool as a means to document any significant issues, judgments, and estimates for discussion with the audit committee. Each matter should be prepared as a separate issues report. Statements should be clear and concise. Some issues may carry over to subsequent meetings, in which case, any updated information should be included in bold.
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Defining Significant Issues, Estimates, and Judgments
As a first step to any discussion of this nature among the audit committee
members, it is important for the audit committee to define its threshold for
a significant issue, judgment, and estimate. The following are some points
that the audit committee should consider in its quest to define a significant
issue, estimate, or judgment.
A significant issue, estimate, or judgment is one that:
- Creates controversy among members of the management team, or between management
and the internal or independent auditors.
- Has or could have a material impact on the financial statements.
- Is or could be a matter of public interest or exposure.
- May be reported in an external release of financial information and management
is unclear or undecided on its presentation. (This may include the Annual Report,
federal and state filings, and any bond filings.)
- Applies a new accounting standard. (Note: the application of a new accounting
standard may or may not be considered a significant issue, estimate, or judgment
for the organization. However, for the record, the audit committee may ask
management to use this format as a means to brief the audit committee on the
application of the new standard.)
- Relates to the application of an accounting standard in a way that is not
consistent with general practice.
- Relates to key controls over financial information that are being designed
or redesigned, have failed, or otherwise are being addressed by the organization.
The audit committee needs to be proactive and consistent in its inquiries
regarding significant issues, estimates, and judgments. At each meeting, the
audit committee should inquire about current and/or unresolved issues or problems
that have arisen in the financial, compliance, or operational control environment.
Management's response should be documented in the meeting minutes.
Management’s report to the audit committee concerning significant issues,
estimates, and judgments should contain the following elements for a proper
basis of discussion by the audit committee:
- Definition of the significant issue, estimate, or judgment. In this section
of the issues report, management should define or summarize the issue as concisely
and clearly as possible.
- Management’s position. This section should address management’s
position on the issue. If there is disagreement among members of management,
those disagreements should be identified here as explicitly as possible, with
brief explanations of why each member of the management team has taken his
or her respective position.
- Relevant literature.
Any professional literature or regulatory requirements addressing this issue
should be cited here. If there is no professional literature available, it
would be appropriate to define industry practice in this space. If this is
a developing area, and there is no accepted industry practice or other sources
to support or refute these positions, this fact should be reported. If there
is a choice on the accounting treatment, that should be disclosed here along
with a discussion on how the choices of treatment were compared and the basis
for the final choice made.
- Risks. Management should identify various risks and/or opportunities associated
with this proposal.
- Federal or state agency or other regulatory disclosure. Management must
inform the audit committee of how it intends to address this issue in required
filings.
- Auditor’s position. Has management consulted with the independent
auditors on this issue? Do they agree with management’s position? Have
they addressed the audit issues that might be associated with it? If so, use
this section of the issues report to discuss their position. If not, use this
section to explicitly state that the auditors have not been consulted.
- Other information relating to this issue, estimate, or judgment. Management
should use this section of the issues report to highlight other related and
relevant information that is not already included in the previous sections.
From The
AICPA Audit Committee Toolkit. Copyright ©
2005 by the American Institute of Certified Public Accountants, Inc., New
York, New York.
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