business matters

JIM Denton
L edger Lines

Do you really need an audit?

C

reating or revising the bylaws for

organizations is a tricky business.
I am not a lawyer so I do not
write bylaws as a matter of profession,
but I am sometimes asked about the
audit requirements clause. The question
is something like: Should we require
a financial audit? My answer is always
that they dont need one because I try to
avoid allowing an organizations governing
document to determine the service that an
outside professional is to provide. Audits
are expensive and are often not generally
necessary unless a third party lender or
investor requires an audit.
If you must address it, consider using
language such as an audit in accordance
with procedures generally accepted in

Do you really need an

audit? If so, have an audit.
But try not to require one
just because you think you
might want one.

20

July 2014 | The Business Times

the United States or other equivalent

procedures agreed-upon by the board
of directors (or audit committee as
applicable) that are performed by an
independent certified public accountant.
This language requires that some type of
process be performed, but does not tie the
organization down to an actual audit.
An agreed-upon procedures engagement
is a type of service that can be tailored
to address certain business practices and
account balances. It allows the user to
determine the procedure (with the help
of the auditor) and thereby obtain a level
of assurance that is more customized
than if an audit had been performed. For
example, an agreed-upon procedure could
be written to say: Obtain and vouch 50
paid invoices from the accounting period
to trace into the general ledger and note
any exceptions. The accountant would
then perform the procedure and report
any related findings.
Agreed-upon procedures in most cases
are more economical than audits. Due
to the defined criteria of the accounting
standards, an audit could involve much
more effort than the agreed-upon
procedures.

The objective of an audit in accordance

with standards generally accepted in the
U.S. is to determine whether the financial
statements are fairly stated in accordance
with specified accounting standards. An
audit will not specifically indicate whether
procedures were properly followed, bank
accounts reconciled, receipts kept or travel
documented.
Simply put, an audit will tell you
whether the financial statements are fairly
stated in all material respects. Fairly stated
financial statements may not always be a
concern of management. An agreed-upon
procedures engagement will tell you more
about processes and documentation.
Do you really need an audit? If so, have
an audit. But try not to require one just
because you think you might want one.
JIM DENTON is a CPA and a managing
partner with Arledge & Associates P.C. in
Edmond. He may be reached via email at
jim@jmacpas.com.