If your organization is like most, your annual audit has been a reasonably straightforward, maybe even predictable process. Thanks to recent comprehensive changes made to auditing rules by the Auditing Standards Board, however, things are becoming more complex.

These new auditing standards require significant changes in how audits are conducted and how the results of the auditor’s work are communicated to clients. The impact? These revisions bring auditing rules for nonpublic entities into closer alignment with the standards imposed on audits of public companies under Sarbanes-Oxley.

Some of these new standards became effective for audits of financial statements dated December 31, 2006 and after. As a result, auditors are required to comply with very specific rules related to the form, content, and extent of audit documentation, including more thorough documentation of auditing procedures and results. Other new guidelines affect the audit evidence that must be obtained before an auditor can consider an audit complete.

If this all sounds complicated, it is. However, because Plante & Moran has continued to streamline and enhance our auditing methods, clients will now be afforded a variety of benefits that weren’t available in previous audits. You can rest assured that Plante & Moran has made the process as efficient and cost-effective as possible.

One new rule now in effect requires auditors to more formally communicate matters they observe about their clients’ accounting procedures and internal controls. Auditors are now compelled to inform clients about any “significant deficiencies” in accounting procedures or internal controls that come to their attention. “Significant deficiency” is a defined term that includes any flaw creating more than a remote risk of errors in financial statements that could reasonably matter to a user of the statements. Auditors must communicate these matters in writing to all individuals involved in overseeing strategic direction and accountability for operations in addition to management.

The remainder of the new rules will become effective for audits of financial statements dated December 31, 2007 and later. These new rules, which are known collectively as the new Risk Assessment Standards, significantly change the procedures auditors must perform in all financial statement audits. Under these new rules, auditors will be required to:

• More thoroughly examine and evaluate clients’ accounting processes and controls, including the overall control environment, key controls over significant transactions, and the quality of internal oversight of the financial reporting process
• More thoroughly assess and document conditions in clients’ systems and processes that create risks of material misstatement in their financial statements and perform additional testing in response to these risks
• Design and perform more analytical tests of accounting and financial data
• Apply more stringent standards in identifying, assessing, and communicating internal control deficiencies
• Communicate more information about the results of the auditor’s work to individuals involved in overseeing strategic direction and accountability for operations

As a practical effect of these new rules, auditors will need to make more detailed and specific requests for information from clients, particularly about processes and controls, and clients will need to do more work to be well-prepared for their audits. The new rules also will require increased audit testing and more thorough auditing procedures and will increase the amount of related documentation that auditors must prepare and maintain.

Every cloud has one, and the new audit procedures are no exception. Clients will receive:

• Better documentation of key processes and controls
• More (and better!) feedback related to process and control deficiencies
• More information about controls that don’t function as intended
• A better, more thorough, audit in the areas of greatest risk to you
• A great opportunity to support cross training and succession planning for key staff positions

It’s also true that Plante & Moran’s approach offers a variety of significant benefits. We’ve made a very complex process relatively easy for our clients. We’ve designed our forms only to ask for relevant information, and we’ve created documents for client use that are easy to prepare and maintain. Our process permits and assists clients in providing a significant amount of supporting documentation, which helps reduce audit time and, consequently, your costs.

Plante & Moran began analyzing these new standards and incorporating the necessary changes into our audit process and tools more than a year ago. It’s clear that the new rules will require us to perform more audit procedures than we have in the past. Over the next several months, our firm will continue investing heavily to implement our new audit methodology and train our staff on these changes. Our goal is to have our staff trained and working with our clients to prepare for the transition to these new rules well in advance of the required implementation date.

As we move forward, we’ll be communicating with our audit clients regularly about matters that will affect their next financial statement audit. In addition, we’ll be working with clients during the upcoming year in a number of areas, including review and documentation of their internal accounting procedures and controls, to ensure a smooth transition to these new standards.

The primary objective of these new rules is to strengthen and enhance the independent audit of financial statements, including more thorough evaluation and information about internal accounting and financial reporting processes and controls. We believe that these new rules, and the additional communications clients will receive about the results of their audit work, will enhance the value clients receive from their financial statement audit.