The Auditor Change Process
Some standards are being applied inconsistently. When a company changes auditors, professional standards specify the successor and predecessor auditors follow certain procedures. Additional procedures have developed through custom. Statement on Auditing Standards no. 7, Communications Between Predecessor and Successor Auditors, provides guidance on communications (some required, others optional) between old and new auditors. The required communications are intended to help the successors decide whether to accept an audit engagement. The optional ones facilitate performance of the audit, particularly in areas concerning balances at the beginning of the period under audit. SAS no. 7 was written from the perspective of an auditor accepting or rejecting a client's request for service; today, the more common practice is for a client to accept or reject an auditor's proposal. This change in the decision-making process could affect the auditor's actions. This article describes the results of a survey conducted to determine how certain aspects of SAS no. 7 are applied in practice and to better understand other facets of the auditor change process, including optional provisions related to reviewing a predecessor auditor's working papers. THE TAkE OF SAS 7 AND THE PREDECESSOR AUDITOR In SAS no. 7, "predecessor auditor" is one who has resigned or been notified his or her services have been terminated. In practice, however, the predecessor may be retained during the proposal process. "Successor auditor" is one who has accepted an engagement or has been invited to make a proposal. The communication responsibility rests with the successor--whether or not the successor accepts the engagement. Required communication. A potential successor auditor should (with client permission) make specific inquiries of the predecessor on matters that will help determine whether to accept the engagement. The standard says the inquiries should include specific questions about, among other things, facts that bear on management's integrity; disagreements with management as to accounting principles, auditing procedures or similar significant matters; and the predecessor's understanding of the reasons for the change of auditors. The predecessor auditor should respond fully to the inquiries, except in unusual circumstances when the predecessor should indicate the response is limited. Optional procedures. The successor auditor also may perform some additional procedures, including making inquiries of the predecessor that will help in expressing an audit opinion. SAS no. 7 says the successor auditor's work may be facilitated by * Making specific inquiries of the predecessor about matters the successor believes may affect the conduct of the audit. * Reviewing the predecessor auditor's working papers. Other issues concern which working papers are to be made available and which can be copied. WHAT AUDITORS DID We mailed a questionnaire to 400 CPAs randomly chosen from American Institute of CPAs members who said auditing was their specialty. There were 151 replies, a 38% response rate. The survey included questions about the extent, timing and form of communication between predecessor and successor auditors and the successor's use of the predecessor auditor's working papers. The first question presented a scenario in which three CPA firms had been asked to submit a proposal to audit Zeta Co., a company previously audited by another CPA firm. Survey respondents were asked to assume they had visited Zeta and reviewed its financial records and procedures to the extent needed to prepare a proposal. Respondents were asked if they would communicate with the predecessor auditor 1. Before visiting Zeta and reviewing its financial records and procedures. 2. After the visit and review but before sending the proposal. 3. Only if the proposal was accepted. …