Don't Let SADs Get You Down

Posted by admin on Jun 3, 2014 12:06:00 PM

One of the more potentially divisive items included in the Auditor’s Report to the Audit Committee is the Summary of Audit Differences (SADs). At times, it seems that SADs are perceived as a black mark on an otherwise clean audit report, which is most likely due to a misunderstanding of what a SAD represents.

calculating-cpaSADs are a mechanism used by the auditor to quantify differences in an audit. They are not meant to be a commentary on the qualitative aspects of management.

PCAOB Auditing Standard 14 requires the auditor to evaluate the results of the audit to determine whether the evidence obtained over the course of the audit is sufficient to support the intended opinion on the financial statements. One of the criteria the auditor should take into consideration is the accumulated differences noted during the audit. In particular, the auditor should pay careful attention to accumulated uncorrected differences noted during substantive testing.

During the planning phase of an audit, the auditor establishes various thresholds of materiality (e.g. Financial Statement materiality, work paper materiality or de minimis) as a way to measure the magnitude of differences noted during fieldwork. Any identified differences below this de minimis threshold are considered to be clearly immaterial or trivial and do not need to be accumulated. The auditor will then aggregate the work paper materiality differences noted during the audit for management to review. It is up to management to decide whether or not to make adjustments to the books for those differences proposed by the auditor. If management decides not to make the changes, these differences are aggregated and presented to the Audit Committee as a Summary of Audit Differences.

Common SADs in mutual fund audits relate to differences in methodology for accounting for accruals and pre-paid expenses and pricing evaluations (whether due to foreign markets being closed on the date of pricing, foreign exchange rates or even the application of fair value factors).

When presented with a Summary of Audit Differences, the Audit Committee should ask any pertinent questions to increase their understanding of the matter while being mindful that these differences are being presented mainly because they are above the auditor’s threshold of what is de minimis to the audit but below Financial Statement materiality. SADs also can help the auditor to facilitate a discussion and possibly present recommendations to the Audit Committee. But it’s important to note that if the audit differences presented truly were material to the Financial Statements they would have been brought to the attention of management and the Audit Committee during the audit fieldwork.

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