"Independent Auditing Practice Announcement No.2-Management Proposal" (hereinafter referred to as Practice Announcement No.2) stipulates that management proposal refers to the written suggestions made by certified public accountants for major internal control defects that may lead to major misstatements or omissions in the accounting statements of the audited entity. By definition, the major control defects described in management proposal may lead to misstatement or omission of accounting statements, thus affecting the accuracy of audit opinions. Therefore, when issuing management proposal, certified public accountants should fully consider the impact on audit opinions.
On the one hand, there may be risks of inaccurate audit opinions, such as whether the major defects mentioned in the management proposal have led to unadjusted major errors in accounting statements, but the audit report has not disclosed them; On the other hand, there may be the risk of insufficient audit evidence due to insufficient implementation of audit procedures, such as the major control defects mentioned in the management proposal that may be utilized, but the full and complete audit procedures are not fulfilled, and only a small and representative sample size or other tests are used to replace the substantive tests that should be performed. The following case 1 can further prove the potential risks of certified public accountants when major control defects are found.
Case 1: Certified Public Accountant A mentioned in the management proposal that the reconciliation of bank deposits of Company A was completed by the cashier, who retrieved the statement from the bank and prepared the balance reconciliation table. The accountant only made a simple review of the reconciliation table, but did not carefully review the outstanding items. The CPA suggested that Company A send an independent third person to finish the bank reconciliation seriously. Two months later, Company A discovered that the cashier had absconded when it planned to adopt the advice of the certified public accountant. Only after accounting reconciliation did it know that the cashier had written cash checks privately for many times by stealing the official seal, and the accumulated unpaid amount reached 5 million yuan by the reconciliation date, of which 3.5 million yuan had been lost by the end of the annual report audit. The management of Company A believes that CPA A knows that there are major defects in the company's bank reconciliation system. In the audit, the audit procedures such as the audit of the bank statement and bank inquiry are still completely dependent on the cashier, and no one is sent to participate in the letter confirmation. The audit of the bank statement is too hasty, which makes the management fail to discover the cashier's fraud in time, and the accounting firm and CPA should bear the responsibility for gross negligence. Later, through the coordination of lawyers, the difference between accounting responsibility and auditing responsibility was emphasized, and the responsibility of certified public accountants was exempted. However, this matter affected the professional reputation of accounting firms and certified public accountants A, and destroyed the long-term cooperative relationship with relevant customers.
Second, the rationality of the proposal
The verification function of audit makes it easy to form an unequal communication relationship between certified public accountants and audited units, while the simple service function of management proposal will solve this problem and keep a long-term cooperative relationship between certified public accountants and customers. Therefore, as a means of service, management proposal should avoid the following two problems in order to make management "interested" in reading it:
(a) regardless of the primary and secondary problems, weight and blindly piled up. Too much emphasis on the possible details in management, rather than considering whether the problem can attract enough attention from the management authorities. As mentioned in Practice Announcement 2, the internal control defects reflected in the management proposal can be arranged according to their influence on accounting statements. When there are many internal control defects, the common writing order is to collect them according to the importance of business items first, and then sort them according to the importance of control defects of the same business item.
(B) unrealistic, regardless of the cost of control. The labor cost and time cost of the operation link should be considered in the additional business control, and the new cost and out-of-control cost should be weighed when making suggestions. When necessary, certified public accountants can emphasize the loss of funds or physical assets caused by major fraud that will occur when it is out of control. At the same time, certified public accountants should further understand whether the reasons for the lack of control of some key control points are caused by the quality, professional knowledge and relationship with management. At this point, the CPA should further evaluate the impact of relevant deficiencies on the whole control process, so as to put forward more reasonable and targeted control suggestions.
Third, the expression of the proposal
The external audit report is a standard, template-typed and simplified report. The audit report standards stipulate the styles such as scope paragraph and opinion paragraph, and also standardize some wording of the report. Except for a few standard paragraphs, most of the contents of the management proposal are independently completed by certified public accountants. Therefore, the expression of management proposal further tests the professional ability of certified public accountants. Below, the author explains the expressions that are common in practice and have a certain professional tendency.
(1) Quotation of figures. Based on the habit of auditing, certified public accountants usually let "numbers" speak for themselves. The citation of figures is necessary and more convincing in evaluating and analyzing the influence of internal control. However, because the management proposal is mainly about the evaluation of internal control, it should be mainly described in words, while figures only play an auxiliary role and should not be used as the main means of description.
(2) Description of the process. In some management proposals, only the consequences of some control deficiencies are emphasized, but the current control measures and key control points of the enterprise are not explained. This statement is not conducive to the management to understand the shortcomings of the original control, resulting in the management proposal is too "theoretical" and not feasible. This situation will affect the effectiveness of the proposed rectification, which is not conducive to the next year's audit work. By comparing the two expressions of case 2, we can see that the second expression is obviously more appropriate and reasonable.
Case 2: In the process of auditing the annual report of Company A in 2004, CPA A found that the capital turnover of Company A was difficult, which was mainly caused by the slow inventory turnover (the inventory turnover days were 60 days last year and 180 days this year). In the further audit, it was learned that the main materials of Company A were steel, etc. Due to the great changes in the market price of steel, the management of Company A believed that it was necessary to increase the safety inventory to reduce the inventory risk.
Method 1: The turnover days of your company's inventory this year are 180 days, which is three times that of the previous year's 60 days. As a result, this year's inventory takes up more funds, which makes the liquidity turnover difficult and affects the short-term financing ability.
Method 2: As the steel market price changes greatly, the management of your company believes that it is necessary to increase the safety inventory to reduce the inventory risk. However, your company's decision to increase the safe inventory to three times that of the previous year did not consider the liquidity turnover. Due to the lack of systematic risk assessment and cost calculation management, your company's inventory management may adversely affect the existing liquidity turnover and further weaken your company's short-term financing ability.
Fourth, communication and correction
(a) the way of communication. Leapfrog and sudden communication may help to establish the authority of certified public accountants in financial personnel and business handling departments. Therefore, some certified public accountants like to use this communication method to achieve a deterrent effect on relevant business departments, which is conducive to the cooperation and efficiency of the audit work in the following year. However, getting the approval of business managers is the basis of upward communication. Once the inaccurate opinions are denied in front of the management, it will damage the authority of CPA's practice, destroy the image of practice, and make unnecessary resistance to future communication. Therefore, the author believes that the communication mode of management advice should be from bottom to top.
(2) the opinions of the management authorities. Practice bulletin 2 stipulates that the recipient of the management proposal is the "management authority". However, in the specific work of an enterprise, the scope of application of the management proposal is not limited to the management authorities, and may be submitted by the management authorities to the board of directors or the shareholders' meeting for consideration. This requires certified public accountants to fully communicate with the management on the defects when issuing relevant management proposals, and at the same time communicate with the control measures to be taken on the related defects. Specifically, the written opinions of management on relevant defects and suggestions can be directly recorded in the management proposal, which is equivalent to giving the management an opportunity to explain in writing, and avoiding sudden communication differences for certified public accountants. Case 3 is a negative case, which further illustrates the importance of written communication.