Control - Manager reviewing a report for 'reasonableness' 1454



  • Interesting replies. I guess my concern was also to do with testing. How do you test the control when the basis is purely someone’s experience and gut instinct. This has been addressed partly by harrywalden. Thanks for that.
    Milan, my email address is hawkinge_babe_at_yahoo.com 🙂



  • To add my tuppence worth:

    1. You have to be careful with ‘reasonableness reviews’ in terms of what risks you are mapping them to. If that review is relatively cursory it may not be sufficiently well designed to meet some risks. You do need to consider what level of error that the control mayr easonably be expected to prevent or detect.
    2. Management review, in general, can benefit from a more formalised description of the control. Not least because a manager may not carry out all the checks that they intended due to time pressure or just forgetting a component. However, in my experience, this can almost always be adressed by giving consideration to the evidencing of the control e.g. developing a month-end checklist for the controller, one of the tasks being to review report x for a, b and c.


  • Hi Mocha - I made some editorial changes to my original post and this might read a little better.
    As a bottom line, Reasonableness checking can’t be on assumptions or best guesses, but it’s going to take some digging into the numbers and checking other systems that feed into the process to ensure there’s quality in the #'s. As Denis wisely shares the responsible areas might need some complementary help on this as well.
    Good luck on this 🙂



  • If the only review of the financials is that of the CFO or Controller and there are no steps in the review to verify the validity of the numbers, then I would say that the control design is not effective.
    However, if multiple clerks prepare account reconciliations that are reviewed in detail by their supervisors, who, in turn prepare financial statements that are reviewed by their managers prior to submission to the Controller or CFO for a final review, then one might concur that the cursory review for reasonableness by the Controller or CFO is adequate.
    In isolation, it is hard to draw a conclusion as to the effectiveness of any one control. Taken in context with other controls, it is much easier.



  • following on from Kymike - as our company has lots of ‘lower level’ controls on journals, postings etc once it reaches the CFO he just ‘reviews for reasonableness’
    We have ended up providing a checklist for all the parts he reviews each month/quarter/year to ‘prove’ he does the review.
    Frankly this is to keep the externals happy … - as they know he does the review - internally seems a bit of a farce and is going back to the bad old days of producing paperwork for the sake of it… 8O
    keep plugging away.
    Andrew



  • Hi Mocha,
    Please write back with your email and I can send you some discussion items on use of analytical procedures and documentation requirements.
    I will not post here or forward to others since I do not know the source of the materials.
    Milan
    Hi Milan
    Sorry to be a bother but I haven’t received the info on analytical procedures and documentation requirements? the email address again is hawkinge_babe_at_yahoo.com Please note there is an underscore between the hawkinge and the babe.
    Much appreciated
    Mocha



  • If the only review of the financials is that of the CFO or Controller and there are no steps in the review to verify the validity of the numbers, then I would say that the control design is not effective.
    However, if multiple clerks prepare account reconciliations that are reviewed in detail by their supervisors, who, in turn prepare financial statements that are reviewed by their managers prior to submission to the Controller or CFO for a final review, then one might concur that the cursory review for reasonableness by the Controller or CFO is adequate.
    In isolation, it is hard to draw a conclusion as to the effectiveness of any one control. Taken in context with other controls, it is much easier.
    Hi Kymike
    In this case which would you consider to be the ‘key’ control? I would have thought the review by managers prior to submission to the Controller or CFO and not the CFO’s review. What do you think?



  • In general, I would think that the review of the financials by the managers would be considered more of a key control than that of the CFO. They are closer to the day-to-day transactions than the CFO or Controller would be and generally will review the financials in more detail than would the Controller or CFO. In general, you look for evidence of manager reviews at the account reconciliation or transaction levels.
    The review by the Controller or CFO is generally more important related to the thoroughness of the financials as they may be aware of events that have occurred, but possibly have not been recorded (i.e., decisions to close/sell certain locations leading to impairment charges, settlements of lawsuits, severance agreements, etc.) that are generally confidential in nature up to a certain point before being communicated to the accounting team to record. They also generally look at the financials from a big picture perspective and will question trends in the business which the managers will have to explain as they are closer to the accounting details. These types of reviews generally take place in monthly or quarterly close meetings where the managers will present results to the Controller or CFO and discuss unusual transactions, accounting issues or variances to forecast or prior year. I would suggest that these types of reviews by the Controller or CFO be documented by retaining a meeting calendar for the year (these are generally regularly-scheduled meetings), meeting agendas or presentation decks and a list of invitees or attendees (generally available by keeping the email invites). Trying to document these controls via meeting minutes (quite often not kept) or initials on presentations to evidence reviews is generally cumbersome, especially for a high-level control. I look at this as a communication type of control that is part of entity-level controls.



  • Hi Mocha,
    I apologize but I just saw your earlier message with your e-mail address and request. I forwarded the information requested to the email address noted in your earlier message.
    The guidance provides additional clarity on auditor documentation requirements when analytical procedures are performed during the planning, testing, and reporting phases of an audit.
    Although the guidance applies to analytical procedures conducted in an external audit of the FS, the material should be helpful and addresses the overall documentation requirements and consideration of judgmental factors such as management reviews.
    Regards,
    Milan



  • Got it, Milan. Thanks so much for that. It will be v useful.


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