Just Exactly What Kind of Audit Am I Getting (Part I)
Posted by Ms. Cheryl Ehmann, AVP Staff Analyst, Credit Union Resources, Inc on 7/24/2017

Exactly what kind of audit am I getting?  Is there really more than one kind?

All credit unions, whether federal or state charters, must have a review of the books to determine the financial statements are fairly presented once a year.  Pretty basic right?  But what can satisfy that requirement can vary widely. 

There are four kinds of acceptable audits – a certified opinion audit, an agreed upon procedures engagement (also called a Supervisory Committee Annual Review), a balance sheet audit, and a report of examination of internal control over call reporting.

Because I have never seen the last two alternatives performed, this discussion will deal with the first two alternatives.

Credit unions with assets of $500 million or more must have a certified opinion audit.  Smaller credit unions can also opt for this type of audit.  Pros for this option are that most people feel comfortable with the idea of a CPA performing the work, and clients feel that if a mistake is made they can easily sue and recover a judgement. Cons include the fact that this is usually much more expensive because the CPA firm has to cover so much overhead, primarily professional liability insurance, and the fact that the work is not as detailed.

Of course if anyone performing your review is negligent you can sue – regardless of whether they are licensed or not.  The probability of a judgement depends on the egregiousness of the negligence and the facts of the case.  The likelihood of a recovery is primarily based on the level of insurance carried by the provider – so as part of your due diligence always make sure the company you choose has professional liability coverage.

A CPA license does confer a presumed level of competence – you at least had to be able to pass the test, right?  I myself have a CPA license and understand the level of knowledge necessary to pass the exam.  However, because of the cost, credit unions make up a very small percentage of CPA clients.  Even though the fee seems large to you, it is relatively small to the firm, so they are likely to assign the most inexperienced staff to a credit union audit.

One factor that comes into play is the fact that a CPA firm is strictly limited in procedures they perform.  They cannot review anything that is considered immaterial – if they do, and there was something that was larger than the item reviewed that could have indicated fraud, they could be sued.  So they are very careful to only review what falls within their scope.  Unfortunately nowhere is materiality defined in professional literature or regulation, so each firm’s idea of materiality is different.   Also, a CPA firm performs a lot more statistical and trend analysis, and less testing of transactions.  If an area does not appear to be out of the norm, it may not be reviewed.

There is nothing wrong with the CPA approach – it is simply important that you understand what you are getting.

The majority of credit unions opt for an agreed upon procedures engagement, or a Supervisory Committee Annual Review.  There is a huge range of services provided in this area.

The NCUA has issued a Supervisory Committee Guide, which is considered the minimum list of procedures that must be performed for a review to be considered acceptable.  Many groups are offering this option because it involves much less field work (thus saving time and money) and is more profitable for the group.  Again, as long as you are aware what you are getting, this is not a problem.  However, the Supervisory Committee is responsible for any testing not performed by the audit group.  You must insist on a detailed engagement letter spelling out exactly what steps will be performed, so that you know what you are responsible for.  

Some groups, such as Credit Union Resources, also offer other engagements.  We call ours a full scope engagement.  This engagement involves testing not included in the minimum procedures scope and is much more thorough.  The cost is a little more, but you get far more in additional work than in additional fees.

The difference between minimum procedures and a full scope engagement is striking.  You may not realize the vast difference if you do not read the engagement letters carefully. 

In my next blog I will address these differences in more detail – but for now, just remember to READ READ READ the engagement letters.  Be an informed consumer – that can only benefit your credit union.  Ask any question that comes to mind – if your group is not willing to answer your questions, that is a huge red flag.

Categories: Financial & Auditing
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