What can the management board and the supervisory board expect from the auditor?

This article answers the following questions:

• What can the management board and the supervisory board expect from the auditor?
• What objectives must be achieved by an auditor performing a statutory audit of financial statements?

A financial statement audit gives an organisation an opportunity to look at its internal processes from a fresh perspective, so it is hardly surprising that the bodies involved in this process want to use the auditor’s visit to obtain information that is important to them. At times, however, the expectations of the various corporate bodies do not fully align. 

Fortunately, although cooperation with the management board and with the supervisory board requires different approaches from auditors, the ultimate goal appears to be the same in both cases – namely to carry out the audit in a way that delivers broadly understood added value. What can be covered by this added value?

What needs do auditors encounter when auditing financial statements?

The management board of a company acts as a kind of agent appointed by the owners to run the business on their behalf, whereas auditors are appointed to confirm that the financial statements prepared by the management board do not contain material misstatements. Cooperation with an audit firm will therefore naturally be assessed differently from the perspective of the management board, which deals with day‑to‑day operations (and expects more from the audit than just a confirmation of figures), than from the perspective of the supervisory board, which is interested in the results (and the audit committee, which serves the interests of the entity's owners).

For management boards, the key expectations towards auditors conducting a statutory audit of financial statements typically include: 

• pointing out errors made by individuals responsible for financial reporting,
• identification of tax risks,
• streamlining business processes within the organisation.

As we can see, the management board tends to expect tasks that go somewhat beyond the scope of a statutory audit and often fall within the responsibilities of internal audit conducted as part of risk management. It is therefore unjustified to blame the auditor for not undertaking such in‑depth procedures – consistent with professional judgement, due care and professional scepticism – and for the fact that, during a later tax inspection, errors in accounting may be identified and the entity may be required to pay, for example, additional income tax.

Meanwhile, supervisory boards and audit committees primarily expect the audit to deliver: 

• information on fraud,
• a summary of risks related to possible dishonesty of the management board,
• a summary of risks that may lead to a breach of the going‑concern assumption,
• information on the quality of internal controls,
• information on material misstatements in the financial statements and on the risks affecting owners or a broader group of stakeholders as a result of such misstatements.

Who does the auditor report to and what do they report?

Differences between the expectations of the groups concerned about the company’s condition mean that auditors often find themselves between a rock and a hard place: 

• on the one hand, they must fulfil their mission – to issue an opinion addressed to the owners and the supervisory board confirming that the financial statements:
  • present a clear and fair view of the company’s financial position and financial performance,
  • comply with applicable laws, accounting principles and the company’s articles of association,
  • have been prepared on the basis of properly maintained accounting records,
• on the other hand, they must cooperate “operationally” with the management board, which also has its own expectations – not always consistent with those of the owners. 

All of the auditor’s work must be performed in accordance with professional standards and good practice in order to comply with methodological requirements and the expectations that Polish supervisory authorities impose on statutory auditors.

It is also worth noting that if a company does not have a supervisory board, this does not mean that it lacks a governance body entirely.

Audit standards require auditors to identify those who are charged with governance (TCWG). This role does not have to be performed by a single person – it may be a group or a specific body. The auditor communicates with TCWG, among other things, to present:

• significant difficulties encountered during the audit,
• significant matters identified during the audit,
• a broad view of qualitative aspects of the accounting policies applied by the entity. 

The audit is a test not only of the accuracy of accounting records but also of the effectiveness of communication

During a financial audit, it is essential for both the management board and the supervisory board to clearly understand the purpose of the audit. To make this possible, mutual expectations should be aligned through a tripartite exchange of views – ideally before the audit is commissioned, not once it has already started. 

This allows management boards, supervisory boards and audit committees to more easily define expectations towards the auditor and to assess the cooperation in a constructive manner – precisely through the lens of what the auditor can (and should) deliver, taking into account the role of each party involved.