Part 2: Audit Requirements
To assist private companies in understanding what the auditors will request and review, we have identified some of the relevant auditing standard requirements below.
Management’s implementation plan encompasses many activities—scoping, accounting assessment, solutions development, and other activities. Auditors need obtain an understanding of this plan.
From a scoping perspective, management is expected to have a variety of key processes and controls implemented to identify revenue streams, relevant contract components and features and business practices to support their accounting policy conclusions. Auditors need to understand how management selected contracts to validate the contract components and features identified during the initial scoping phase. Auditors will also need to perform testing to validate management’s assessment in order to provide support to the audit opinion.
From an accounting assessment perspective, the auditing standards require the auditor to obtain an understanding of the entity’s accounting policies including the reasons for any changes in these policies. To do so, auditors will be reviewing management’s documentation to determine if the accounting policies comply with ASC 606, and validating that the company’s accounting complies with those policies.
Internal control considerations
The auditing standards require the auditor to obtain an understanding of company’s internal controls relevant to the audit. Further, the auditor must evaluate the design of the controls and determine whether they have been implemented by performing procedures in addition to inquiry of the entity’s personnel. As a result, management must evaluate how any changes due to the implementation of ASC 606 impact its control environment.
Further, the new guidance requires management to either recast prior-period financial statements presented for comparative purposes (full retrospective method) or record a transition adjustment and provide disclosures of significant changes by financial statement line item (modified retrospective method). Management must have controls and processes in place for either method chosen. Auditors must obtain an understanding of those controls and test to substantiate there is not a material misstatement.
Extensive new disclosures
The extensive new disclosures required by ASC 606 may require companies to update systems, processes, and controls used to develop disclosures. It is important to note that those companies that assert they will experience little or no impact to top line revenue due to adopting ASC 606 will likely still expend a significant amount of effort to comply with the extensive new disclosure requirements. The auditors will need to perform testing in order to substantiate the new disclosures and underlying information used to support those disclosures.
It is important for companies to keep their auditors abreast of implementation issues and progress. The more communication the company and auditors have throughout the implementation process, the less likely it is that surprises will arise.
The following indicators may lead the auditor to conclude that management is behind or failing to execute their implementation plan and, therefore, may necessitate additional work:
- Inability of management to articulate the details of their implementation plan or make progress toward implementing that plan
- Lack of a detailed implementation plan and timeline
- Evidence that key deadlines from the timeline have been missed and that there are neither plans to catch up nor enough time to do so
- Poor tone at the top, including lack of involvement from those charged with governance
Where do we start?
A comprehensive implementation plan that includes the right people across the right functions is critical to a successful implementation of the new guidance. Companies should consider the following action items as they tackle ASC 606:
- Train employees across the organization on ASC 606, and allow employees to help identify impacts to their own functional areas (forecasting, employee benefits, tax, sales teams)
- Develop an overall implementation plan and timeline
- Evaluate competence across the organization, and consider hiring external service providers to assist with the implementation process, as needed
- Inventory all contracts with customers and identify key terms and conditions, as well as any deviations from those standard terms
- For areas of change between existing GAAP and ASC 606, identify cross-functional impacts to the organization (including tax impacts)
- Make any accounting policy elections and document new policies, as needed
- Document and implement any internal control changes
- Identify disclosure gaps that require system updates or changes, and initiate the process to close those gaps
Cullen Walsh, Partner
Grant Thornton Accounting Advisory Services
Want to learn more about how ASC 606 can affect your organization? Cullen Walsh, Partner, Accounting Advisory Services at Grant Thornton and Walt Williams, Director of Revenue Optimization and Strategy at Quadax, presented a webinar, “ASC 606 - Lessons Learned and What You Need to Know.” Watch On-Demand.
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