Competencies of Future Auditors: What to Expect

Leroy Dennis

When you decided to major in accounting in college, it may have been because you excelled in math, were good at posting debits and credits, or just liked working with numbers. As you have become engaged in our profession, you probably have discovered that accounting and auditing involve much more. Auditing isn’t what it used to be…and auditing as we know it today isn’t what it will be in the future, either.

Lately, there has been discussion in professional circles about what skills will be required of an auditor down the road. The question is: What technical expertise and proficiencies will auditors need to have in the next three to five years that will enable them to perform an effective and efficient audit? When I talk with audit and accounting leaders throughout the United States about this issue, I consistently hear some of the same expected future requirements for auditors:

• With the impending application of the new risk assessment standards, auditors will need to adopt a critical-thinking approach to each audit. This will include a more robust understanding of the client’s business risk assessment process and how the client responds to identified risks. Skills that will be needed to do a better job of assessing risk include deeper business knowledge and industry expertise. Also, increased skepticism will be important. The auditor will need to identify inherent risks and control risks to determine the risk of material misstatement in the financial statements. Most importantly, the auditor must be able to document the linkage of the assessed risk at the assertion level with the design of audit procedures.

• The risk assessment process will drive a greater focus on the understanding of internal controls, and most internal controls are not manual controls any more. Because errors in processing data are often the source of material financial statement misstatements, auditors are going to need a deep understanding of IT controls for relevant assertions.

• Auditing for the risk of material misstatement due to fraud will be interwoven in the risk assessment process. Auditors will need to be better at making inquiries and at applying data extraction to identify suspect transactions or journal entries. More training related to fraud will be needed to improve interview and forensic skills. Professional skepticism will still be necessary, but it will need to be combined with technical abilities to dig deep and follow up thoroughly on identified red flags.

• Misapplication of accounting principles is one of the main causes of material financial statement misstatements. Auditors need to have a desire for in-depth training on accounting standards that affect the companies they serve. Auditors must become more of an expert in very technical accounting matters because you can’t audit a transaction without understanding the proper accounting for it. However, before delving into the details of the accounting literature, auditors first need to fully understand the terms and substance of complicated transactions.

• Fair value measurements in financial statements are becoming prolific, and specialists are often needed as part of the related audit procedures. It is becoming more important for every auditor to be more knowledgeable about the principles of valuation so as to be able to conclude about the appropriateness of the methods and assumptions used by the specialist. We must be appropriately trained so that we can consider whether the specialist’s findings are reasonable in the circumstances.

Auditors of the future have got to be hands-on with all of these requirements, whether they serve large complex clients or smaller clients. In planning training programs, firms will need to look both in the crystal ball and the mirror to ensure that their training includes the appropriate curriculum related to these skills. But instruction is only as good as the person learning it. Each professional needs to have a desire to expand his or her own technical capabilities.

Perhaps this outlook on expected auditor competencies is daunting, especially when it is already difficult for some firms to attract and retain enough talent to keep up with growth opportunities. I believe, however, that if auditors become even more focused on industry and technical expertise, we will continue to be respected as an important element of the U.S. capital markets. After all, while on the surface auditor competencies appear to deal with audit-related issues, in reality these competencies are addressing important economic concerns of companies — business risks, internal controls, fraud, and accuracy — just to name a few.

Leroy Dennis is the executive partner of assurance services of McGladrey & Pullen, LLP. Dennis serves on the AICPA Center for Public Company Audit Firms Executive Committee, the SEC Advisory Committee on Smaller Public Companies and the Public Company Accounting Oversight Board’s Standing Advisory Group.

AZ CPA – July/August 2006

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