Four Elements of an Audit Point—Really?

Good writing at work requires addressing the issues before anything else. The auditing world nicely illustrates this truth. The general operating principle for auditors is that an audit point includes four elements: criteria, condition, cause, and effect. These elements attempt to answer the following questions:

• criteria — By what standards is the auditor assessing the situation?
• condition — What is the situation?
• cause — Why does the condition occur?
• effect — To what risk does the condition expose the auditee? 

Here is an example:

XYZ Corporation should pay invoices within 30 days of the invoice date (criterion). XYZ pays invoices on average 45 days after the invoice date (condition) at the direction of management (cause). This delinquency could lead to poor vendor relations and subject XYZ to costly, time-consuming litigation (effect). 

But auditors should think twice if they believe that this audit point is comprehensive. They may need to consider other elements:

• method — How did the auditor determine the condition?
• limitation — What prevented the auditor from conducting a more thorough assessment?
• finding — How would the auditor summarize the condition?
• recommendation — What should the auditee do about the condition?
• follow-up — How will the auditor address this finding in a future audit?

Let's see how the narrative has to change once these additional elements appear in the same audit point:

We examined a random sampling of 400 invoices and disbursements of the 1,975 total transactions (20.3%) of XYZ's West Coast office for the period January 15, 2014 to February 14, 2014 (method). Given the two-day audit schedule, we were unable to review a larger sampling or a longer period, and we did not review XYZ's East Coast office at all (limitation).

Our review shows that XYZ's West Coast office's Account Payable Department is delinquent in disbursing funds (finding). XYZ should pay invoices within 30 days of the invoice date (criteria). In the sample, XYZ paid invoices on average 45 days after the invoice date (condition) at the direction of management (cause). This delinquency could lead to poor vendor relations and subject XYZ to costly, time-consuming litigation (effect).

XYZ management should develop a mitigation plan to pay invoices within the contractually committed period and present it to the auditor within 30 days of this report (recommendation). In 90 days, we will return to XYZ to audit Accounts Payable disbursements for this criterion (follow-up).

The seasoned auditor would rightly say that even more elements exist (e.g., auditee response, aberrations, benefits), so less experienced auditors must understand that the four-element template is there just as a jumpstart, not as a complete formula.