What auditors should keep in mind when taxes and laws change
November 25, 2024
As a new presidential administration takes shape, the potential for substantial shifts in tax laws and other financial regulations is top of mind for auditors. Audit professionals at all levels must be prepared to assess, evaluate, and respond to these changes, all while keeping clients’ needs at the forefront.
Let’s take a look at some key considerations to keep in mind as your work to ensure your audit process is both compliant and resilient in an evolving regulatory landscape.
1. Reassess inherent and material misstatement risks
When tax and legislative changes occur, one of the primary considerations for auditors is to revisit the audit’s risk assessment. Tax law changes can introduce new complexities and alter financial positions, requiring a reevaluation of the inherent risks and the risk of material misstatement.
In particular, auditors should look for:
New significant risks. Legislative changes can introduce complexities that weren’t previously material, leading to potential misstatements. Be sure to identify any areas where tax changes might significantly impact financial statements.
Risk of non-compliance. New tax laws may also impose requirements or deadlines that clients aren’t fully prepared for, leading to potential penalties or liabilities that can affect their financial position. Ensure compliance risk is incorporated into your audit assessments to avoid surprises.
2. Evaluate significant estimates
Tax changes often impact accounting estimates, particularly deferred tax assets, uncertain tax positions, and potential tax credits. These estimates require an understanding of how new laws will influence the realization and measurement of tax-related accounts.
Deferred tax assets and liabilities. Shifts in tax rates can impact the valuation of deferred tax assets and liabilities. Be sure to assess whether deferred tax balances require adjustments, as new tax rates may increase or decrease their value.
Uncertain tax positions. Changes in tax laws can raise questions about how certain positions will be treated under the new regulations. Auditors should evaluate any potential adjustments in how uncertain tax positions are recognized, measured, and disclosed.
Remember to work closely to understand the assumptions and judgment areas related to these estimates, ensuring they reflect the most recent tax law interpretations.
3. Disclosure requirements for tax rate changes
When tax laws change, disclosure requirements often follow suit. Entities may need to disclose how new tax rates or laws will affect their financial position and future tax obligations.
Disclosure of tax rate impacts. If there are notable changes in tax rates, companies may be required to disclose the expected impact on deferred tax balances. As an auditor, you must ensure that such disclosures are made accurately and in accordance with accounting standards.
Future tax obligations. For some entities, changes in tax law may lead to increased or decreased tax liabilities in the coming periods. Confirm that your clients include these forward-looking considerations, especially if there are substantial tax rate impacts on earnings or cash flow.
Remember: As an auditor, you play a key role in verifying that disclosures are both accurate and complete. These disclosures provide stakeholders with critical information on how legislative changes may affect the company’s future financial health.
4. Consider a tax specialist to help manage complexity
Legislative changes often result in tax complexity that requires specialized knowledge beyond the typical scope of an audit team. With complex tax treatments, it’s wise to engage a tax specialist to support the engagement.
Evaluate complex tax areas. Changes may affect how certain transactions, like mergers and acquisitions or cross-border activities, are taxed. Having a specialist on board can provide insights into specific transactions or structures, ensuring they are accounted for correctly under the new legislation.
Avoid misinterpretation of tax codes. Tax specialists can help interpret nuanced changes to the tax code, ensuring that both the client and the audit team fully understand how new tax laws apply to their unique circumstances.
Amidst shifting tax legislation, incorporating a tax specialist’s expertise into the engagement can improve accuracy and audit quality.
5. Harness the power of AI and cloud-based audit technology
AI-powered tax technology can help auditors quickly identify the risks that come with changing tax legislation by analyzing large volumes of data and flagging areas that could affect a client’s financial position.
Enhance your risk assessment with AI-powered analytics. Cloud-based audit technology allows audit teams to standardize and update procedures instantly, ensuring consistency across engagements. This flexibility is essential for adapting to new tax laws quickly and at scale. AI algorithms can analyze historical tax data and past client filings to identify trends and patterns, helping you assess the potential impact of new tax laws on a client’s risk profile.
Real-time risk alerts. AI-powered tax research tools embedded in audit platforms can continuously monitor regulatory updates, issuing alerts for legislative changes that might pose new risks or opportunities for misstatements. Using AI-driven insights allows auditors to proactively reassess inherent risks and plan audit adjustments more efficiently.
By enhancing risk assessment, encouraging real-time collaboration, and harnessing AI-driven compliance tools, auditors can respond to tax and regulatory changes proactively and efficiently.
Tax planning in a changing political landscape
Amidst an evolving tax landscape, audit professionals must remain informed and agile. By reassessing risks, evaluating estimates, ensuring accurate disclosures, and of course, engaging AI-powered technology, your audit team can confidently guide clients through any changes that may come their way.
[Thomson Reuters]
