Audit Planning Analytics for First-Year Businesses

How to create planning analytics when there is no prior year

How do you create audit planning analytics for first-year businesses? We commonly compare current year numbers to the prior period, but, in this case, there are no prior year numbers. What other options are available?

Audit Planning Analytics for First Year

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Planning Analytics for First-Year Businesses

Audit standards don’t require the use of any particular analytics, so let’s think outside the box (of comparing current and prior year numbers). There are at least four alternatives:

  1. Nonfinancial information
  2. Ratios compared to industry averages
  3. Intraperiod totals (e.g., monthly or quarterly)
  4. Budgetary comparisons

How can we use nonfinancial information?

AU-C 315, paragraph .A7 states:

Analytical procedures performed as risk assessment procedures may include both financial and nonfinancial information (for example, the relationship between sales and square footage of selling space or volume of goods sold).

First Option

So one option is to compute expected numbers using nonfinancial information. Then compare the calculated numbers to the general ledger to search for unexpected variances.

Second Option

A second option is to calculate ratios common to the entity’s industry and compare the results to industry benchmarks. While industry analytics can be computed, I’m not sure how useful they are. An infant company often will not generate numbers comparable to more mature entities. But we’ll keep this choice in our quiver, just in case.

Third Option

A more useful option is the third–comparing intraperiod numbers. First, discuss the expected monthly or quarterly revenue trends with the client before you examine the accounting records. The warehouse foreman might say, “We shipped almost nothing the first six months. Then things caught fire. My head was spinning the last half of the year.” Does the general ledger reflect this story? Did revenues and costs of goods sold significantly increase in the latter half of the year?

Fourth Option

The last option we’ve listed is a review of the budgetary comparisons. Some entities, such as governments, lend themselves to this alternative; others, not so–those that don’t adopt budgets.


So, yes, it is possible to create useful risk assessment analytics–even for the first year of operation.

Remember: planning analytics are for the purpose of detecting risk. If the numbers don’t line up as expected, then you have a risk indicator. It is here that you may need to respond with substantive procedures.

Other Ideas?

What planning analytics do you perform for first-year audit clients?

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Episode 9 – Ten Ways to Prevent Small Business Fraud

You can lessen the threat of fraud even when you can't segregate accounting duties

10 Ways to Prevent Small Business Fraud

10 Ways to Prevent Small Business Fraud

Many small businesses think they can’t prevent fraud. Why? There are not enough people to segregate accounting duties. Also, small businesses may feel like they don’t know how to prevent fraud (even if they had more people). 

Here are ten ways to lessen the threat of fraud regardless of your company’s size. But these suggestions are even more important for the small business that has a limited number of employees.

Check these suggestions out to save yourself plenty of heartaches.

Backdoor Payroll Theft of Withholdings

This relatively unknown fraud can be dangerous

The Theft

Gertrude, the payroll clerk, intentionally overpays state withholding taxes by $25,000. She then amends her own W–2 so that it includes the excess payment (the $25,000 is added to her state withholding total). Once Gertrude files her personal state tax return, she receives an extra $25,000. In effect, she is using the state government as a funnel for theft.

In this business, Gertrude processes payroll, files all related payroll tax reporting information, makes payroll withholding payments and records payroll entries in the general ledger—not uncommon in a smaller organization. Also, no second person reviews the W-2s before mailing.

Backdoor Payroll Fraud

Picture is courtesy of

The Weakness

One person is performing all payroll functions, so her actions are not visible to anyone else. Also, no second person–in addition to Gertrude–is reviewing the W-2s before filing.

The Fix

Have someone outside the payroll department review and mail the W-2s. (If the W-2s are returned to the payroll clerk, she could change them.)

The Power of Story in Teaching CPAs

Storytelling enhances communication, but most CPE classes are void of narrative. CPAs need more than information. We need (at least some) emotion.

This post provides information about the power of story in teaching CPAs.

Power of Story in Teaching CPAs

The Power of Story in Teaching CPAs

Think of your last educational class, particularly the slide deck. You recall the presenter saying, “Here’s all the information I have regarding variable interest entities.”

And the bullets began:

  • A variable interest entity is …
  • Obligation to absorb…
  • Scope exceptions include…

It’s here you said to yourself (in a Steve Martin tone), PLEEEASE!

Speakers must first remember we are talking to human beings, people with passion and fears and heartbeats. (Yes, CPAs qualify.)

If a speaker’s goal is to transfer knowledge, what’s the best way to do so? Start with a story.

I hear your rejoinder now, “About variable interest entities?”


VIEs are not tantalizing. But dig deeper and you will find the story. (There’s always a story.)

Start with Story

In searching for the spice, you ask yourself questions. Why do the VIE standards exist? What events led to their creation? The result: a story to wet your audience’s appetite.

In teaching the class, you start with Enron and its use of special purpose entities. You describe the immeasurable damage done by Ken Lay and his lieutenants, and that Mr. Lay never served a day of time–his life cut short just before sentencing. You tell the tantalizing story of the courageous whistle-blower, Sherron Watkins (a Time Magazine Person of the Year). And since your audience is full of CPAs, your Arthur Andersen vignette does not fall on deaf ears.

Boring? Not you.

Your story creates context and breathes life into an otherwise tedious set of standards.

Now your listeners are receptive.

The Formula

So your formula is: Story, then content. Create appetitive. Then feed.

Following this path, you find your audience listening, even leaning forward.

Brain Rules

John Medina, in his book, Brain Rules, suggests that teachers “bait the hook” every ten minutes. Medina says, “After 9 minutes and 59 seconds, the audience’s attention is getting ready to plummet to near zero.” Stories are one of those hooks. The book goes on to say, “Fear, laughter, happiness, nostalgia, incredulity–the entire emotional palette can be stimulated, and all work well.”

Brain Rules lists three elements of a hook (to engage your class):

  1. The hook has to trigger an emotion.
  2. The hook has to be relevant.
  3. The hook has to go between segments.

Your Suggestions

How do you use stories to enhance your teaching?

Key Fraud Survey Insights from the ACFE’s 2016 Report to the Nation

You can only stop fraud when you know how it occurs

If you are to prevent fraud, you must first know how it occurs. Every two years the Association of Certified Fraud Examiners issues its fraud survey titled Report to the Nation. Below you’ll see key fraud survey insights from the 2016 study.

Key Fraud Survey Insights

Key Fraud Survey Insights

  • A typical organization loses 5% of revenues in a given year as a result of fraud
  • The median loss for all cases was $150,000
  • 23% of the cases involved losses of more than $1 million
  • Asset misappropriation occurred in more than 83% of cases
  • Of the asset misappropriation cases, billing schemes and check tampering schemes pose the greatest risk
  • The median duration of the frauds was 18 months
  • Schemes that lasted more than five years caused a median loss of $850,000
  • In 94.5% of the cases, the perpetrator took some efforts to conceal the fraud (usually creating or altering documents)
  • 39% of the cases were detected by tips
  • Whistleblowers are most likely to report fraud to their direct supervisors (20.6% of cases) or company executives (18%)
  • Approximately two-thirds of the cases targeted privately held or publicly owned companies
  • Corruption is more prevalent in larger organizations
  • Check tampering, skimming, payroll, and cash larceny schemes are twice as common in small organizations when compared to larger organizations
  • Fraud is most prevalent in the following industries: Banks, governments, manufacturing 
  • The presence of anti-fraud controls correlates with both lower fraud losses and quicker detection (33% to 50% more quickly)
  • The most prominent weakness is a lack of internal controls (cited in 29.3% of cases)
  • The perpetrator’s level of authority is strongly correlated with the size of the fraud
  • More occupational frauds originate in the accounting department (16.6%) than in any other business unit
  • The more individuals involved in an occupational fraud scheme (collusion), the higher the losses tend to be
  • For schemes with five or more perpetrators, the median loss was $633,000
  • One of the more common red flags was the fraudster was living beyond his or her means
  • Only 5.2% of perpetrators had previously been convicted of a fraud-related offense
  • In 40.7% of cases, the victim organizations decided not to refer their fraud cases to law enforcement

The Dangers of a Trusted Bookkeeper

Many small businesses have unknown threats

So your business has a wonderful bookkeeper, Joan Hardison. Just last week you told your banker, “Joan does such a good job, I don’t have even think about my bookkeeping.” But does your trust create potential dangers–some that might be significant?

Dangers of a Trusted Bookkeeper

Bookkeeping Password

Is Joan the only person with the password to your bookkeeping software? If yes, why? Oh, she’s trustworthy. I see. But can she control when he dies?

If Joan is hit by a bus and passes from this earth, can you access your bookkeeping information?

If your company has years of bookkeeping information and Joan is the only person with the password, then you may lose it all. Yes, you have the printed copies of your financial statements, but the details of your financial life may be lost forever. 

Intentional Destruction of Bookkeeping Information

Here’s another threat. Joan becomes angry.

Well, now she can intentionally destroy your financial records. In some systems, this is as simple as hitting a delete key. So provide the bookkeeping password to multiple people (if the system does not allow multiple users). If a bookkeeper leaves, remove that person from the system as soon as possible. Sabotage is an ugly thing. 

Also, consider the potential for harm if your bookkeeper is the administrator in your bookkeeping software. He or she controls who gets in and who can’t. It may be wise to make someone other than the bookkeeper the administrator, or–if the system allows–set up two administrators. Main point: Don’t allow one person (the bookkeeper) to control everything.

Additionally, back up your data, or use a cloud service that does this for you. 

The Threat of Theft

Oh, and here’s one more danger: Theft.

Many small businesses trust their bookkeeper too much, not reviewing what the person is doing. This is a recipe for fraud.

If your bookkeeper prints your checks, then she can write checks to herself, can she not. And if she alone reconciles the bank statement, then you really have a problem. She may be the only person that sees cleared checks. If you’re the business owner, you may be thinking, “But I’m the only authorized check signer.” Good luck with that. I’ve seen plenty of forged checks.

As I tell my clients, “Trust your mother but cut the deck.”

Too many small business owners fail to review the work of their bookkeepers, and these businesses often are not audited. Since the bookkeeper knows no one is watching (and that no one will), it’s easy to steal. What’s the solution?

While not a silver bullet, have the bank statements mailed to the small business owner (or someone other than the bookkeeper). Have this person open the bank statements and review the cleared checks. Thereafter, provide the bank statement to the bookkeeper. This simple step can save you. Now, the bookkeeper knows someone is paying attention, and your risk of theft is diminished. 


So, if you have a trusted bookkeeper, great! But you still need to do the following:

  • Provide the bookkeeping password to more than one person
  • Backup your bookkeeping information
  • Have your bank statements mailed to someone other than the bookkeeper