The Why and How of Auditing: A Blog Series about Basics

This series will make you more efficient as you become better informed

Do you audit by forms? Do you struggle with what forms to use—and which ones to leave out? Do you sometimes feel like forms create a maze, and you can’t get out? If yes, you are not alone.

The Why and How of Auditing

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While forms such as risk assessment, audit planning, and audit programs all are necessary, they can cause us to lose our way. To gain clarity, sometimes we need to go back to the basics.

Each year Vince Lombardi held a football up and said, “This is a football.” Then he’d begin teaching fundamentals to the best players on the planet. He knew that to win, his players had to understand blocking, tackling, passing, running.  Understanding the basics brings clarity, and that’s what I’m after in the “The Why and How” of auditing—to remove the fog of following forms. 

The Why and How of Auditing

Here’s an overview of the upcoming posts:

  • The Why and How of Acceptance and Continuance
  • The Why and How of Risk Assessment
  • The Why and How of Fraud Auditing
  • The Why and How of Audit Planning
  • The Why and How of Auditing Cash 
  • The Why and How of Auditing Receivables/Revenue
  • The Why and How of Auditing Plant, Property, and Equipment
  • The Why and How of Auditing Payables/Expenses
  • The Why and How of Auditing Payroll
  • The Why and How of Auditing Debt
  • The Why and How of Auditing Equity
  • The Why and How of Wrapping Up Audits
  • The Why and How of Audit Communications
  • The Why and How of Project Management

Lucy says to Charlie Brown, “I’ll hold the ball, and you kick,” but as Charlie Brown leans into his launch, Lucy pulls away. You know the result: Charlie Brown, lying on his back. 

Some audit procedures look appealing. They call for you to kick. But they are a waste of effort and energy. They leave you staring into the blue sky. We need to know what is best—and necessary. In the coming weeks, I will provide the bare minimum of what auditors need to do. So, join me in the journey.

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Subscribe to my blog so that you won’t miss any of these posts. (See the blue box below.) I will email you each week’s information. (You can easily unsubscribe at any time. You’ll see the blue unsubscribe at the bottom of each email.) Whether you are a seasoned audit professional or you are just starting out, this information will make you a more powerful auditor

The Skinny on No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash

If a company has restricted cash, your cash flow statement will change

FASB issued ASU 2016-18 in November 2016. This standard changes the way restricted cash is shown in cash flow statements.

Here’s the skinny on the new standard. (To download the slidedeck, click here.)

If you like accounting and auditing videos, consider joining us at CPA Scribo’s Facebook group. (I do a couple of Facebook Live videos each week that don’t show up here on my blog.) To join, click here.

New Peer Review Report Language for Peer Reviews Commencing after December 31, 2016

The AICPA Peer Review Board approved changes to the peer review standards in its November 14, 2016 Open Session. The changes are effective for peer reviews commencing on or after January 1, 2017. The key changes are as follows:

  • New peer review report language
  • New representation letter language (this is the representation letter you sign at the conclusion of your peer review)

The new peer review reports looks more like our present audit opinions. Here’s an example.

Peer Review Report with a Peer Review Rating of Pass in a System Review

Report on the Firm’s System of Quality Control

October 31, 2017

To the Partners of Smith & Jones, LLP and the Peer Review Committee of the North Carolina Association of CPAs.

We have reviewed the system of quality control for the accounting and auditing practice of Smith & Jones, LLP (the firm) in effect for the year ended June 30, 2017. Our peer review was conducted in accordance with the Standards for Performing and Reporting on Peer Reviews established by the Peer Review Board of the American Institute of Certified Public Accountants (Standards).

A summary of the nature, objectives, scope, limitations of, and the procedures performed in a System Review as described in the Standards may be found at aicpa.org/prsummary. The summary also includes an explanation of how engagements identified as not performed or reported in conformity with applicable professional standards, if any, are evaluated by a peer reviewer to determine a peer review rating.

Firm’s Responsibility

The firm is responsible for designing a system of quality control and complying with it to provide the firm with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects. The firm is also responsible for evaluating actions to promptly remediate engagements deemed as not performed or reported in conformity with professional standards, when appropriate, and for remediating weaknesses in its system of quality control, if any.

Peer Reviewer’s Responsibility

Our responsibility is to express an opinion on the design of the system of quality control and the firm’s compliance therewith based on our review.

Required Selections and Considerations

Engagements selected for review included an engagement performed under Government Auditing Standards, including a compliance audit under the Single Audit Act, and an audit of an employee benefit plan.

As a part of our peer review, we considered reviews by regulatory entities as communicated by the firm, if applicable, in determining the nature and extent of our procedures.

Opinion

In our opinion, the system of quality control for the accounting and auditing practice of Smith & Jones, LLP in effect for the year ended June 30, 2017, has been suitably designed and complied with to provide the firm with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects. Firms can receive a rating of pass, pass with deficiency(ies) or fail. XYZ & Co. has received a peer review rating of pass.

Bobbye Kelly & Associates

Key Highlights from the 2016 Fraud Survey: Association of Certified Fraud Examiners

The Association of Certified Fraud Examiners conducts a biennial fraud survey titled Report to the Nations on Occupational Fraud and Abuse.

Fraud Survey

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Key Fraud Survey Statistics

Here are some statistics from the 2016 report:

  • The most common detection method is tips — 39% of fraud was detected by tips
  • The median loss per fraud case is $150,000
  • 41% of fraud cases are not referred to law enforcement (mainly due to fear of bad publicity)
  • The typical organization loses 5% of its revenue to fraud
  • Large organizations are more apt to use antifraud programs than small ones
  • Banking, governments and manufacturing suffer the largest losses (and in that order)
  • The average fraud exists 18 months before detection
  • Fraud schemes lasting more than 5 years caused a median loss of $850,000
  • 82% of the entities in the survey underwent audits
  • 95% of the time the fraudster took efforts to conceal the theft
  • Fraud losses increase with the number of people involved in the theft
  • Most fraudsters are first-time offenders (with only 5% having been previously convicted of theft)
  • The typical fraudster is:
    • Male (69%),
    • Middle-aged (30 to 50 years of age),
    • Educated (60% had college degrees), and
    • Works with the organization for a number of years
  • 19% of the frauds involved owners or executives resulting in median losses of $703,000
  • Only 8% of the frauds were committed by an employee with less than one year of employment
  • Billing schemes such as fictitious vendors continue to cause significant losses
  • 23% of the fraud cases were for more than $1 million dollars

See the complete ACFE survey here.

See my fraud prevention book on Amazon here.

Eight Ways to Increase Your Efficiency and Productivity as a CPA

Responses to my poll shows that CPAs are more interested in efficiency than making more money

How can you increase your efficiency as a CPA?

Suppose you have a magic wand that allows you to change one thing in your CPA firm. What will it be? The poll response is “Get work done more efficiently.” This response is almost twice as high as “Make more money.”

So how can you be more efficient?

Increase Your Efficiency as a CPA

Ways to Increase Your Efficiency as a CPA

Here are eight ways to be more efficient:

  1. Hire great employees
  2. Stay on one job and finish it
  3. Work on one project at a time
  4. Take breaks
  5. Close your door
  6. Take CPE before you need it
  7. Maintain a robust research library
  8. Buy top-quality computers, monitors, and scanners

1. Hire Great Employees

Have you noticed that great employees overcome problems, even the thorniest ones? They don’t make excuses. They simply get work done. And these gems get work done in less time. Hiring the right people is your most significant action.

2. Stay on One Job

Starting and stopping. Starting and Stopping. Starting and Stopping. A sure recipe for inefficiency. Plan your employees’ work so that they can stay on one job until complete. Momentum is everything. Reward employees when they meet deadlines (and tell them ahead of time that the “thank you” is coming).

3. Work on One Project at a Time

Too often we try to multitask, but the research shows that we can only perform one action at a time. Clear everything from your desk but the immediate task. Then focus on that one thing. Turn off social media and the phone. Answer emails in batches at predetermined times during the day, but no more than four times a day.

4. Take Breaks

Taking breaks increases your efficiency. This is counterintuitive but true.

Picture from AdobeStock.com

Picture from AdobeStock.com

The human brain is not designed to work endlessly without diversion. Use the Pomodoro technique or some other method, but take periodic short breaks–at least one an hour. If you are a partner, tell your team members that you desire for them to take breaks. Your employees will follow your example.

5. Close Your Door

What does an open door communicate? “Come on in.” What does a cracked door communicate? “You may come in but knock.” What does a closed door communicate? “Please do not come in.” An open door is an invitation to interruptions. 

If you are someone that employees need to visit often, then establish an open door policy for specific times of the day.

6. Take CPE Before You Need It

When you know you will need certain knowledge in the future, take a CPE class so you have the answers before they are needed. You’ve got to take CPE anyway, so why not take classes that provide timely information.

7. Maintain a Robust Research Library

Finding answers quickly is a key to efficiency–and we all have questions. Spend the money to have online access to research material in the areas that you practice. I know this is more difficult for small firms, but without sound answers, we are walking in the dark.

Also, archive your research in the cloud. Doing so will, over time, enable you to build a powerful library of questions and answers. For four years, I have stored my research in Evernote. So when I encounter issues, I often remember that I previously researched the issue. And I know the answer is in my Evernote library.

Joining the Center for Plain English Accounting (CPEA) has been helpful to my firm. The CPEA provides timely summaries of new standards, enabling me to digest the constant flood of new standards.

8. Buy Top-Quality Computers, Monitors, and Scanners

How much time do you spend waiting on your computer to respond to your most recent request? Those seconds–and sometimes minutes–are wasted time. Buy computers with as much speed as you can afford. This is not a place to be penny foolish.

Multiple monitors will make you more efficient. (I use four.) Larger monitors will make you even more efficient.

Keep a scanner next to your desk. I use my Scansnap scanner several times a day. Scanning enables me to keep my desk and office more orderly. Also, scanning into a PDF can make the documents searchable if you use optical character recognition (OCR). Once searchable, then just type control f for find and then type in the words you are looking for.

Other Ideas

What about you? What do you do to increase efficiency?

Check out my previous efficiency post.

Parts of SSARS 23 are Effective Immediately: See What They Are

SSARS 23 affects compilation and review reports

SSARS 23, Omnibus Statement on Standards for Accounting and Review Services–2016, was issued in late October 2016, but parts of the standard are applicable immediately.

SSARS 23 Changes Effective Now

The two key changes effective immediately are:

  1. An update of compilation and review report language regarding supplementary information
  2. You must now report departures from the applicable financial reporting framework in the compilation report
SSARS 23

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1. Update of Compilation and Review Report Language for Supplementary Information

The compilation and review report language regarding supplementary information changed with the issuance of SSARS 23.

Compilation Report Supplementary Information Language

The compilation report language regarding supplementary language is as follows:

Compilation Report Language for Supplementary Information Subject to Compilation Procedures

The accompanying [identify the supplementary information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management. The supplementary information was subject to our compilation engagement. We have not audited or reviewed the supplementary information and do not express an opinion, a conclusion, nor provide any assurance on such information.

Compilation Report Language for Supplementary Information Not Subject to Compilation Procedures

The accompanying [identify the supplementary information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management. The supplementary information was not subject to our compilation engagement. We do not express an opinion, a conclusion, nor provide any assurance on such information.

Review Report Supplementary Information Language

The review report language regarding supplementary language is as follows:

Review Report Language for Supplementary Information Subject to Review Procedures

Other Matter

The accompanying [identify the supplementary information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from, and relates directly to, the underlying accounting and other records used to prepare the financial statements. The supplementary information has been subjected to the review procedures applied in our review of the basic financial statements. We are not aware of any material modifications that should be made to the supplementary information. We have not audited the supplementary information and do not express an opinion on such information.

Review Report Language for Supplementary Information Not Subject to Review Procedures

Other Matter

The accompanying [identify the supplementary information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management. We have not audited or reviewed such information and we do not express an opinion, a conclusion, nor provide any assurance on it.

2. Disclose Departures in the Compilation Report

SSARS 21 allowed CPAs to report departures from the applicable financial reporting framework either in the notes or in the compilation report. SSARS 23 requires that such departures be reported “in a separate paragraph” in the compilation report. In other words, you can no longer just disclose the departure in the notes to the financial statements.

SSARS 21 Book

To see my SSARS 21 book on Amazon, click here.

 

Are You Looking for an Easy-to-Understand Fraud Prevention Book?

Do you lie awake at night wondering if theft is occurring in your organization?

Do you lie awake at night wondering if theft is occurring in your organization? Are you looking for an easy-to-understand guide to fraud prevention?

Find simple but insightful guidance in The Little Book of Local Government Fraud Prevention.

Written by a Certified Public Accountant and a Certified Fraud Examiner with over thirty years experience, you’ll find loads of great ideas to stop fraud dead in its tracks.

Fraud Prevention Book

How This Fraud Prevention Book Empowers You

While the book focuses on local government fraud, you’ll find fraud prevention techniques for nonprofits and small businesses as well.

The books enables you to:

  • Understand what fraud is (and what it is not)
  • Implement powerful fraud prevention techniques
  • Recognize the red flags of theft
  • Understand how frauds occur at the transaction level (e.g., accounts payable fraud)

You don’t have to be a CPA to understand this book–or to use the guidance. The book is useful to laypeople and fraud prevention experts alike.

You will also find transaction-level checklists for implementing internal controls (for example, questions prompting you to evaluate your payroll process).

Be empowered to guard your organization from fraud. See the book on Amazon by clicking here.

Praise for the Book

Here are a few comments from Amazon Reviews:

Bought it this morning and read it all in one sitting. It was clear, concise and kept my attention with practical examples. I often find that some of the books I read on fraud topics are abstract and confusing. This one was just the opposite. Thanks for authoring this book Charles.

Christopher Arsenault

Charles captures key controls required not only in government entities, but all entities and illustrates what can happen in absence of those controls. If you are an auditor, accountant, manager, or board member you will find this information useful.

Donald Vieira

The book highlights several real world case studies of fraud and abuse. This book describes various levels of controls, separation of duties and the value of a Certified Fraud Examiner. Great book!

Paul

It’s Time to Apply FASB’s New Going Concern Standard

This new standard addresses disclosures in companies with going concern issues

It’s time to apply FASB’s new Going Concern standard. In August 2014, the Financial Accounting Standards Board (FASB) issued Presentation of Financial Statements–Going Concern. The standard is effective for annual periods ending after December 15, 2016.

For the calendar year 2016, management needs to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the reporting entity’s ability to continue as a going concern.

Going Concern

Applicable to What Entities?

What entities is the standard applicable to? All entities.

Key Points of the Going Concern Standard

In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued (or within one year after the date that the financial statements are issued when applicable).

Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are available to be issued (or at the date that the financial statements are issued when applicable).

What is Substantial Doubt?

Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are available to be issued (or issued when applicable).

What if Management’s Plans Alleviate the Going Concern Issue?

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):

  1. Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
  2. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  3. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern

What if Management’s Plans Do Not Alleviate the Going Concern Issue?

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the notes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued (or issued when applicable). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:

  1. Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
  2. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  3. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern

Effective Date

The amendments in this standard are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

Audit Standard

For audits, the guidance in AU-C section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, is applicable. This standard requires that auditors evaluate whether there is substantial doubt about the ability of a reporting entity to continue as a going concern for a reasonable period of time and assess uncertainties about the ability of a reporting entity to continue as a going concern.