Well, 2016 is in the books for CPA Scribo.
Here are the top ten 2016 posts (starting with number 10 and moving to number 1)–based on your social shares.
Top 10 CPA Scribo Posts
and drum roll…..
Your Ideas for 2017
If you have an accounting or auditing idea that you’d like for me to address in 2017, please let me know–post a comment. Thanks.
If you’ve never seen The Pros and The Cons website, you should. My friend, Gary Zeune, provides fraud prevention information from the perspective of white collar prevention specialists–and from the dark side (those who steal).
Understanding how fraudsters think and act may be your greatest asset in stopping theft.
Gary provides fraud prevention articles, books, and videos on his website. He has a wealth of knowledge and a strong network of Pros and Cons working with him. If you haven’t heard Gary speak, seek out the opportunity to do so. You can contact Gary at gzfraud@TheProsAndTheCons.com. He and Dennis Dycus (who also works with Gary) are two of my favorite white collar crime speakers.
Gary provides online CPE classes, so if you need some interesting fraud prevention classes here at year-end, check his website out here.
My book, Preparation of Financial Statements and Compilation Engagements (Kindle version only), is on sale for $3.99 through Tuesday (normally $9.99). The book has sample financial statements and engagement letters–and simple-to-follow Preparation and Compilation guidance. You can purchase and download it here: http://amzn.to/2hmGfV1
Peer Review Inherent Risk Questions Revised
Separate inherent risk assessments are not required by GAAS; however, changes to peer review checklists (several months ago) were causing “no” answers (which implies a deficiency) when audit firms did not use separate practice aids to assess inherent risk.
These “no” answers were an unintended consequence of the way the peer review inherent risk questions were worded. (I scratched my head the first time I saw them.) The questions are now revised.
Now the peer reviewer will focus on the risk assessments related to the risk of material misstatement (RMM) (which is the result of the control risk and the inherent risk). The revised questions still ask the reviewer to consider if the RMM is impacted by a less-than-high inherent risk assessment.
The intent of the inherent risk questions, I believe, is to cause the reviewer to consider whether the inherent risk assessment is appropriate and not used to falsely reduce the amount of substantive work.
Remember Inherent Risk x Control Risk = RMM, so an auditor could lessen his response to risk (substantive work) by lowering the inherent risk (without a proper basis for doing so).
What does this mean for you? Make sure you can defend your lower inherent risk assessments (provide a logical explanation for the lower IR assessment).
Client acceptance and continuance may be the most important step in an audit, but it’s one that gets little attention. A prospective client calls saying, “Can you audit my company?” and we respond, “sure.” While new business can be a good thing, relationships need appropriate vetting. Not doing so can lead to significant (and sometimes diastrous) problems.
My daughter recently met a young man on Instagram. Not unusual these days. But now the relationship is entering into its third month. They talk every day for two or three hours. So far, they have not been in the same room—and not even in the same city. Skype, yes. Physical presence, no. That’s happening at the end of this month. (He lives eight hours away.)
So what do Mom and Dad think about all of this? Well, it’s fine. My wife checked him out on Facebook (I know you’ve never done this). And my daughter has told us all about the “fella” and his family. We like what we’re hearing. He has similar beliefs. He has a job (Yay!), and he has graduated from college. His family background is like ours.
Why do we want to know all the details about the young man? Because relationships impact people—my daughter, the young man, and their family members and friends. We want what is best for my daughter because we want her to be happy.
And that’s what good relationships create. Happiness. The same is true with clients. As Steven Covey said, “think win, win.” When the customer wins and your CPA firm wins, everyone is happy. Mutual needs are met.
Careless CPAs accept business with only one consideration: Can I get paid?
While getting paid is important, other factors are also critical.
Here are a few things to consider:
- Are they ethical?
- Are you independent?
- Do you have the technical ability to serve them?
- Do you the capacity to serve them?
Are They Ethical?
I want my daughter to marry a guy with beliefs that correspond with who she is. Is he honest? Would he steal? Is he transparent? Who are his associates? What do others think of him?
We ask similar questions in accepting a new client. Audit standards require us to consider whether the prospective client has integrity. If the company is not morally straight, then there’s no need to move forward.
Are You Independent?
The time to determine your firm’s independence is the beginning—not at the conclusion of the audit. As a peer reviewer, I can tell you that some firms don’t fully vet their independence. Consider what happens—during a peer review—when a firm is not independent, and it has issued an audit opinion. The original audit report will be recalled, and I’ll bet the company asks for and receives a full refund of the fee. Oh, and there’s that impact on the peer review report.
Pay attention to nonattest services—such as preparation of financial statements—that you are requested to provide. If the client has no one with sufficient skill, knowledge, and experience to accept responsibility for such services, you may not be independent.
Do You Have the Technical Ability to Serve Them?
If you can pick up a client in an industry in which you have no experience, should you? Possibly, but it depends on whether you can appropriately understand the client and their industry before you conduct the engagement. Some new customers may not be complicated. In those cases, CPE may get you into position to provide the audit.
But what if the potential engagement involves a highly sophisticated industry and related accounting standards for which you are ill equipped? It may be better to let the engagement go and refer it to an audit firm that has the requisite knowledge. Or maybe you can partner with the other firm.
Do You Have the Capacity to Serve Them?
A prospective client calls saying, “Can you audit my company? We have a December 31 year-end, and we need the audit report by March 31.” After some discussion, I think the fee will be around $75,000. But my staff is already working sixty hours a week during this time of the year. Should I take the engagement?
My answer would be no unless I can create the capacity. How? I can hire additional personnel or maybe I can contract with another firm to assist. If I can’t create additional capacity, then I’ll let the opportunity pass.
Far too many firms accept work without sufficient capacity. When this happens, corners are cut, and staff members and partners suffer. Stuffing—even more—work into a stressful time of the year is not a wise thing to do. You’ll lose people, and if the engagement is deficient, peer review results may be subpar.
When you don’t have the capacity to accept good clients, consider whether you should discontinue service to some present customers.
The Continuance Decision
Quality controls standards call for CPAs to not only develop acceptance procedures, but we are to create continuance protocols as well. I previously said CPAs often don’t give proper attention to acceptance procedures. So, how about continuance decisions? Even worse. It’s as though—once we accept a client—we permanently retain them.
Each year, we should ask, “If this was a new client opportunity, would I accept them?” If the answer is no, then why do we continue serving them?
Here are a few questions to ponder:
- Has the client paid their prior year fees?
- Am I still independent?
- Does the client demand more from me than the fee merits?
- Do I enjoy working with this client?
- Is the client’s financial condition creating additional risks for my firm?
- Is the client acting in an ethical manner?
Each year, well before the audit starts, ask yourself these questions. And then consider, is the bottom 10% of my book of business keeping me from accepting better clients? My experience has been that when I have the capacity, new business appears. When the capacity is lacking, I don’t. The decision to hold on to bad clients is a decision to close the door to better clients. Don’t be afraid to let go.
Risk Assessment Starts Now
When should we start thinking about risk assessment? Now.
Whether you are going through the initial acceptance procedures or you are making your continuance decision, start thinking about risk now. Assuming you accept the client, you’ll be a step ahead as you begin to develop your audit plan. Ask questions such as:
- How is your cash flow?
- Do you have any debt with covenants?
- Who receives the financial statements?
- Has the company experienced any fraud losses?
- How experienced is management?
- Why are you changing auditors?
Keep these notes for future reference and audit planning.
Next Post in this Series
The above is the first post in “The Why and How of Auditing.” My next post will be “The Why and How of Risk Assessment.” Subscribe to my blog to make sure you don’t miss anything.
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.
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 Property
- 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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FASB issued ASU 2016-18, Statement of Cash Flows, 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.)
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