Monthly Archives: February 2017

How to Solve Accounting Problems Quickly

By Charles Hall | Accounting

Do you ever need to solve accounting problems quickly?

I often hear the words, “Hey Charles, I’ve got a quick question,” and they launch into their issue, hopeful I can look into my crystal ball and give them an answer. As it turns out, I do have one. I keep it on my desktop. You probably have one too.

Most CPAs, when confronted with an accounting Gordian Knot, begin their quest to cut through the problem with their mighty sword–the GAAP Guide. Ah, an excellent choice for sure, but is it the best place to start? Or how about the granddaddy of them all? The FASB Codification. Another fine choice, but it’s an 800-pound gorilla. So where’s the best place to start? The crystal ball.

And what is the crystal ball? It’s your disclosure checklist.

You say, “but it’s just a laundry list of accounting requirements.” Yes, but it’s a great pointer (to answers).

To solve accounting problems quickly, do a word search in your disclosure checklist. My checklist is in Word, so I use the find feature (click control, find) to locate a keyword. Try to use a unique word where possible–such as noninterest or contingent. You may have to click next a few times to locate the relevant text. Once you find the relevant text, the pathway to your solution lies before you: the checklist provides you with the applicable FASB Codification ASC section (e.g., 850-10-50-5). You can key the number in the FASB Codification or your research library to find your answer.

Now you can provide a quick answer to that difficult question (and look like a genius). When your peers ask, “How did you find the answer so quickly?” Tell them, “My crystal ball.”

Confirmation of Receivables: Is It Required?

By Charles Hall | Auditing

When is the confirmation of receivables required?

Confirmation of Receivables is Usually Required

AU-C 330 paragraph 20 states the following:

The auditor should use external confirmation procedures for accounts receivable, except when one or more of the following is applicable:

1. The overall account balance is immaterial.
2. External confirmation procedures for accounts receivable would be ineffective.
3. The auditor’s assessed level of risk of material misstatement at the relevant assertion level is low, and the other planned substantive procedures address the assessed risk. In many situations, the use of external confirmation procedures for accounts receivable and the performance of other substantive procedures are necessary to reduce the assessed risk of material misstatement to an acceptably low level.

If receivables are material and confirmation procedures will be effective, then confirmations must be sent. (Normally, the existence assertion related to receivables is moderate to high. So, 3. above is not in play.)

When are Confirmations Ineffective?

AU-C 330.A56 states:

External confirmation procedures may be ineffective when based on prior years’ audit experience or experience with similar entities:

• response rates to properly designed confirmation requests will be inadequate; or
• responses are known or expected to be unreliable.

If the auditor has experienced poor response rates to properly designed confirmation requests in prior audits, the auditor may instead consider changing the manner in which the confirmation process is performed, with the objective of increasing the response rates or may consider obtaining audit evidence from other sources.

Alternative Procedures When Confirmations are not Sent

What audit procedure should be performed if confirmations are not sent? Usually, the auditor will examine cash collections after the period-end. Care must be taken to ensure that the subsequent collections examined relate to receivables that existed at period-end and not to sales occurring after period-end.

Required Documentation When Confirmations are not Sent

AU-C 330.31 states that “the auditor should include in the audit documentation the basis for any determination not to use external confirmation procedures for accounts receivable when the account balance is material.” So, it is not sufficient to simply state that the use of confirmations is ineffective. We should state that we tried to confirm receivables in a prior year without effective results or that we tried to confirm receivables for clients in a similar industry, but without effective results.

The auditor should include a memo to the file or add comments on the receivables work paper explaining why confirmations were not sent.

See my post: Auditing Receivables and Revenues.