CPA Firm Research: Five Tips to Make Your Life Easier

Do you ever feel like you just can't find an answer to a difficult problem?

Do you ever find it difficult to solve accounting, auditing, or tax problems? In this post, I offer five tips to aid you in your CPA firm research. These suggestions will make your professional life easier.

CPA Firm Research

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1. Firm Knowledge Base

When you perform your research for tax or accounting and auditing issues, consider archiving the research in a central location. If another person or department within your company has already spent five hours finding an answer, why not make that information available to everyone? Three ways you can store research include:

  1. One Word file
  2. Folders in a server location
  3. A database (e.g., Evernote)

Use One Word File

For sole practitioners, this can be as simple as placing all research in a single Word file on your network. Storing research in this manner makes the information electronically searchable. So when the issue comes up again, you just perform an electronic search (from the Word Home tab, click Find, type in your keyword, click Find Next).

Use a Folders in a Server Location

A second alternative is to store information in folders on a server location. Decide how to classify your archived research (e.g. auditing, tax, accounting). Then ask all firm members to save their research using the same categories and location (e.g., a particular network drive in the research folder). This can be as simple as creating a folder for each category, such as accounting, auditing, tax. Subfolders can be used as well. A better solution, however, is the use of a database.

Use a Database

Consider archiving this information in a database that is accessible to all personnel. I use Evernote as my digital library. With Evernote, you can also use notebooks and tags to store your information. Think of notebooks as folders. So if you have folders, why tags? Well, they provide another way to retrieve information, regardless of the folder. I provide an overview of notebooks and tags in Evernote for CPAs. I also encourage you to check out Michael Hyatt’s post about his Evernote file structure. 

Standardized Consultation Form

Also, consider creating a standardized consultation form. This form might include:

  1. Issue to be Resolved
  2. Persons Inquired of
  3. Professional Standard Citations
  4. Conclusion
  5. Person Performing the Research
  6. Sign-Off by Partner
  7. Concurring Partner Sign-Off (if required by your firm)

Click Consultation Form for a sample document.

Scanning System

If you want to convert your paper research files into electronic copies, here’s a post regarding the development of a scanning system. See the post regarding how you can make your paper files electronically searchable using optical character recognition. Here is an example (youtube video) in Adobe Acrobat. I recommend the Fujitsu iX500 scanner (click picture to see on Amazon).

2. AICPA Hotline

I can’t count the times I have used the AICPA Hotline, a free service (for AICPA members). Usually, I send an email with my question and receive a phone call from the AICPA representative within 24 hours. Click here for technical hotline contact information (phone number or technical inquiry form). You will also find contact information for the ethics hotline here.

I have found these experts to be extremely knowledgeable and helpful. Are there any downsides? Yes. The technical hotline will not provide you with a written response (by letter or email), but they do provide verbal answers and sources (e.g., FASB Codification section) so you can document your research.

If you desire written responses to your technical questions, consider joining the Center for Plain English Accounting (CPEA). My firm joined about two years ago, and we have found the Center to be quite helpful and worth the money.

3. Hire (or Contract With) a Technical Research Specialist

When you can, appoint a person or department to handle your internal research issues. A person who does plenty of research will naturally be more efficient and knowledgeable. In my firm, my department–Quality Control–is the designated research center. So we field questions often. 

If you can’t hire someone internally, consider establishing a relationship with an external technical person to assist you. (I do so on a fee-basis for a few firms. My email is chall@mmmcpa.com.) 

4. Firm Library

Where you can, buy quality research material. (My firm uses Thomson Reuters and AICPA resources–mainly audit guides. We also subscribe to the FASB Codification.) These publications help you sleep better at night and save you time.

Learn the most efficient ways to use your particular vendor’s electronic research tools.

Boolean operators can be helpful. I can, for example, perform a search of all of our licensed A&A publications (presently about 40) and look for every instance of interest rate swap located within ten words of the word derivative. What’s the result? A list of each publication where the condition exists. Then I can drill down within any of those publications. 

5. Disclosure Checklists – A Crystal Ball

You can electronically search a disclosure checklist to quickly find sources of related research material (e.g., FASB references). I previously blogged about using your disclosure checklist as a crystal ball to expedite your research.

What About You?

How do you perform research efficiently? Please share your tips.

 

Peer Reviews: Avoiding Independence Problems

Peer reviewers are finding plenty of issues regarding independence (and documentation)

Peer reviewers continue to hammer independence and related documentation. So it is vitally important that we not only be independent but that we also properly document its presence. My prior independence post pointed out that peer review checklists require reviewers to examine your independence documentation. This short video provides tips regarding independence and staying out of the dog house.

CPA Scribo Facebook Group: Join Now

If you are interested in some dialog about accounting and auditing issues, I invite you to join my new Facebook group: CPA Scribo.

Why the group? I believe this will give you a community where you can engage with other CPAs and accountants on a one-on-one basis. The communication will be more free-flowing than my blog.

So join and share a thought, a pain, a victory, a challenge, a question. I look forward to getting to know you better.

It’s a closed group, so you will need to ask to join.

The link to join is: https://www.facebook.com/groups/1260820653952216/?ref=bookmarks

How to Create New Accounting Products and Services

Here are steps to ensure the success of your new projects

This is a guest post by Harry Hall, the Project Risk Coach. Harry is a speaker, teacher, and blogger who helps leaders and project managers get results. Harry has managed projects–mainly for insurance companies–for more than 17 years. He also teaches project management courses to CPA firms. Harry lives in Macon, Georgia with his wife Sherri. He can be found on LinkedIn.

Are you wondering how to create new accounting products and services? In this post, I’ll explain how.

how to create new accounting products and services

Imagine an accounting firm (we’ll call it Premier CPAs) that has struggled in recent years. Revenue is down, and the firm has lost several top clients. To make matters worse, the firm recently received a fail report in its peer review.

The partners recently met and were brutally honest with one another. Something has to change.

Premier CPAs has a great team of auditors. However, they are failing to understand their client’s needs, and they are not changing their business model accordingly. Over time, competing CPA firms have created superior products and services.

The partners selected a team to go offsite and develop a strategic plan. The group was challenged to perform an assessment of where the firm is and where it needs to go.

The top strategies identified were to:

  • Implement a more modern auditing software solution
  • Map and re-engineer Premier CPAs’ audit processes
  • Implement a small customer service center

How to Make Your Dreams Come True

Great ideas, but how do we make them a reality? It’s easy to talk about things, but it’s another matter to plan and execute new ideas.

Well, you could do this like many lack-luster firms. Just do the projects willy-nilly. Do it as you have time. Find a few warm bodies who are not busy to do the work. Maybe assign the activities to the IT guy.

Will you get there? Maybe, but how long will it take? How much further will you fall behind your competition?

Take a different approach. Focus on your goals and strategies. Be intentional.

How to Create New Accounting Products and Services

The following steps can put you on a fast track to greater success:

  1. Define your projects. In the initiation of your projects, define them with project charters. Spell out the problems you are attacking, your goals, what you will deliver, the assumptions of the project, the constraints of the project, key stakeholders, top risks, and who will serve on the project team.
  2. Assign project sponsors. Select partners and senior management who will define and cast the vision for the projects. These leaders should have the authority to provide resources and money to complete the projects. While the project team does most of the work, the sponsors are ultimately responsible for ensuring success (and should be held accountable).
  3. Create project teams. One of the most important things you can do for your projects is to staff the teams. Carefully select individuals who have the knowledge and skills to deliver the project in a timely manner. There will likely be some opportunity cost in this equation. You may have to assign some audit personnel to perform the project work.
  4. Kick off projects. Get your project team and key stakeholders together for the project kick-off. The sponsors should share their vision for the project. The individual leading the project (i.e., project manager) should review the project charter, ensuring that everyone understands the project and their roles.
  5. Monitor progress. The project managers should periodically meet with their team members to check the status of the project and to plan their next steps. The project managers report to the sponsors, and in some firms, the sponsors report to senior management and partners. Doing so provides transparency throughout the firm’s leadership.
  6. Celebrate success. Create a robust project culture by celebrating when teams hit milestones or complete projects on time and under budget. Thank your teams.
  7. Perform benefits realization. How do we ensure that the projects produce the desired results? Measure your results at designated times (e.g., six months and twelve months after the completion of each project).

Parting Words…This Is NOT Easy

These steps may require a significant transformation in the firm’s culture. Changing what people believe, their attitudes, and their behavior is the toughest part of creating a productive project culture.

First, leadership is required, not optional. Without a firm hand, people will fall back into old bad habits. The senior leadership team of the firm must consistently communicate their expectations and lead by example. Make sure there is a high level of accountability with appropriate rewards and recognition for high performing teams.

Second, train your teams in project management. At a minimum, identify and train individuals who will serve as project managers. You may want to get a project coach to work with your firm. Many progressive firms require their project managers to get project management certifications.

Lastly, all of these actions must be performed with an eye on your firm’s strategic goals and objectives. Make sure the changes align and support your vision, mission, and goals.

Your best days are ahead!

Financial Statement References (at the Bottom of the Page)

What financial statement page references are required?

What wording is required at the bottom of financial statement pages? Is there a difference in the references in audited statements and those in compilations or reviews? What wording should be placed at the bottom of supplementary pages? Below I’ll answer these questions.

financial statement references

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Audited Financial Statements and Supplementary Information

First, let’s look at financial statement references in audit reports.

While generally accepted accounting principles do not require financial page references to the notes, it is a common practice to do so. Here are examples:

  • See notes to the financial statements.
  • The accompanying notes are an integral part of these financial statements.
  • See accompanying notes.

Accountants can also–though not required–reference specific disclosures on a financial statement page. For example, See Note 6 (next to the Inventory line on a balance sheet). It is my preference to use general references such as See accompanying notes.

Audit standards do not require financial statement page references to the audit opinion.

Supplementary pages attached to audited financial statements should not include a reference to the notes or the opinion.

Preparation, Compilation, and Review Engagements

Now, let’s discuss references in preparation, compilation, and review engagements. 

Compilation and Review Engagements

SSARS 21 does not require a reference (on financial statement pages) to the compilation or review report; however, it is permissible to do so. What do I do? I do not refer to the accountant’s report. I just put See accompanying notes at the bottom of each financial statement page.

You are not required to include a reference to the accountant’s report on the supplementary information pages. SSARS 21 does suggest that such references be included in case the financial statements or supplementary information are separated from the compilation or review report. Examples include:

  • See Accountant’s Compilation Report.
  • See Independent Accountant’s Review Report.

What do I do? I include a reference to the accountant’s report on each supplementary page.

Preparation of Financial Statement Engagements

SSARS 21 provides an option (to compilations) called the preparation of financial statements (AR-C 70), a nonattest service. AR-C 70 requires that the accountant either state on each page that “no assurance is provided” or provide a disclaimer which precedes the financial statements. AR-C 70 does not require that the financial statement pages refer to the disclaimer (if provided), but it is permissible to do so. Such a reference can read See Accountant’s Disclaimer.

If your AR-C 70 work product has supplementary information, consider including this same reference (See Accountant’s Disclaimer) on the supplementary pages.

SSAE 18: The Clarified Attestation Standards

Effective May 1, 2017

SSAE 18 is effective on May 1, 2017, and changes the Attestation Standards.

Do you issue any attestation reports such as agreed upon procedures? If yes, then be aware of the recent changes from the Auditing Standards Board (ASB). The ASB has clarified the Attestation Standards. The ASB did the same with the audit standards a few years ago; that change resulted in the AU-C (clarity) designations for audit standards.

SSAE 18

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The re-write of the Attestation Standards culminated in the April 2016 issuance of SSAE 18.

SSAE 18 supersedes all Attestation Standards other than:

  • AT section 701, Management’s Discussion and Analysis (MD&A). AT section 701 will not be clarified because practitioners rarely perform attestation engagements to report on MD&A; it will be retained in the attestation standards in its current form. AT section 701 has been renumbered as AT-C section 395.

Also be aware that AT section 501 An Examination of an Entity’s Internal Control Over Financial Reporting That is Integrated With An Audit of Financial Statements was moved to the auditing standards as Statement on Auditing Standards (SAS) No. 130, as An Audit of Internal Control Over Financial Reporting That is Integrated With An Audit of Financial Statements.

Just as the ASB did with the audit clarity standards, a “-C” is added to the clarified Attestation Standards. So the clarified attestation standards are identified as AT-C. The clarified standards are written using ASB’s clarity conventions, including:

  • Objectives for each chapter
  • Definitions in each chapter
  • Separating requirements from application and explanatory material
  • Using various formatting techniques such as bulleted lists to enhance readability
  • When applicable, including additional considerations for governmental entities or smaller less complex entities

Attestation Levels of Service

The clarified standards provide for the following types of attestation services:

ServiceAT-C SectionReport Type
Examination205Opinion
Review210Conclusion
Agreed Upon Procedures215Findings

Sample report excerpts follow:

Examination Report on Subject Matter; Unmodified Opinion

In our opinion, the schedule of investment returns of ABC Company for the year ended December 31, 2020, is presented in accordance with the ABC criteria set forth in Note 1 in all material respects.

Review Report on Subject Matter; Unmodified Conclusion

Based on our review, we are not aware of any material modifications that should be made to the accompanying schedule of investment returns of ABC Company for the year ended December 31, 2020, in order for it to be in accordance with XYZ criteria set forth in Note 1.

Agreed-Upon Procedures Report

We obtained the accounts receivable subsidiary ledger as of June 30, 2017, from Topaz, Inc. We compared all customer account balances in the aged trial balance (exhibit B) as of June 30, 2017, to the balances shown in the accounts receivable subsidiary ledger.

We found no exceptions as a result of the procedure.

New SSAE 18 Requirements

In addition to clarifying (restructuring) the attestation standards, SSAE 18 also:

  • Separates the review engagement procedures and reporting requirements from those of examination engagements (and highlights the similarities of reviews performed under the SSAEs and those performed under Statements on Standards for Accounting and Review Services [SSARS])
  • Requires the practitioner to request a written representation letter in all attestation engagements (the pre-clarity standards only required representation letters for certain engagements)
  • Changes the existing requirements related to scope limitations, indicating that based on the practitioner’s assessment of the effect of the scope limitation, the practitioner should express a qualified opinion, disclaim an opinion, or withdraw from the engagement
  • Eliminated compilations of prospective financial information from the attestation standards (the Accounting and Review Services Committee issued SSARS 23 to cover this service)

Effective Date

The guidance in SSAE No. 18 is effective for practitioners’ reports dated on or after May 1, 2017.

For a full copy of SSAE No. 18, click here.

How to Review Financial Statements on Computer Screens

Here are suggestions to help you review financial statements

Today I give you seven steps to review financial statements on computer screens.

I recently provided you with a post titled How to Review Financial Statements Efficiently and Effectively. That article provides information about creating and reviewing financial statements, but it does not provide information about doing so on a computer screen. Many accountants prefer to review physical copies of financial statements. Others prefer to do so on their computer screens. This article is for the latter group.

reviewing financial statements

How to Review Financial Statements on Computer Screens

  1. First, open and visually scan the entire financial statement (spend two to three seconds per page) just to get a feel for the whole product. How do the parts fit together? Are the financial statements subject to the Yellow Book? Do they contain supplementary information? Are the statements comparative?
  2. Second, use a large computer screen (22 inches or more) to compare your financial statement pages. Reduce the financial statement page size by holding the control key down and scrolling back with your mouse. As you do so, you will see multiple statements on the screen, for instance: balance sheet, income statement and cash flow statement.  Now that you can see multiple statements, you can tick and tie your numbers. I use step 2. to compare the financial statement numbers. For example, I compare the net income number on the income statement to the same number on the cash flow statement. Then I use step 3. to compare the financial statements to the notes and the supplementary information.
  3. Next, use two to three computer screens to compare your financial statements with the notes and supplementary information. Open the financial statement on each screen–for instance, the balance sheet on screen 1, the notes on screen 2, and the supplementary information on screen 3. In Word, click View, New Window and another instance of the document will open. Then you can move the new instance to a second screen. Alternatively, you can use the side-by-side feature in Word to place two open documents on one screen. (To see my physical office setup, click here.)
  4. After completing your review of the notes, return to and take a second look at the balance sheet to see if the disclosures are complete. (Since you just reviewed the notes, it’s easier to compare them to the balance sheet. If, for example, you look at the balance sheet and see inventory but no disclosure for the same, you’ll more easily see the error.)
  5. Use the find feature (in Word, click the Home tab, click Find, then key in the number–or word–you are looking for) to locate words or numbers. If you want to compare the long-term debt number on the balance sheet to the notes and to supplemental information, type that number into your search dialog box and you’re immediately taken to the same number in the notes. Click next, and you will see the next instance (in the supplementary information). You can do the same with words. (Note-If you embed Excel tables in the Word document, the find feature will not locate numbers in the embedded tables.)
  6. When needed, take breaks. Never spend more than 1.5 hours reviewing statements without taking a short break. You get more done by relaxing periodically.
  7. Finally, if you are reviewing financial statements in Word, consider turning on Track Changes and key in suggested revisions. Word reflects your modifications in a distinct color–that way, others can see your suggested changes. They can also see who made the suggested corrections. Thereafter, they can accept or reject the proposed changes.

Your Suggestions

Those are my ideas. What are yours?

Tick and Tie Financial Statements

Here are examples of financial statement numbers that tick and tie

What are the steps to tick and tie financial statements?

You may be wondering what “tick and tie” means. It refers the action an accountant performs when he agrees one financial statement number to another.  For example, the accountant can compare total assets with total liabilities and equity–they should be the same. If they are not, something is wrong. This is the purpose of ticking and tieing numbers: to ensure that the financial statements are correct. Accountants also compare financial statement numbers with note disclosures or to supplementary information. Again, many such numbers should agree.

tick and tie financial statements

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Financial statements come in a wide variety of presentation formats depending on the industry and the requirements of the financial reporting framework (e.g., generally accepted accounting principles). Below I provide common numbers that accountants tick and tie (agree), assuming the financial statements include:

  1. Balance sheet
  2. Income statement
  3. Statement of changes in equity
  4. Cash flow statement

The Accounting Equation

Keep in mind the accounting equation: Total Assets = Total Liabilities + Total Equity.  All three (total assets, total liabilities, total equity) appear on the balance sheet.

Also, remember that net income–which appears on the income statement–is the result of subtracting expenses from revenues. In equation form, the formula is Net Income = Revenues – Expenses.

Tick and Tie Examples

Here are the numbers that should agree:

  • Total assets equals total liabilities and equity (the balance sheet includes each of these)
  • Net income on the income statement should agree with net income on the statement of changes in equity
  • Net income on the income statement should agree with the first line on the cash flow statement (assuming the indirect method is used to prepare the cash flow statement)
  • The last line of the cash flow statement is cash; this period-end cash balance should agree with the cash balance on the balance sheet
  • The last line(s) of the statement of changes in equity (the period-end equity balance) should agree with the equity balance(s) on the balance sheet
  • A statement of changes in equity can include multiple columns for each category of equity (e.g., retained earnings, common stock, paid-in capital); each of the ending equity balances should agree with the equity shown on the balance sheet
  • Any payments made to the owners (e.g., distributions) appear on the statement of changes in equity and should agree with the same amount on the cash flow statement (in the financing section of the cash flow statement)
  • If the cash flow statement is comparative (e.g., two-year presentation), the ending cash for the prior year should agree with the beginning cash balance in the current year
  • If the financial statements contain notes, some disclosure numbers will agree with financial statement balances (e.g., the receivables note disclosure will usually include total receivables; this figure should agree with the receivable line on the balance sheet)
  • The plant, property, and equipment note will typically include total depreciation expense for the year; this depreciation expense number should agree with the cash flow statement depreciation line (assuming the cash flow statement is shown using the indirect method)
  • Supplementary information (e.g., a detail of other expenses) should agree with the other expense line on the income statement 

Closing Thoughts

The above list of tick-and-tie numbers is not comprehensive. There are too many variations in financial statement presentations to provide a full universal list. But, hopefully, this helps.

10 Super Easy Ways to Increase Your Productivity

Here are ways for CPAs to be more efficient

Are you a CPA looking for ways to increase your productivity?

Here are ten suggestions.

CPA Productivity

Courtesy of Dollar Photo

1. Control f

First, I see too many CPAs hen-pecking around, trying to find information in their electronic piles. Many times the quickest route to finding information is Control f (Command f on a Mac). Hold your control key down and type f. This action will usually generate a find dialog box–-then key in your search words. Control f works in Excel, Word, PowerPoint, and Adobe Acrobat.

2. OCR Long Documents

Computers can’t read all electronic documents (that is, not all documents are electronically searchable). Sometimes you need to convert the document to OCR. OCR stands for optical character recognition. So how can you make an electronic document readable and searchable?

Scan documents into Adobe Acrobat and use the OCR feature to convert bitmap images into searchable documents. Then use Control f to locate words. When should you OCR a document? Typically when it’s several pages long. Do so when you don’t want to read the entire document to find a particular word or phrase.

For example, suppose your client gives you a one-hundred-page bond document, and you need to locate the loan covenants. Rather than reading the entire document, convert it to searchable text (using Adobe Acrobat) and use Control f to locate each instance of the word covenant

3. Dispatching Paper Quickly

A clean work surface enables you to think clearly.

So make filing decisions quickly–as soon as a paper or electronic document is received. Keep your desk (and computer desktop) clean.

If you can dispatch a document in less than two minutes, do so immediately. For documents that take more than two minutes to file, electronically scan them. Then place the document in an action folder on your computer’s desktop. (If you don’t have time to scan the document at the moment, create a To Be Scanned pile in a paper tray.)

You’re thinking, “But I’ll forget about the document if it’s not physically on my desk.” Allay this fear by adding a task in Outlook to remind you of the scanned document (you can even add the document to a task). I create tasks with reminders. So, for example, the reminder pops up at 10:00 a.m. on Tuesday morning; attached is the relevant document. That way I don’t forget.

For more information about scanning, see my post How to Build an Accountant’s Scanning System. I also recommend David Allen’s book Getting Things Done which provides a complete system for making filing decisions.

4. Close Your Door

An open door says what? Come in.

A cracked door says what? Knock and come in.

A closed door says what? Don’t enter, especially without knocking.

I close my door for about an hour at a time. Additionally, I turn off all electronic devices and notifications. Doing so allows me to focus on the task at hand. 

5. Use a LiveScribe Pen

Do you remember everything someone says in a meeting? I don’t. Livescribe allows me to take notes and simultaneously record the conversation. Then I can hear any part of the conversation. For example, if I–in a meeting–write the words “intangible amortization,” I can (later) touch the tip of my pen to that phrase (in my Livescribe notebook) and hear what was said as I wrote those words. That way, I don’t have to call a meeting attendee and ask, “What did you say about intangible amortization?”

6. Take Breaks and Naps

Another idea is to take breaks and naps.

Counterintuitive? Yes, but it works.

Breaks

I come from the old school of “don’t lift your head up or someone will see how lazy you are.” I’m not sure where this thinking comes from, but you will be more efficient–not less–when you take periodic breaks. I recommend a break at least once every two hours.

Naps

Naps? You may be thinking, “Are you kidding?”

Research shows you will be more productive if you take a nap during the day. It doesn’t have to be long, maybe ten or fifteen minutes after lunch. You’ll feel fresher and think more clearly. According to Dr. Sandra Mednick, author of Take a Nap, Change Your Life, napping can restore the sensitivity of sight, hearing, and taste. Napping also improves creativity.

Michael Hyatt recently listed several famous nappers:

  • Leonardo da Vinci took multiple naps a day and slept less at night.
  • The French Emperor Napoleon was not shy about taking naps. He indulged daily.
  • Though Thomas Edison was embarrassed about his napping habit, he also practiced his ritual daily.
  • Eleanor Roosevelt, the wife of President Franklin D. Roosevelt, used to boost her energy by napping before speaking engagements.
  • Gene Autry, “the Singing Cowboy,” routinely took naps in his dressing room between performances.
  • President John F. Kennedy ate his lunch in bed and then settled in for a nap—every day!
  • Oil industrialist and philanthropist John D. Rockefeller napped every afternoon in his office.
  • Winston Churchill’s afternoon nap was non-negotiable. He believed it helped him get twice as much done each day.
  • President Lyndon B. Johnson took a nap every afternoon at 3:30 p.m. to break his day up into “two shifts.”
  • Though criticized for it, President Ronald Reagan famously took naps as well.

For empirical evidence that naps help, check out the book Rest, Why You Get More Done When You Work Less.

Also, here are more ideas to create energy in your day.

7. Answer Emails and Phone Calls in Chunks

If you pause every time you get an email or a phone call, you will lose your concentration. Therefore, try not to move back and forth between activities. Do one thing at a time since multitasking is a lie.

Pick certain times of the day (e.g., once every three hours) to answer your accumulated emails or calls.

8. Exercise

I run (by myself) or walk (with my wife) six times a week–usually in the morning before work. Exercising helps my attitude and clears my mind. Also, I feel stronger late in the day.

9. Lunch at 11:30 a.m. or 1:00 p.m.

Another idea: Go to lunch at 11:30 a.m. or 1:00 p.m. Why stand in line? 

10. Take One Day Off a Week

Finally, I usually don’t work on Sundays (even in busy season). For me, it’s a day to worship, relax, see friends, and revive. I find the break gives me strength for the coming week.

Muddled minds destroy productivity.

Your Ideas?

These are a few of my thoughts. Please share yours.

The Balance Sheet Audit Approach: Slaying a Sacred Cow

Why the risk based audit approach is better

Sacred cows make great steaks. Richard Nicolosi.

Risk-based audit standards have existed for years, but I still see a resistance to risk assessment procedures. Why? A reliance on the traditional balance sheet audit approach. I think many auditors prefer to test a bank reconciliation (ticking off each cleared transaction) to interviewing the company’s CFO. They enjoy the certainty of vouching payables (yep, the invoice agrees with the payable detail) and disdain the difficulty of walking a transaction through the accounting system. Regardless, many CPA firms struggle to slay the sacred cow of balance sheet audits.

What is a Balance Sheet Audit?

So what is a balance sheet audit approach?

It’s the examination of period-end balance sheet totals (the results of accounting processes) rather than the accounting processes themselves. For example, the auditor might confirm receivables and not perform a walkthrough of billing and collections. The balance sheet audit approach lacks any significant focus on the income statement.

While it is true that nailing down (or “beating up”) the balance sheet provides helpful audit evidence, there are some downsides.

The Downside of Balance Sheet Audits

So what are the weaknesses of a balance sheet audit approach?

First, the balance sheet approach does not address the income statement. Consequently, income statement line items may be misclassified (e.g., expenses netted with revenues). If the balance sheet is correct, net income (the result of revenues and expenses) is correct. But revenues and expenses can still be misclassified. (I once saw grant revenue of $300,000 netted with related grant expenses resulting in a $0 impact to revenues and expenses.)

Secondly, and more importantly, the balance sheet audit method does not address the possibility of theft (and some forms of fraudulent reporting of revenues and expenses). Sure we can confirm cash and reconcile the balance to the general ledger. So what? If someone steals $1 million in cash receipts (or $10 million or whatever number you want to use), the balance sheet approach may not address the risk of theft.

The same is true if the CFO steals money by cutting checks to himself (or to fictitious vendors). The accounts payable balance can be reconciled to a detail, and a search for unrecorded liabilities can be performed–typical balance sheet audit steps–but these procedures don’t address theft.

Finally, audit standards require walkthroughs, fraud inquiries, planning analytics, and an understanding of the business. Without these steps, we cannot truly understand audit risks that lie hidden in accounting processes.

balance sheet audit

Picture from AdobeStock.com

The Upside of Risk-Based Audits

I still believe that auditors can save time using a risk-based audit approach.

Understanding the business and its processes requires time, but doing so can lead to a leaner audit. You can decrease some substantive procedures when you know where your risks are. We can also mitigate audit risk (because we know what the risks are).

And this is the beauty and logic of risk-based audits. We determine where the risks are, and then we perform procedures to address those risks. We cease to blindly focus on the balance sheet. 

Less time, less risk.

Sounds good to me–but slaying a sacred cow is necessary. I like my steaks medium rare. How about you?

Agree or disagree? Please let me know.