65% Realization–Again?

By Charles Hall | Accounting and Auditing

Jun 09

You’ve just completed another audit, and you see your realization is 65%. You encourage yourself with the thought that next year things will be different. Next year you won’t have the same unexpected problems. Next year your staff will have more experience. But then you recall thinking the same thing last year, and the year before that. Why does this keep happening?

Low realization (the heavy discounting of standard rates) usually implies our engagement has leaks. So how can we right the ship? Here are a few thoughts.


Picture courtesy of DollarPhotoClub.com

Leaky Hole 1: Too Much Weight

Boats with light loads move quicker.

During your off-season (if you have one), review the file. Work paper files, like our closets, tend to accumulate unneeded clutter. Eliminate unnecessary work papers that add no value. Useless work papers have a strong tendency to reappear in the future. Why? Staff will often mimic the prior year file.

Leaky Hole 2: Not Identifying Risks

A good captain knows where the shoals are.

If we can identify our risks, we can focus on the essential–that which must be addressed. Doing so may require a change of habits, a change from auditing by automatic pilot to one of doing more work in the beginning stage of the engagement. Identifying risks is hard work and requires a greater level of skill than “beating up the balance sheet.” But risk-based auditing is more effective and efficient.

Risk assessment includes the following:

  • Creating effective planning analytics (do variances exist that merit attention?)
  • Walk-throughs (understand–really understand–significant processes)
  • Understanding the entity (What are the numbers that management and the board focus upon? What keeps management awake at night?)
  • Perform your brainstorming session (open discussion will generate better ideas)

Then take these disparate elements and synthesize them into your formal risk assessment.

The result: a plan that identifies and responds to risk.

Leaky Hole 3: No Budget

A good captain has a map (a target).

I’m not concerned with tracking time by audit areas. Doing so may take more time than it’s worth. But I want my audit team to know what the overall target is–the amount of time for the total engagement. And if they meet that goal? Give them a reward. A day off. (Okay, maybe a half day.) Take them out for a nice meal. Provide a small bonus.

Targets create focus.

Rewarding efficiency generates future success (even if we don’t stay at a Holiday Inn Express).

Leaky Hole 4: An Old Boat

Replace old boats.

Is your firm using outdated computers or software?

Here are a few questions to consider:

  • Does each staff member have a portable monitor?
  • Does the team have a quality scanner?
  • Is the team working out of the cloud?
  • If your firm is not paperless, why not?
  • Are your work papers linked to the trial balance?
  • Does your firm provide audit templates by industry specialization?
  • Has the audit team received current technology training?

And If You Already Do These Things?

Can the fee be negotiated? If not, it may be time to let go of the engagement. Not all jobs are desirable, and this one may, in fact, inhibit your ability to seek out better opportunities.

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About the Author

Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses.He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events.Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.



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