Category Archives for "Accounting and Auditing"

10 Steps to Make Work Papers Sparkle
May 22

10 Steps to Make Work Papers Sparkle

By Charles Hall | Accounting and Auditing , SSARS

In this post, I provide ten steps to make work papers sparkle.

Have you ever been insulted by a work paper review note?

Your tickmarks look like something created by my child.

Rather than providing guidance, the comment feels like an assault.

Or maybe you are the reviewer–you stare at a work paper for several minutes–and you’re thinking, “what the heck is this?” Your stomach tightens and you say out loud, “I don’t have time for this.”

There are ways to create greater clarity in your work papers.

Make Work Papers Sparkle

Make Work Papers Sparkle

Here are ten steps to make your work papers sparkle.

  1. Timely review work papers. The longer the in-charge waits to review work papers, the harder it is for the staff person to remember what they did and, if needed, to make corrections. Also, consider that the staff person may be reassigned to another job. Therefore, he may not be available to clear the review notes.
  2. Communicate the work paper’s purpose.

a.  An unclear work paper is like a stone wall. It blocks communication.

b.  State the purpose of the work paper; for example:

Purpose of Work Paper – To search for unrecorded liabilities as of December 31, 2018. Payments greater than $30,000 made from January 1, 2019, through March 5, 2019, were examined for potential inclusion in accounts payable.

Or:

Purpose of Work Paper – To provide a detail of accounts receivable that agrees with the trial balance; all amounts greater than $20,000 agreed to subsequent receipt.

If the person creating the work paper can’t state the purpose, then maybe there is none. It’s possible that the staff person is trying to copy a work paper from the prior year that (also) had no purpose.

Click Purpose Notation Explanation for brief audio comment.

c.  All work papers should satisfy a part of the audit program (plan). No corresponding audit program step? Then the audit program should be updated to include the step—or maybe the work paper isn’t needed at all.

3.  The preparer should sign off on each work paper  (so it’s clear who created it).

4. Audit program steps should be signed off as the work is performed (not at the end of the audit–just before review). The audit program should drive the audit process—not the prior year work papers.

5.  Define tickmarks.

6.  Reference work papers. (If you are paperless, use electronic links.)

7.  Communicate the reason for each journal entry.

The following explanation would not be appropriate:

To adjust to actual.

A better explanation:

To reverse client-prepared journal entry 63 that was made to accrue the September 10, 2018, Carter Hardware invoice for $10,233.

8.   When in doubt, leave it out.

Far too many documents are placed in the audit file simply because the client provided them. Moreover, once the work paper makes its way into the file, auditors get “remove-a-phobia“–that dreaded sense that if the auditor removes the work paper, he may need it later.

If you place those unneeded documents in your audit file and do nothing with them, they may create potential legal issues. I can hear the attorney saying, “Mr. Hall, here is an invoice from your audit file that reflects fraud.”

Again, does the work paper have a purpose?

My suggestion for those in-limbo work papers: Place them in a “file 13” stack until you are completely done. Then–once done–destroy them. I place these work papers in a recycle bin at the bottom of my work paper tree. 

9.  Complete forms. Blanks should not appear in completed forms (use N/A where necessary).

10. Always be respectful in providing feedback to staff. It’s too easy to get frustrated and say or write things we shouldn’t. For instance, your audit team is more receptive to:

Consider providing additional detail for your tickmark: For instance–Agreed invoice to cleared check payee and dollar amount.

This goes over better than:

You failed to define your tickmark–again?

Last Remarks

What other ways do you make your work papers sparkle? Comment below.

You may also be interested in a related post: 7 Steps to Effectively Review Financial Statements. Also, see If It’s Not Documented, It’s Not Done.

CPAHallTalk.com
May 14

CPAHallTalk.com is My New Blog Name (June 1)

By Charles Hall | Accounting and Auditing

CPA-Scribo.com is about to become CPAHallTalk.com.

CPAHallTalk.com

Last week I decided to change the name of my blog. So, I reached out to my regular subscribers and asked for their assistance. I offered a $200 Amazon gift card to the winner. I couldn’t believe the response.

How many suggestions did I receive? Over 200! I was blown away.

And who is the winner? Sara Laidlaw (Www.asbinc.net) from Savannah, Georgia.

Thanks, Sara, for the new name.

If you key in CPA-Scribo.com after the change on June 1, you’ll automatically redirect to the new URL: CPAHallTalk.com.

Thanks much to everyone that participated! My subscribers are the best. At present, the blog has over 1,500 subscribers. So, come on and join the party. You can subscribe below.

The blog is on track to have over 180,000 visitors this year

corporate account takeover
May 02

Corporate Account Takeover (the Importance of Using Bank Security Procedures)

By Charles Hall | Accounting and Auditing , Fraud , Local Governments

Some thieves gain control of company bank accounts using a corporate account takeover scheme. And with that control, they steal money. Below you’ll see how this type of theft occurs.

On March 17, 2010, cyber thieves hacked into the computers of Choice Escrow and stole the login ID and password to their online banking account. With that information, the thieves were able to submit a $440,000 wire transfer from Choice Escrow’s bank account to an account in Cyprus.

Corporate account takeover

Courtesy of istockphoto.com

When Choice Escrow and the bank were unable to resolve their differences, Choice Escrow filed suit. The back-and-forth legal battle lasted until March 18, 2013, when a court ruled the loss was the responsibility of Choice Escrow. A major determining factor in the decision was Choice Escrow’s refusal of the dual control security mechanism offered by Bancorpsouth Bank. According to Article 4A of the Uniform Commercial Code, if an institution offers a reasonable security procedure to a commercial customer and that customer turns down that security procedure, then the customer is liable in the event of a loss.

Bancorpsouth Bank offered dual control to Choice Escrow twice. Not only did the bank offer this security feature to Choice Escrow, but Bancorpsouth also documented the customer’s refusal to use the security feature. The documentation of the customer’s refusal of the security features was a determining factor in this case. From a bank’s perspective, this case underscores the importance of a written agreement with commercial online banking customers and, more importantly, the importance of documenting the security procedures offered to those customers. From a user’s perspective, the case highlights the need to use the security procedures offered.

Corporate Account Takeover

Corporate account takeover is a term which has become more prevalent over recent years. Generally speaking, corporate account takeover occurs when an unauthorized person or entity gains access or control over another entity’s finances or bank accounts. This usually results in the theft of money in the form of fraudulent wire transfers or ACH transactions.

These fraud schemes first began to be noticed in 2005 but have since become much more widespread and frequent. Recent statistics have revealed that the fraudsters carrying out these schemes are actually becoming less successful in getting money out of a bank account. This reduction is due to both increased efforts on the part of the financial institutions, as well as better education of the customer to help them avoid becoming a target.

Usually, the financial institutions themselves are not the targets of the attack but rather the corporate customers of the institution. Using malware, social engineering, and various other methods, the fraudster obtains information about the customer’s online banking credentials. Once the online banking credentials have been obtained, a request for wire or ACH transfers is placed by the thief. Any business may be targeted for these types of attacks, but those at risk mostly are small businesses, governments, and nonprofits who have limited resources to protect against such threats.

Audit Planning Analytics
May 01

Audit Planning Analytics: What You Need to Know

By Charles Hall | Auditing

You can identify risks of material misstatement with audit planning analytics. 

Audit Planning Analytics

Audit Planning Analytics

The auditing standards provide four risk assessment procedures: 

  1. Inquiry
  2. Observation
  3. Inspection
  4. Analytical procedures

I previously provided you with information about the first three risk assessment procedures. Today, I provide you with the fourth, analytical procedures.

While analytical procedures should occur at the beginning and the end of an audit, this post focuses on planning analytics.

Below I provide the quickest and best way to develop audit planning analytics

What are Analytics?

If you're not an auditor, you may be wondering, "what are analytics?" Think of analytics as the use of numbers to determine reasonableness. For example, if a company's cash balance at December 31, 2017, was $100 million, is it reasonable for the account to be $5 million at December 31, 2018? Comparisons such as this one assist auditors in their search for errors and fraud.

Overview of this Post

We'll cover the following:

  • The purpose of planning analytics
  • When to create planning analytics (at what stage of the audit)
  • Developing expectations 
  • The best types of planning analytics
  • How to document planning analytics
  • Developing conclusions 
  • Linkage to the audit plan

Purpose of Planning Analytics

The purpose of planning analytics is to identify risks of material misstatement. Your goal as an auditor is to render an opinion regarding the fairness of the financial statements. So, like a good sleuth, you are surveying the accounting landscape to see if material misstatements exist.

A detective investigates a crime scene using various tools: fingerprints, forensic tests, interviews, timelines. Auditors have their own tools: inquiry, observation, inspection, analytical procedures. Sherlock Holmes looks for the culprit. The auditor (and I know this isn't as sexy) looks for material misstatements. 

The detective and the auditor are both looking for the same thing: evidence. And the deft use of tools can lead to success. A key instrument (procedure) available to auditors is planning analytics. 

When to Create Planning Analytics

Create your preliminary analytics after gaining an understanding of the entity. Why? Context determines reasonableness of numbers. And without context (your understanding of the entity), changes in numbers from one year to the next may not look like a red flag--though maybe they should.

Therefore, learn about the entity first. Are there competitive pressures?  What are the company's objectives? Are there cash flow issues? What is the normal profit margin percentage? Does the organization have debt? Context creates meaning.

Additionally, create your comparisons of numbers prior to creating your risk assessments. After all, the purpose of the analytical comparisons is to identify risk.

But before creating your planning analytics, you first need to know what to expect.

Developing Expectations 

Knowing what to expect provides a basis for understanding the changes in numbers from year to year. 

Expectations can include:

  • Increases in numbers
  • Decrease in numbers
  • Stable numbers (no significant change)

In other words, you can have reasons to believe payroll (for example) will increase or decrease. Or you might anticipate that salaries will remain similar to last year.

Examples of Expectations Not Met

Do you expect sales to decrease 5% based on decreases in the last two years? If yes, then an increase of 15% is a flashing light.

Or maybe you expect sales to remain about the same as last year? Then a 19% increase might be an indication of financial statement fraud.

But where does an auditor obtain expectations?

Sources of Expectations

Expectations of changes can come from (for example):

  • Past changes in numbers 
  • Discussions with management about current year operations
  • Reading the company minutes
  • Staffing reductions
  • Non-financial statistics (e.g., decrease the number of widgets sold)
  • A major construction project

While you'll seldom know about all potential changes (and that's not the goal), information--such as that above--will help you intuit whether change (or a lack of change) in an account balance is a risk indicator.

Now, let's discuss the best types of planning analytics. 

The Best Types of Planning Analytics

Auditing standards don't specify what types of planning analytics to use. But some, in my opinion, are better than others. Here's my suggested approach (for most engagements). 

Audit Planning Analytics

First, create your planning analytics at the financial statement reporting level. Why? Well, that's what the financial statement reader sees. So, why not use this level (if you can)? (There is one exception in regard to revenues. See Analytics for Fraudulent Revenue Recognition below.)

The purpose of planning analytics is to ferret out unexpected change. Using more granular information (e.g., trial balance) muddies the water. Why? There's too much information. You might have three hundred accounts in the trial balance and only fifty at the financial statement level. Chasing down trial-balance-level changes can be a waste of time. At least, that's the way I look at it.

Second, add any key industry ratios tracked by management and those charged with governance. Often, you include these numbers in your exit conference with the board (maybe in a slide presentation). If those ratios are important at the end of an audit, then they're probably important in the beginning.

Examples of key industry ratios include:

  • Inventory turnover
  • Return on equity
  • Days cash on hand
  • Gross profit 
  • Debt/Equity 

Okay, so we know what analytics to create, but how should we document them?

Analytics for Fraudulent Revenue Recognition

AU-C 240.22 says, "the auditor should evaluate whether unusual or unexpected relationships that have been identified indicate risks of material misstatement due to fraud. To the extent not already included, the analytical procedures, and evaluation thereof, should include procedures relating to revenue accounts." 

The auditing standards suggest a more detailed form of analytics for revenues. AU-C 240.A25 offers the following:

  • a comparison of sales volume, as determined from recorded revenue amounts, with production capacity. An excess of sales volume over production capacity may be indicative of recording fictitious sales.
  • a trend analysis of revenues by month and sales returns by month, during and shortly after the reporting period. This may indicate the existence of undisclosed side agreements with customers involving the return of goods, which, if known, would preclude revenue recognition.
  • a trend analysis of sales by month compared with units shipped. This may identify a material misstatement of recorded revenues.

In light of these suggested procedures, it may be prudent to create revenue analytics at a more granular level than that shown in the financial statements.

How to Document Planning Analytics

Here are my suggestions for documenting your planning analytics.

  1. Document overall expectations.
  2. Include comparisons of prior-year/current-year numbers at the financial statement level. (You might also include multiple prior year comparisons if you have that information.)
  3. Document key industry ratio comparisons.
  4. Summarize your conclusions. Are there indicators of increased risks of material misstatement? Is yes, say so. If no, say so.

Once you create your conclusions, place any identified risks on your summary risk assessment work paper (where you assess risk at the transaction level--e.g., inventory).

Use Filtered Analytical Reports with Caution (if at all)

Some auditors use filtered trial balance reports for their analytics. For instance, all accounts with changes of greater than $30,000. There is a danger in using such thresholds. 

What if  you expect a change in sales of 20% (approximately $200,000) but your filters include:

  •  all accounts with changes greater than $50,000, and 
  • all accounts with changes of more than 15%

If sales remain constant, then this risk of material misstatement (you expected change of 20%, but it did not happen) fails to appear in the filtered report. The filters remove the sales account because the change was minimal. Now, the risk may go undetected.

Developing Conclusions

I am a believer in documenting conclusions on key work papers. So, how do I develop those conclusions? And what does a conclusion look like on a planning analytics work paper?

First, develop your conclusions. How? Scan the comparisons of prior year/current year numbers and ratios. We use our expectations to make judgments concerning the appropriateness of changes and of numbers that remain stable. Remember this is a judgment, so, there's no formula for this. 

No Risk Identified

Now, you'll document your conclusions. But what if there are no unexpected changes? You expected the numbers to move in the manner they did. Then no identified risk is present. Your conclusion will read, (for example):

Conclusion: I reviewed the changes in the accounts and noted no unexpected changes. Based on the planning analytics, no risks of material misstatement were noted.

Risk Identified

Alternatively, you might see unexpected changes. You thought certain numbers would remain constant, but they moved significantly. Or you expected material changes to occur, but they did not. Again, document your conclusion. For example:

Conclusion: I expected payroll to remain constant since the company's workforce stayed at approximately 425 people. Payroll expenses increased, however, by 15% (almost $3.8 million). I am placing this risk of material misstatement on the summary risk assessment work paper at 0360 and will create audit steps to address the risk.

Now, it's time to place the identified risks (if there are any) on your summary risk assessment form.

Linkage to the Audit Plan

I summarize all risks of material misstatements on my summary risk assessment form. These risks might come from walkthroughs, planning analytics or other risk assessment procedures. Regardless, I want all of the identified risks--those discovered in the risk assessment process--in one place.

The final step in the audit risk assessment process is to link your identified risks to your audit program. 

Overview of Risk Assessment and Linkage

Now, I tailor my audit program to address the risks. Tailoring the audit program to respond to identified risks is known as linkage.

Audit standards call for the following risk assessment process:

  • Risk assessment procedures (e.g., planning analytics)
  • Identification of the risks of material misstatement
  • Creation of audit steps to respond to the identified risks (linkage)

Summary of Planning Analytics Considerations

So, now you know how to use planning analytics to search for risks of material misstatement--and how this powerful tool impacts your audit plan.

Let's summarize what we've covered:

  1. Planning analytics are created for the purpose of identifying risks of material misstatement
  2. Develop your expectations before creating your planning analytics (learn about the entity's operations and objectives; review past changes in numbers for context--assuming you've performed the audit in prior years)
  3. Create analytics at the financial statement level, if possible
  4. Use key industry ratios 
  5. Conclude about whether risks of material misstatement are present
  6. Link your identified risks of material misstatement to your audit program

If you have thoughts or questions about this post, please let me know below in the comments box. Thanks for reading.

First-Year Businesses and Planning Analytics

You may be wondering, "but what if I my client is new?" New entities don't have prior numbers. So, how can you create planning analytics? 

First Option

One option is to compute expected numbers using non-financial information. Then compare the calculated numbers to the general ledger to search for unexpected variances.

Second Option

A second option is to calculate ratios common to the entity’s industry and compare the results to industry benchmarks.

While industry analytics can be computed, I’m not sure how useful they are for a new company. An infant company often does not generate numbers comparable to more mature entities. But we’ll keep this choice in our quiver--just in case.

Third Option

A more useful option is the third: comparing intraperiod numbers. 

Discuss the expected monthly or quarterly revenue trends with the client before you examine the accounting records. The warehouse foreman might say, “We shipped almost nothing the first six months. Then things caught fire. My head was spinning the last half of the year.” Does the general ledger reflect this story? Did revenues and costs of goods sold significantly increase in the latter half of the year?

Fourth Option

The last option we’ve listed is a review of the budgetary comparisons. Some entities, such as governments, lend themselves to this alternative. Others, not so–those that don’t adopt budgets.

Summary

So, yes, it is possible to create useful risk assessment analytics–even for a first-year company.

audit and work paper mistakes
Apr 23

Forty Audit and Work Paper Mistakes

By Charles Hall | Auditing

Today, I offer you a list of forty audit and work paper mistakes.

audit and work paper mistakes

The list is based on my observations from over over thirty years of audit reviews (and not on any type of formal study).

You will, however, shake your head in agreement as you read these. I know you’ve seen them as well. The list is not comprehensive. So, you can add others in the comments section of this post.

Here’s the list.

  1. No preparer sign-off on a work paper
  2. No evidence of work paper reviews
  3. Placing documents in the file with no purpose (the work paper provides no evidential matter for the audit)
  4. Signing off on unperformed audit program steps
  5. No references to supporting documentation in the audit program
  6. Using canned audit programs that aren’t based on risk assessments for the particular entity
  7. Not documenting expectations for planning analytics
  8. Inadequate explanations for variances in planning analytics (“revenue went up because sales increased”)
  9. Planning analytics with obvious risk of material misstatement indicators, but no change in the audit plan to address the risk (sometimes referred to as linking)
  10. Not documenting who inquiries were made of
  11. Not documenting when inquiries were made
  12. Significant deficiencies or material weaknesses that are not communicated in written form
  13. Verbally communicating control deficiencies (those not significant deficiencies or material weaknesses) without documenting the conversation
  14. Performing needed substantive tests with no related audit program steps (i.e., the audit program was not amended to include the necessary procedures)
  15. Assessing control risk below high without testing controls
  16. Assessing the risk of material misstatement at low without a basis (reason) for doing so
  17. Documenting significant risks (e.g., allowance for uncollectible receivable estimates in healthcare entities) but no high inherent risks (when inherent risk are separately documented)
  18. Not documenting the predecessor auditor communication in a first-year engagement
  19. Not documenting the qualifications and objectivity of a specialist
  20. Not documenting all nonattest services provided
  21. Not documenting independence
  22. Not documenting the continuance decision before an audit is started
  23. Performing walkthroughs at the end of an engagement rather than the beginning
  24. Not performing walkthroughs or any other risk assessment procedures
  25. Not performing risk assessment procedures for all significant transaction areas (e.g., risk assessment procedures performed for billing and collections but not for payroll which was significant)
  26. Not retaining the support for opinion wording in the file (especially for modifications)
  27. Specific items tested are not identified (e.g., “tested 25 disbursements, comparing amounts in the check register to cleared checks” — we don’t know which particular payments were tested)
  28. Making general statements that can’t be re-performed based on the information provided (e.g., “inquired of three employees about potential fraud” — we don’t know who was interviewed or what was asked or their responses)
  29. Retrospective reviews of estimates are not performed (as a risk assessment procedure)
  30. Going concern indicators are present but no documentation regarding substantial doubt
  31. IT controls are not documented
  32. The representation letter is dated prior to final file reviews by the engagement partner or a quality control partner
  33. Consultations with external or internal experts are not documented
  34. No purpose or conclusion statement on key work papers
  35. Tickmarks are not defined (at all)
  36. Inadequately defining tickmarks (e.g., ## Tested) — we don’t know what was done
  37. No group audit documentation though a subsidiary is included in the consolidated financial statements
  38. No elements of unpredictability were performed
  39. Not inquiring of those charged with governance about fraud
  40. Not locking the file down after 60 days 

That’s my list. What would you add?

supplementary information
Apr 11

Supplementary Information, Other Information and Required Supplementary Information

By Charles Hall | Auditing

What’s the difference in supplementary information, additional information, and required supplementary information? What language should be included in the audit opinion when such information is included in the financial statements?  What audit procedures must be performed? Below I provide the answers.

supplementary information

1. Supplementary Information

Supplementary information is defined as information presented outside the basic financial statements, excluding required supplementary information (see below), that is not considered necessary for financial statements to be fairly-presented in accordance with the applicable financial reporting framework (e.g. FASB).  (See AU-C 725 for more guidance about supplementary information.)

Supplementary information may include:

  • Accounting information and
  • Nonaccounting information

Supplementary information examples include:

  • Detail of “Other Income” as shown in the statement of operations*
  • Detail of “General and Administrative” expenses as shown in the statement of operations*
  • Number of employees in a given payroll period**

* Derived from financial statements

** Not derived from the financial statements

Procedures to Perform

Procedures to be performed include:

  • Determine whether the information is fairly stated, in all material respects, in relation to the financial statements as a whole

Sample Opinion Language

Example auditor’s report paragraph:

The [identify accompanying supplementary information] is presented for purposes of additional analysis and is not a required part of the 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 information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole.

For examples of presenting the supplementary language (1) in the standard opinion or (2) separately, click here.

Notice that an opinion is rendered on supplementary information. No opinion is given in regard to other information.

2. Other Information

Other information is financial and nonfinancial information (other than the financial statements and the audit report) that is included in a document containing audited financial statements and the audit report (e.g., an annual report), excluding required supplementary information. An auditor can use this option when he or she is not engaged to render an opinion on such information. (See AU-C 720 for more guidance about other information.)

Other information examples include:

  • Financial summaries
  • Employment data
  • Planned capital expenditures
  • Names of officers and directors

Procedures to Perform

Procedure to be performed:

  • Reading the other information in order to identify any material inconsistencies with audited financial statements

Sample Opinion Language

The auditor can use an other-matter paragraph to disclaim an opinion regarding other information. Sample language follows:

Our audit was conducted for the purpose of forming an opinion on the basic financial statements as a whole. The [identify the other information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on it.

3. Required Supplementary Information

Required supplementary information (RSI) is information that a designated accounting standard-setter (e.g., FASB, GASB) requires to accompany the basic financial statements. RSI is not part of the basic financial statements. However, the designated accounting standard-setter has determined that the information is an essential part of financial reporting. (See AU-C 730 for more guidance about required supplementary information.)

Required supplementary information examples include:

  • Management discussion and analysis (MD&A) for governments
  • Estimates of current or future costs of future major repairs and replacements for common interest realty associations

Procedures to Perform

Procedures to be performed include:

  • Inquiry of management about methods used to create information
  • Comparing the information for consistency with management responses and the financial statements
  • Obtaining written representations from management

Sample Opinion Language

Example auditor’s report paragraph:

Accounting principles generally accepted in the United States of America require that the [identify the required supplementary information] on page XX be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Financial Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Some governments exclude the MD&A. Here is sample opinion wording when the MD&A is omitted.

Supplementary Information in Compilations and Review Engagements

You can see information about supplementary information wording for compilation or review reports here. Also, see my post about presenting supplementary information in compilation and preparation engagements.

How to create energy that sustains you
Mar 06

How to Create Energy that Sustains You

By Charles Hall | Accounting and Auditing

So you are in the middle of your busy season and you are wondering how you will get it all done. Right?

One thing is for sure: Without energy, nothing happens. As Jim Loehr and Tony Swartz say in The Power of Full Engagement: Energy, not time, is the fundamental currency of high performance.

How to create energy that sustains you

I started my career in 1984. It was a time when CPA firm partners would demand that you put your head down and never look up (and if you did, you might get whacked). The thought was that young staff were inexhaustible. After all, we had our youth.

But after being in public accounting for over thirty years, I have found that such an outlook is not only unwise, it is counterproductive. Sometimes squeezing out “just one more job” causes us to implode.

So should we work hard? Absolutely. But we should also recover if we are to perform at our highest levels.

When Do You Need Recovery?

Here are a few signs that you worked too long, and you need recovery:

  • You stare at a financial statement page for several minutes before you realize you are in a daze (not reading, just staring)
  • You can’t stay focused (your mind keeps wondering)
  • You are working with a sense of dread rather than joy
  • You are too stressed to sleep at night
  • You find yourself increasingly rude to your spouse, friends, coworkers
  • You reach for too much caffeine, or worse, alcohol, to get you through the day
  • You feel like a robot
  • You are often short of breath
  • You have a sense of drowning

The body needs balance, and when it doesn’t get it, strange things start to happen. And when this work style–working without recovery–becomes habitual, we lose our vitality and health. Our production begins to decline rather than increase.

How Do You Recover?

Picture is courtesy of DollarPhoto.com

Picture is courtesy of DollarPhoto.com

Here are disciplines that will enable you to excel during your busy season.

  1. Take breaks – Working ten to twelve hours a day (and eating at your desk)–without breaks–is a sure way to deplete yourself. You need to work and recover, work and recover, work and recover — not work, work, work. The recovery can be as simple as taking five minutes to stand and stretch, but you need to move periodically away from your desk. If possible, go outside and walk for five to ten minutes (a couple of times a day). Recovery can be a simple phone call to a family member to tell her (or him) that you love them. Some professionals use the Pomodoro technique to move in and out of their work. There’s even an app for that. It may seem counterproductive to take breaks, but it’s not — as long as we don’t abuse the break time. Remember the purpose of the short break is to recover. For those of you that are runners, you know that Jeff Galloway teaches the same art in running: run and mix in walks (recovery). And many who use Jeff’s technique have found they can run farther and faster.
  2. ExercisingRun, walk, or do some exercise on a consistent basis. I was a smoker in college and–as a way to help me kick the habit–I started running. That was thirty-seven years ago. Today I am fifty-seven, and I still either run or walk at least three times a week. I find that running helps me the most. When I consistently run, I think more clearly and don’t drag late in the day. When I don’t run, I notice my thinking becomes cloudy, and I become moody. When I’m on my routine (run three times a week, at least, two miles a run), I even notice that I have bursts of energy in the middle of the afternoon, something that never happens when I am not exercising.
  3. Drink water – Staying hydrated throughout the day will keep you humming late in the day. I have put a water dispenser in my office, so I don’t have to worry about going to the store to buy bottled water. The cost of the water container (and water that they bring to my office) is about $25 per month — worth every penny.
  4. Sleep – I have read a great deal about how much sleep I need each night. And it seems the consensus is a minimum of 7.5 to 8.0 hours per night. I know this: when I get consistent sleep, I perform better. I have a routine each evening of winding things down about 9:30 and being in bed about 10:00 p.m. so I can rise at 6:00 a.m. (so I can write blog posts like this one). Going back to exercising for a moment, if you work your body hard, you will sleep better. I have noticed the farther I run, the harder I sleep. Also, if I am in bed for more than fifteen to twenty minutes without going to sleep, I get up and take melatonin — this helps me fall asleep.
  5. Eating well – Another method of recovery is eating. Not too much, but enough to provide energy. I eat a healthy breakfast each morning, a light lunch, and dinner. Then about mid-morning and mid-afternoon, I snack (usually nuts or fruit). If you’ve ever watched Tiger Woods play golf, you’ve seen him munching on a banana or energy bar during the middle of a round — he’s feeding his body to maintain energy. Eating too much at one time will throw your body’s metabolism out of balance, so a steady intake (balance) is what we need.
  6. Coffee – Coffee in moderation can stimulate your thinking and mood, at least, it does for me. I drink a cup first thing in the morning. Then I have another cup just after lunch. Too much coffee will drain you of energy. Rather than reaching for another cup, take a short walk, drink more water.
  7. Music – If possible listen to good music while you work. I find that I am more productive with music playing quietly in the background.

Call to Action

Try one or all of these and stay at it. Habit is the key. You may find in the initial days of change that you’ll desire to revert to your old habits, but as you continue, your new ways will become normal. Then you’ll find new energy for the tasks at hand.

Have a great day!

measurement of inventory
Feb 19

Simplifying the Measurement of Inventory (ASU 2015-11)

By Charles Hall | Accounting

Are you up to speed on ASU 2015-11 Simplifying the Measurement of Inventory? This post assists in understanding the new accounting measurement for inventory.

measurement of inventory

Accounting Measurement for Inventory

ASU 2015-11 requires that entities measure inventory at the lower of cost or net realizable value (LCNRV), provided they don’t use the last-in-last-out method (LIFO) or the retail inventory method. Entities using LIFO or the retail inventory method will continue to use the lower of cost or market (where market is replacement cost). Entities using the first-in-first-out (FIFO), average cost, or any other cost flow methods (other than LIFO and the retail inventory methods) should use the lower of cost or net realizable value approach.

So, where applicable, market is being replaced by net realizable value.

The Financial Accounting Standards Board’s glossary defines net realizable value as follows:

Estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

Why the change? FASB is working to simplify some accounting standards. FASB had received comments from stakeholders that the requirement to subsequently measure inventory was “unnecessarily complex because there are several potential outcomes.”

Why did FASB not require the LCNRV method for all entities? The summary section of ASU 2015-11 says,  “The Board received feedback from stakeholders that the proposed amendments would reduce costs and increase comparability for inventory measured using FIFO or average cost but potentially could result in significant transition costs that would not be justified by the benefits for inventory measured using LIFO or the retail inventory method…Therefore, the Board decided to limit the scope of the simplification to exclude inventory measured using LIFO or the retail inventory method.”

What Disclosure is Required for the Change in Accounting Principle?

BC16 of ASU 2015-11 states the following:

The Board decided that the only disclosures required at transition should be the nature of and reason for the change in accounting principle. The Board concluded that the costs of a quantitative disclosure about the change from the lower of cost or market to the lower of cost and net realizable value would not justify the benefits because a reporting entity would be required in the year of adoption to measure inventory using both existing requirements and the amendments in this Update, and because the change would not be significant for some entities.

An entity is required only to disclose the nature and reason for the change in accounting principle in the first interim and annual period of adoption.

Sample ASU 2015-11 Disclosures

Here is a sample disclosure from Mercer International Inc.’s 10-K:

Accounting Pronouncements Implemented

In July 2015, the FASB issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory (“ASU 201511”) which requires that inventory within the scope of this update, including inventory stated at average cost, be measured at the lower of cost and net realizable value. This update is effective for financial statements issued for fiscal years beginning after December 15, 2016. The adoption of ASU 201511 did not impact the Company’s financial position.

Here is a sample disclosure from Delta Apparel, Inc.’s 10-K:

Recently Issued Accounting Pronouncements Not Yet Adopted

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, (“ASU 201511“).  This new guidance requires an entity to measure inventory at the lower of cost and net realizable value. Currently, entities measure inventory at the lower of cost or market. ASU 201511 replaces market with net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured under last-in, first-out or the retail inventory method.  ASU 201511 requires prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities.  Early application is permitted.  ASU 201511 will, therefore, be effective in our fiscal year beginning October 1, 2017. We are evaluating the effect that ASU 201511 will have on our Consolidated Financial Statements and related disclosures, but do not believe it will have a material impact.

Here is a sample disclosure from Dr. Pepper Snapple Group, Inc.’s 10-K:

Recently Adopted Provisions of U.S. GAAP
 
As of January 1, 2017, the Company adopted ASU 201511, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 201511“). ASU 201511 requires inventories measured under any methods other than last-in, first-out (“LIFO”) or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Subsequent measurement of inventory using LIFO or the retail inventory method is unchanged by ASU 201511. The adoption of ASU201511 did not have a material impact on the Company’s consolidated financial statements.

Effective Dates for ASU 2015-11

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.

Mistakes CPAs Make
Feb 17

Twenty Mistakes that CPAs Make

By Charles Hall | Accounting and Auditing

Here are twenty mistakes that CPAs make:

  1. We hire people without sufficient knowledge and temperament
  2. We accept more work than we can possibly perform
  3. We don’t cull our bad clients (which contributes to #2.)
  4. We work without taking breaks
  5. We don’t exercise
  6. We try to be experts in too many industries
  7. We use outdated computers and software (e.g., we are not paperless)
  8. We don’t plan our continuing education (and take anything we can find at the end of the year)
  9. We have no strategy, moving from one engagement to another because it’s pressing
  10. We work sitting down all day (when standup desks are available)
  11. We bill our clients months after the service is provided (rather than a couple of weeks)
  12. We allow email to drive our day (we are reactive)
  13. We don’t express sincere appreciation to our peers and employees (those fully deserving of “thank you!”)
  14. We don’t use engagement letters to define our work
  15. We have no exit strategy, hoping someone will knock on our door and offer to buy the practice
  16. We ignore those we love (because we are overworked and irritable)
  17. We don’t stay current on evolving standards
  18. We don’t fire unproductive or difficult employees
  19. We don’t deal with problems (bad clients or employees) because doing so is awkward
  20. We never pause to evaluate our lives

Mistakes CPAs Make

Since  1984, I have worked in public accounting, a profession I dearly love. One thing I’ve noticed about CPAs is we are too immersed in our work–to a point of blindness. We don’t step back and evaluate what or how we do things. Would we be better off if we intentionally removed certain responsibilities? Might we not be even more profitable and happier? 

Two things–more than anything else–will sap your energy and productivity: (1) difficult clients and (2) unproductive or difficult employees.

The 80/20 rule is applicable in our profession. We make 80% of our money from 20% of our work. And 80% of our headaches come from 20% of our clients and employees. (Were you awake last night thinking about one of these?) While the exact percentages may not be true for you, the concept is highly relevant. 

I’ve given you twenty mistakes that CPAs make. Are there others you would add?

If you found this article of interest, see my post What Keeps CPAs Awake at Night. Also, here are Forty Mistakes Auditors Make.

ASU 2016-14
Feb 12

Understanding the New Nonprofit Accounting Standard

By Charles Hall | Accounting

Are you ready to implement FASB’s new nonprofit accounting standard? Back in August 2016, FASB issued ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. In this article, I provide an overview of the standard and implementation tips.

new nonprofit accounting

New Nonprofit Accounting – Some Key Impacts

What are a few key impacts of the new standard?

  • Classes of net assets
  • Net assets released from “with donor restrictions”
  • Presentation of expenses
  • Intermediate measure of operations
  • Liquidity and availability of resources
  • Cash flow statement presentation

Classes of Net Assets

Presently nonprofits use three net asset classifications:

  1. Unrestricted
  2. Temporarily restricted
  3. Permanently restricted

The new standard replaces the three classes with two:

  1. Net assets with donor restrictions
  2. Net assets without donor restrictions

Terms Defined

These terms are defined as follows:

Net assets with donor restrictions – The part of net assets of a not-for-profit entity that is subject to donor-imposed restrictions (donors include other types of contributors, including makers of certain grants).

Net assets without donor restrictions – The part of net assets of a not-for-profit entity that is not subject to donor-imposed restrictions (donors include other types of contributors, including makers of certain grants).

Presentation and Disclosure

The totals of the two net asset classifications must be presented in the statement of financial position, and the amount of the change in the two classes must be displayed in the statement of activities (along with the change in total net assets). Nonprofits will continue to provide information about the nature and amounts of donor restrictions.

Additionally, the two net asset classes can be further disaggregated. For example, donor-restricted net assets can be broken down into (1) the amount maintained in perpetuity and (2) the amount expected to be spent over time or for a particular purpose.

Net assets without donor restrictions that are designated by the board for a specific use should be disclosed either on the face of the financial statements or in a footnote disclosure.

Sample Presentation of Net Assets

Here’s a sample presentation:

Net Assets
Without donor restrictions
  Undesignated $XX
  Designated by Board for endowment     XX
     XX
With donor restrictions
  Perpetual in nature     XX
  Purchase of equipmentXX
  Time-restrictedXX
XX
Total Net Assets$XX

Net Assets Released from “With Donor Restrictions”

The nonprofit should disaggregate the net assets released from restrictions:

  • program restrictions satisfaction
  • time restrictions satisfaction
  • satisfaction of equipment acquisition restrictions
  • appropriation of donor endowment and subsequent satisfaction of any related donor restrictions
  • satisfaction of board-imposed restriction to fund pension liability

Here’s an example from ASU 2016-14:

nonprofit statement of activities

Presentation of Expenses

Presently, nonprofits must present expenses by function. So, nonprofits must present the following (either on the face of the statements or in the notes):

  • Program expenses
  • Supporting expenses

The new standard requires the presentation of expenses by function and nature (for all nonprofits). Nonprofits must also provide the analysis of these expenses in one location. Potential locations include:

  • Face of the statement of activities
  • A separate statement (preceding the notes; not as a supplementary schedule)
  • Notes to the financial statements

I plan to add a separate statement (like the format below) titled Statement of Functional Expenses. (Nonprofits should consider whether their accounting system can generate expenses by function and by nature. Making this determination now could save you plenty of headaches at the end of the year.)

External and direct internal investment expenses are netted with investment income and should not be included in the expense analysis. Disclosure of the netted expenses is no longer required.

Example of Expense Analysis

Here’s an example of the analysis, reflecting each natural expense classification as a separate row and each functional expense classification as a separate column.

expenses by function and nature

The nonprofit should also disclose how costs are allocated to the functions. For example:

Certain expenses are attributable to more than one program or supporting function. Depreciation is allocated based on a square-footage basis. Salaries, benefits, professional services, office expenses, information technology and insurance, are allocated based on estimates of time and effort.

Intermediate Measure of Operations

If the nonprofit provides a measure of operations on the face of the financial statements and the use of the term “operations” is not apparent, disclose the nature of the reported measure of operations or the items excluded from operations. For example:

Measure of Operations

Learning Disability’s operating revenue in excess of operating expenses includes all operating revenues and expenses that are an integral part of its programs and supporting activities and the assets released from donor restrictions to support operating expenditures. The measure of operations excludes net investment return in excess of amounts made available for operations.

Alternatively, provide the measure of operations on the face of the financial statements by including lines such as operating revenues and operating expenses in the statement of activities. Then the excess of revenues over expenses could be presented as the measure of operations.

Liquidity and Availability of Resources

FASB is shining the light on the nonprofit’s liquidity. Does the nonprofit have sufficient cash to meet its upcoming responsibilities?

Nonprofits should include disclosures regarding the liquidity and availability of resources. The purpose of the disclosures is to communicate whether the organization’s liquid available resources are sufficient to meet the cash needs for general expenditures for one year beyond the balance sheet date. The disclosure should be qualitative (providing information about how the nonprofit manages its liquid resources) and quantitative (communicating the availability of resources to meet the cash needs).

Sample Liquidity and Availability Disclosure

The FASB Codification provides the following example disclosure in 958-210-55-7:

NFP A has $395,000 of financial assets available within 1 year of the balance sheet date to meet cash needs for general expenditure consisting of cash of $75,000, contributions receivable of $20,000, and short-term investments of $300,000. None of the financial assets are subject to donor or other contractual restrictions that make them unavailable for general expenditure within one year of the balance sheet date. The contributions receivable are subject to implied time restrictions but are expected to be collected within one year.

NFP A has a goal to maintain financial assets, which consist of cash and short-term investments, on hand to meet 60 days of normal operating expenses, which are, on average, approximately $275,000. NFP A has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, as part of its liquidity management, NFP A invests cash in excess of daily requirements in various short-term investments, including certificate of deposits and short-term treasury instruments. As more fully described in Note XX, NFP A also has committed lines of credit in the amount of $20,000, which it could draw upon in the event of an unanticipated liquidity need.

Alternatively, the nonprofit could present tables (see 958-210-55-8) to communicate the resources available to meet cash needs for general expenditures within one year of the balance sheet date.

Cash Flow Statement Presentation

A nonprofit can use the direct or indirect method to present its cash flow information. The reconciliation of changes in net assets to cash provided by (used in) operating activities is not required if the direct method is used.

Consider whether you want to incorporate additional changes that will be required by ASU 2016-18, Statement of Cash Flows–Restricted Cash. If your nonprofit has no restricted cash, then this standard is not applicable.

You can early implement ASU 2016-18. (The effective date is for fiscal years beginning after December 15, 2018.) Once this standard is effective, you’ll include restricted cash in your definition of cash. The last line of the cash flow statement might read as follows: Cash, Cash Equivalents, and Restricted Cash.

Effective Date of ASU 2016-14

The effective date for 2016-14, Not-for-Profit Entities, is for fiscal periods beginning after December 15, 2017 (2018 calendar year-ends and 2019 fiscal year-ends). The standard can be early adopted.

For comparative statements, apply the standard retrospectively. 

If presenting comparative financial statements, the standard does allow the nonprofit to omit the following information for any periods presented before the period of adoption:

  • Analysis of expenses by both natural classification and functional classification (the separate presentation of expenses by functional classification and expenses by natural classification is still required). Nonprofits that previously were required to present a statement of functional expenses do not have the option to omit this analysis; however, they may present the comparative period information in any of the formats permitted in ASU 2014-16, consistent with the presentation in the period of adoption.
  • Disclosures related to liquidity and availability of resources.
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