All Posts by Charles Hall

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About the Author

Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty-five years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention, The Why and How of Auditing, Audit Risk Assessment Made Easy, and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles consults with other CPA firms, assisting them with auditing and accounting issues.

Group audit
Aug 19

Demystifying Group Audits: Key Definitions and Requirements

By Charles Hall | Auditing

SAS No. 149Special Considerations — Audits of Group Financial Statements (Including the Work of Component Auditors and Audits of Referred-to Auditors) defines what firms must do in group audits.

Sometimes, auditors have a group audit but don’t know it (as Michael Westervelt pointed out in his JOA article), or they are aware that a group audit is in play but don’t know the requirements. Either way, if your firm doesn’t comply with group audit standards and your peer reviewer notices, you’ve got a problemsometimes a big one.

Group audits raise questions such as who is responsible for what. Below, I explain the responsibilities of the following:

  • Group auditor,
  • Group engagement partner,
  • Component auditor and
  • Referred-to auditor.

I also provide key group audit definitions and communication and documentation requirements.

I will use a question-and-answer format to explain the following:

  • Group audits
  • Group auditor
  • Group audit partner
  • Component auditor
  • Components
  • Component performance materiality
  • Aggregation risk
  • Referred-to auditor
  • Number of audit firms
  • Group audit documentation

Group audit

Group Audits

What is a group audit?

It’s an audit of group financial statements.

But what are group financial statements? They are financial statements that include multiple entities or business units or the aggregation of financial information from entities or business units such as branches or divisions. Group financial statements include aggregating financial information from business units with separate locations, management, or information systems. (See A4 and A5 of SAS 149 for additional information.)

Here are examples of group financial statements:

  1. Consolidated financial statements (e.g., a parent company owns another company)
  2. Combined financial statements (e.g., two companies owned by the same person are combined)
  3. Equity method investment (a company reports an equity method investment on its balance sheet)
  4. Joint venture
  5. A government with a discretely presented component unit
  6. An entity organized by geography (e.g., an entity comprised of American, Mexican, and Canadian operations managed by three national management teams; each national reporting center has its own general ledger)

If you are auditing one of these, you are conducting a group audit, and specific audit requirements apply. If you are directing the audit, you are the group auditor; in some cases, other audit firms might participate.

Group Auditor

So, what is a group auditor?

It’s the group engagement partner and engagement team members other than component auditors (see component auditor definition below).

The group auditor performs duties including the following:

  • Establishes the group audit strategy
  • Develops the group audit plan
  • Determines components to audit
  • Gains an understanding of the group and its environment, reporting framework, and system of internal controls
  • Takes responsibility for assessing group financial statement risks of material misstatement
  • Takes responsibility for the performance of further audit procedures, including the work of component auditors and work related to the consolidation process
  • Determines the resources needed to perform the audit, including any component auditors (see below)
  • Determines the component performance materiality (see below) to address aggregation risk (see below)
  • Directs and supervises component auditors and reviews their work
  • Makes decisions about referencing the audit of a referred-to auditor (see below)
  • Evaluates the conclusions based on audit evidence as a basis for the group audit opinion
  • Evaluates whether sufficient appropriate evidential matter is present to support the group audit opinion (including the work of component auditors or through reference to a referred-to auditor’s opinion)
  • Forms an opinion on the group financial statements based on the audit evidence obtained
  • Communicates with those charged with governance (and management, when appropriate) about audit matters including:
    • an overview of the component auditor’s work
    • decisions to make reference to audits of referred-to auditors
    • any scope limitations
    • fraud or suspected fraud
    • internal control deficiencies
  • Evaluates whether the audit documentation is sufficient to enable an experienced auditor (one with no previous connection with the engagement) to understand the following:
    • Nature, timing, and extent of audit procedures
    • Audit evidence
    • Conclusions about significant matters

When component auditors are in use, the group auditor has specific responsibilities, including the following:

  • Evaluating the adequacy of component auditor communications for the group auditor’s purposes
  • Determining the nature, timing, and extent of the component auditor’s involvement
  • Being sufficiently and appropriately involved in the component auditor’s work
  • Confirming that the component auditor understands and will comply with the ethical requirements
  • Determining the component performance materiality (see below) to lessen aggregation risk (see below)
  • Determining the appropriateness of the further audit procedures performed by the component auditor
  • Reviewing component auditor documentation while taking into account the group financial statement risks of material misstatement and significant risks
  • Evaluating the sufficiency and appropriateness of the audit evidence obtained from all components, including evidence provided by component auditors

The group auditor should communicate the following to component auditors:

  • The component auditor’s responsibilities
  • The relevant ethical requirements
  • Requesting the component auditor to confirm that they will cooperate with the group auditor
  • The need for timely communication during the engagement
  • Risk assessment matters that affect the risk assessment procedures to be performed by the component auditor
  • Matters affecting planned further audit procedures in response to group financial statement risks of material misstatement
  • Significant risks of the group financial statements that have a bearing on the component audit procedures
  • Related party relationships and transactions affecting the component
  • Any events or conditions that may raise substantial doubt about the group’s ability to continue as a going concern (as related to the component auditor’s work)

Group Engagement Partner

Who is the group engagement partner?

The auditor responsible for the group audit.

The group engagement partner’s responsibilities include:

  • Deciding that sufficient appropriate audit evidence can be obtained (including the use of component auditors and referred-to auditors) before accepting the engagement or making the decision to continue providing audit services
  • Being sufficiently and appropriately involved in the group audit, including the work of component auditors
  • Determining that the component auditor has appropriate competence and capabilities 
  • Determining the nature, timing, and extent of the component auditor’s involvement in the group audit
  • Accountability for the group audit and compliance with standards
  • Determining the appropriateness of significant judgments and conclusions
  • Taking responsibility for directing, supervising, and reviewing the work of component auditors

Here are examples of different ways the group engagement partner can direct and supervise component auditors:

  • Have meetings with or make phone calls to the component auditors about risk assessment, findings, or other issues
  • Review the component auditor’s documentation
  • Be a part of the component auditor’s meetings with component management

Group audit

Component Auditor

What is a component auditor?

An auditor that audits a group audit component, such as a business subsidiary.

A component auditor (working with the group auditor) is a part of the audit team.

Component auditors can include:

  • Auditors from a firm network,
  • An audit firm that is not a network firm, or
  • The group auditor’s firm (e.g., another office in the firm of the group auditor)

It is possible that all component auditors are from the group audit firm. It is also possible that component auditors include the group audit firm and audit firms external to the group audit firm.

The group auditor should ask the component auditor to communicate certain component matters, including the following:

  • Matters that might affect the identification and assessment of the risk of material misstatement at the group financial statement level
  • Related party relationships or transactions not previously communicated by the group auditor
  • Identification of the information audited by the component auditor
  • Whether the component auditor performed the requested work
  • Noncompliance with laws and regulations
  • Whether the component auditor complied with ethical requirements
  • Corrected and uncorrected misstatements
  • Possible management bias
  • Deficiencies in the system of internal control
  • Fraud or suspected fraud
  • Any events or conditions that might affect the group’s ability to continue as a going concern for a reasonable period of time
  • Any other significant matters communicated to the component’s management or those charged with governance
  • Overall findings and conclusions of the component auditor

The group audit report should not reference any component auditors when component auditors participate in the group audit.

Components

What are components?

A component is an:

  • Entity
  • Business unit
  • Function
  • Business activity, or
  • Some combination thereof

The group auditor determines how components relate to one another for planning and performing audit procedures.

For instance, the group auditor might decide that the group audit firm will audit entities A, B, and C, and another firm (a component auditor) will audit entity D. In this example, the group audit firm and the component audit firm comprise the audit team.

In another example, the group auditor might decide that the group audit firm will audit entities A, B, and C and reference the audit report of entity D performed by another firm (called the referred-to auditor). The referred-to auditor is not a part of the audit team.

A component auditor needs to know what the component materiality is.

Component Performance Materiality

What is component performance materiality?

It’s the amount the group auditor sets to reduce aggregation risk (see below) to an appropriate level. The component performance materiality must be less than the group performance materiality.

Additionally, the component auditor must communicate any misstatements above a certain amount (component threshold) to the group auditor. The group auditor specifies this component threshold, and it should not exceed the trivial amount in the group financial statement.

For example, the trivial misstatement amount for the ABC Consolidated financial statements might be $75,000 (as set by Cole CPA firm), and the component threshold could be $25,000 for entity B, a component audited by the Gee Whiz CPA firm. If Gee Whiz identifies one misstatement of $15,000 and another for $55,000, it must communicate the second misstatement to Cole CPA firm, the group audit firm.

One unique risk in group audits is aggregation risk.

Aggregation Risk

What is aggregation risk?

It’s the risk that aggregate uncorrected and undetected misstatements might exceed the financial statements’ materiality.

Suppose the group auditor audits companies A and B, and a component auditor audits company C. And say the group audit materiality is $750,000. If company A has a passed adjustment of $300,000 in accounts receivable (an overstatement) and company C has an undetected misstatement in accounts receivable of $600,000 (also an overstatement), the aggregate uncorrected and undetected misstatements is material.

So, the group auditor needs to plan the engagement to keep aggregation risk at an appropriate level. One way to do so is to lower the materiality thresholds for the various components.

Sometimes, another auditor audits a component and issues an opinion on the entity. When this occurs, the group auditor can elect to reference the other auditor’s opinion.

Group audit

Referred-to Auditor

What is a referred-to auditor?

An auditor who audits an entity that the group audit report references.

The group engagement partner can only make reference when the referred-to auditor issues an audit report on a component that is not restricted as to use.

A referred-to auditor is not part of the audit team or a component auditor.

Should the group auditor direct the referred-to auditor’s work? No, the group auditor does not direct or supervise the referred-to auditor or review their work. Even so, the group engagement partner should determine whether the referred-to auditor followed generally accepted auditing standards (GAAS) or the PCAOB standards. Additionally, the group auditor should read the component’s financial statements and the referred-to audit report to see if there are any significant matters.

Referred-to Auditor Example

For example, Big CPA firm might audit ABC Company and XYZ Company. Little CPA firm audits DEF Company and issues an audit opinion on it. Big CPA’s audit report can reference Little CPA’s audit (provided specific requirements are met; see below). Illustration 2 in SAS 149 provides a sample report for this situation.

Here’s a sample referred-to paragraph that would follow the Big CPA firm’s opinion paragraph:

We did not audit the financial statements of DEF Company, a wholly owned subsidiary, whose statements reflect total assets constituting 15 percent and 20 percent, respectively, of consolidated total assets on December 31, 20X1 and 20X0, and total revenues constituting 14 percent and 17 percent, respectively, of consolidated total revenues for the years then ended. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for DEF Company, is based solely on the report of the other auditors.

(Note – I bolded some words to highlight the language in this example paragraph. Standard audit opinions do not bold such wording.)

The purposes of this referred-to paragraph are to communicate:

  • that the group auditor was not involved in the referred-to auditor’s audit, and
  • the source of the audit evidence for the referred-to components

The group auditor can provide the magnitude of the referred-to auditor’s work in percentages or dollar amounts. (The example above uses percentages.)

The group auditor does not direct the audit of the referred-to auditor’s work, so the group auditor says its opinion (concerning that portion of the group financial statements) is based solely on the referred-to auditor’s report.

Referred-to Auditor Communications

What communications should occur between the group auditor and the referred-to auditor?

The group auditor should communicate the related party relationships identified by group management, any other related party, and any related party transactions (that affect the referred-t0 auditor’s work) to the referred-to auditor.

Moreover, the group engagement partner should do the following:

  1. Make the referred-to auditor aware of relevant ethical requirements
  2. Confirm whether the referred-to auditor complied with the ethical requirements
  3. Determine whether the referred-to auditor has appropriate competence and capabilities

Referencing the referred-to auditor’s report may not be suitable if the group auditor believes the referred-to auditor lacks appropriate competence and capabilities or has not complied with ethical requirements.

The group auditor should request the following from the referred-to auditor:

  1. Identification of the component financial information on which the referred-to auditor issues a report
  2. Confirmation that the referred-to auditor will cooperate with the group auditor
  3. Related party relationships not previously identified by the group auditor or group management
  4. The auditor’s report of the referred-to auditor

Number of Audit Firms

So, do group audits always include more than one audit firm?

No, not necessarily. One firm can audit all entities in group audit financial statements. Alternatively, one or more component auditors from other audit firms can audit one or more components.

Here are examples of group audits:

  1. One firm audits all components comprising a consolidated financial statement
  2. One firm audits five entities comprising a consolidated financial statement, and another firm audits two entities included in that same consolidated financial statement
  3. For a governmental audit:
    1. Audit firm A audits seven opinion units
    2. Audit firm B audits a discretely presented component unit (one opinion unit)
  4. One firm audits a company that owns an equity method investment, and another firm audits the equity method investment company
  5. One firm audits all operations of a company in the United States, and another firm audits all operations in England (the company’s financial statements include all operations)

Exhibit A of SAS 149 (titled Relevancy of Requirements in Various Group Audit Scenarios) outlines the paragraphs in this standard that are relevant to various scenarios. The scenarios include the following:

  1. Group auditor – the group auditor carries out the audit, and no component auditors participate
  2. Group auditor and component auditors – component auditors are involved in the group audit
  3. Group auditor and referred-to auditors – the group auditor, in its audit opinion, makes reference to the referred-to auditor’s report, and no component auditor is involved
  4. Group auditor, component auditors, and referred-to auditor – the group auditor, in its audit opinion, makes reference to the referred-to auditor’s report, and component auditors are involved

So, see exhibit A for the pertinent SAS 149 paragraphs when performing a group audit.

Group Audit Documentation

What group audit documentation do you need?

Group audit documentation includes the following (this is not a comprehensive list):

  • The basis for component determinations and how those were used in planning and performing the group audit
  • The basis of component performance materiality and component thresholds for communication
  • Your understanding of the group’s system of internal control
  • The basis for your determination that component auditors possess sufficient competence and capabilities
  • Evidence of the group auditor’s direction and supervision of the component auditor and the review of their work
  • Communications with component auditors, including matters such as fraud, significant matters, or going concern
  • For referred-to auditors:
    • Financial statements of the component
    • Referred-to auditor’s report
    • The basis for your determination that the referred-to auditors possess sufficient competence and capabilities
  • The group auditor’s evaluation of, and actions taken in response to, findings or conclusions from component auditors or referred-to auditors regarding issues that could materially impact the group financial statements

Group Audit Summary

Here are summary points from the above:

  • The group audit standards are often relevant when you audit an entity with multiple entities, divisions, or opinion units (governments).
  • The group auditor (including the group engagement partner) directs a group audit, including a component auditor’s work.
  • The group auditor does not direct the work of a referred-to auditor; a referred-to auditor is not a part of the audit team.

SAS 149 Effective Date

SAS 149 is effective for audits of group financial statements for periods ending on or after December 15, 2026.

efficient CPA
Aug 06

Efficient CPA: 10 Super Easy Ways to Increase Productivity

By Charles Hall | Accounting and Auditing , Technology

Do you want to be an efficient CPA?

Here are ten super easy ways to increase your productivity.

super easy ways to increase productivity

10 Ways to Become an Efficient CPA

1. Use 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 using 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. Dispatch 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; 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 sure don’t. Livescribe allows me to take notes and simultaneously record the conversation. Then I can hear any part of the discussion. For example, if–in a meeting–I 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 at that moment. The recording plays back through my Livescribe pen. That way, I don’t have to call and ask, “What did you say about intangible amortization?”

If you have an iPad, a cheaper alternative to Livescribe is Notability

6. Take Breaks and Naps

Another idea to become a more efficient CPA is to take breaks and naps.

Counterintuitive? Yes, but it works.

Breaks

I come from the old school of “don’t lift your head 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.

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. Doing so will make you a more efficient CPA.

See my article Text, Email or Call: Which is Best?

8. Exercise

I run (by myself) or walk (with my wife) six days 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 my thoughts about becoming an efficient CPA. Please share yours.

Nonprofit financial statements
Jul 26

Nonprofit Financial Statements Video Overview

By Charles Hall | Accounting

Nonprofit financial statements are unique and can be confusing to understand.

The Financial Accounting Standards Board (FASB) provides the accounting standards for nonprofit entities such as ASU 2014-16, Presentation of Financial Statements of Not-for-Profit Entities. Those standards require certain presentation requirements such as a statement of functional expenses and liquidity disclosures.

The best way to understand the not-for-profit financial statement requirements is to take a look at an example.

In the video below, I take you through the statement of financial position, the statement of activity, the statement of functional expenses, the cash flow statement and related disclosures. 

Click the picture below to watch this video now. Whether you are an experienced CPA, an auditor, a nonprofit board member, a nonprofit accountant, or an accounting student, you’ll find this helpful.

YouTube player
Journal entries
Jul 08

Journal Entries Made Easy: New Book

By Charles Hall | Accounting

Journal Entries Made Easy, an Introduction to Accounting is my new book available on Amazon.

Are you an accounting student or new to accounting? Or maybe you need a journal entry (JE) handbook. Then here’s an aid to assist you. 

Journal Entries made easy

Introduction to Accounting

In the first six chapters I explain how accounting happens, the basic building blocks. I tell you about how financial statements are the result of the following:

  • Chart of accounts
  • JEs
  • General ledgers
  • Subsidiary ledgers
  • Trial balances

The first six chapters are as follows:

Chapter 1 – Financial Statements
Chapter 2 – Chart of Accounts
Chapter 3 – Understanding Journal Entries
Chapter 4 – Types of Journal Entries
Chapter 5 – Solving Accounting Problems
Chapter 6 – Creating Good Journal Entries

In reading the first six chapters, you’ll gain an understanding of how accounting happens—even if you’ve never done any accounting.

Entry Examples

In the remainder of the book I provide sample JEs by account balance (e.g., cash) or transaction cycles (e.g., receivables/revenues). Here are those chapters:

Chapter 7 – Cash
Chapter 8 – Receivables/Revenues
Chapter 9 – Inventory/Cost of Goods Sold
Chapter 10 – Investments
Chapter 11 – Plant, Property & Equipment
Chapter 12 – Intangibles
Chapter 13 – Accounts Payable/Expenses
Chapter 14 – Accrued Salaries Payable/Salary Expenses
Chapter 15 – Debt
Chapter 16 – Equity

Video Overview of the Book

Here’s a video providing an overview of the book and those who assisted me in its development. 

YouTube player

Get Your Copy Now

Get your copy of Journal Entries Made Easy on Amazon. 

AICPA Consulting Standards
May 25

AICPA Consulting Standards – The Swiss Army Knife

By Charles Hall | Accounting and Auditing

In this post, I tell you how to use the AICPA Consulting Standards (Statement on Standards for Consulting Services). I will also compare AUP engagements with consulting engagement options.

Are you ever asked to perform unusual engagements such as reporting on a city’s water losses, or reviewing a company’s internal controls for billing, or performing test counts of widgets.

When such client requests are made, you might wonder “what professional standards should I follow?” Often the answer is in the AICPA Consulting Standards.

Woman talking about AICPA Consulting Standards

AUP or a Consulting Engagement?

Regarding unusual engagements, I am sometimes asked, “Should this be an agreed-upon-procedures (AUP) engagement or a consulting engagement?” 

My answer is usually, “It depends.”

Allow me a moment to compare AUPs with Consulting engagements, and then I’ll explain how to make this decision.

Agreed Upon Procedures Engagement

First, consider the AUP option.

AUPs are mainly composed of the following:

  1. Procedures
  2. Findings

An example of a procedure and finding follows:

Procedure – Agreed all January 2020 disbursements greater than $20,000 to checks that cleared the bank statement; also compared the payee on each check to the payee per the check register.

Finding – All check payees agreed with the exception of check 2394 for $45,000. The payee for this check was I. Cheatum, and the check register reflected a payment to King’s Supply Company.

CPAs must be independent of the client to perform AUP engagements.

CPA Consulting Engagement

Second, we’ll consider the consulting engagement option.

A consulting engagement (sometimes called management advisory services) is less precise than an AUP and does not necessarily follow the procedures/findings format. There are no specific reporting standards for a consulting engagement, so a CPA can more easily design the engagement to meet various needs. The consulting standards are more flexible than the attestation standards. And this flexibility enables you to be more creative in designing the engagement.

Independence is not required when performing consulting engagements, though the CPA still needs to be objective. For example, the CPA needs to be free of conflicts of interest. 

A consulting report might address the following:

  1. Reading of minutes
  2. Interviews of individual employees
  3. Flowcharting of internal controls
  4. Summary of production statistics
  5. Narrative of business goals and enterprise risks

As you can tell, there are no procedures and findings (though you are not prohibited from doing so). Most CPAs usually perform AUPs when there are specific procedures.

The Best Option

So which is better? An AUP or a consulting engagement?

I’ll say it again: It depends. On what? Third party reliance.

Consider the following:

  1. Will there be external parties (e.g. creditors) placing reliance on the report?
  2. Is the purpose of the report to add credibility to the information (by having the CPA attest to procedures and findings)?

If the answer to either of these questions is yes, then consider the AUP option. Why? The Attestation Standards–the guidance for AUPs–are more defined and rigorous. And AUP procedures tend to be more specific than those in a consulting engagement.

If no third party reliance, then a consulting engagement may be the better option. Always ask, “Who will receive the report?” You need to know who will read and potentially place reliance upon the report. Then design the work product accordingly. 

Litigation Exposure

Are consulting engagements riskier than AUPs? Generally, yes—at least, in my opinion.

The safer option is to perform an AUP. In such engagements, you are asked by the client to perform particular procedures or you design procedures that the client approves (see SSAE 19). This specificity lowers the risk of potential litigation as it relates to your work product.

The flexibility of a consulting engagement, while helpful in designing creative deliverables, can be riskier because of the lack of specific client requirements. (This is why the consulting engagement letter is so important. You can clearly define what the client wants done.)

Now, let me provide you with an overview of the Consulting Standards. 

AICPA Consulting Standards 

You might call the AICPA Consulting Standards the CPA’s Swiss army knife. Why? Because of the diversity of services you can perform.

What services fall under these standards?

The consulting standards specifically address six areas:

  1. Consultations – e.g., reviewing a business plan
  2. Advisory services – e.g., assistance with strategic planning
  3. Implementation services – e.g., assistance with a merger
  4. Transaction services – e.g., litigation services
  5. Staff and other support services – e.g., controllership services
  6. Product services – e.g., providing packaged training services

CPAs often provide consulting services such as the following:

  • Consultations with regard to complex transactions
  • Fraud investigation services
  • Internal control services
  • Bankruptcy services
  • Divorce settlement services
  • Controllership services
  • Business plan preparation
  • Cash management
  • Software selection
  • Business disposition planning

Now, let’s review the characteristics of consulting engagements.

Characteristics of a Consulting Engagement

The characteristics of a consulting engagement include the following:

  • Generally nonrecurring
  • Requires a CPA with specialized knowledge and skills
  • More interaction with client
  • Generally performed for the client (usually, no third party sees the information)

But, what are the workpaper requirements for a consulting engagement?

Consulting Workpaper Requirements

Consulting workpaper requirements are minimal. Nevertheless, documentation is always wise.

The understanding with the client can be oral or in writing (I recommend the latter).

The consulting standards do not require the CPA to prepare workpapers, but you should do so anyway. The workpapers are the link between your work and your report. Also, the general standards of the profession, contained in the AICPA Code of Professional Conduct, apply to all services performed by members. The general standards state:

Sufficient Relevant Data. Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

By now, you’re probably thinking the Consulting Standards sound easy, I’ll bet the reporting requirements are challenging. Not so, my friend.

Consulting Reports

A report is not required, but if one is provided, the client and CPA determine the content and format. Again, define the particulars in an engagement letter. How’s that for flexibility? 

No Opinion or Attestation Report

For consulting engagements, the CPA does not issue an opinion or any other attestation report.

Subject to Peer Review?

Are deliverables created under the Consulting Standards subject to peer review? No.

Where Can I Find the AICPA Consulting Standards?

Here are the AICPA Consulting Standards. They are only a few pages in length. 

AICPA Consulting Standards Summary

The Consulting Standards provide us with a breath of options, enabling you and I to craft services and reports in the manner desired by our clients. This is one Swiss army knife that I will continue to use. 

Here is a table comparing consulting and AUP services. If needed, the table below scrolls horizontally.

Consulting vs. AUP

Question Consulting AUP
Procedure and finding format?Usually no, but permissible to do soYes
Engagement letter required?No, but best to obtain a signed agreement with specifications of what is to be done and the type of report to be issued (if any)Yes
Work papers required?
Must obtain obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performedYes
Report required?No; report can be provided but no specific wording is requiredYes; specific wording is required
Opinion provided?NoNo
Offers a high level of flexibility in terms of structuring the engagement?The approach and report (if one is issued) is very flexibleAccountants can design the AUP procedures but the client has to approve them
An attest service?NoYes
Provides assurance to third parties?No, report can be provided to third parties but it is not an assurance reportYes
Subject to peer review?NoYes
When a report is to be provided to third parties, consider using the AUP approach since it is an assurance service.

 

Read my article about AUPs (SSAE 19)

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