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

Bookkeeping, preparations, compilations
Jan 12

Bookkeeping, Preparations, Compilations, and Review Engagements: Questions and Answers

By Charles Hall | Preparation, Compilation & Review

Today, we’ll answer various questions regarding bookkeeping, preparations, compilations, and review engagement.

Bookkeeping, preparations, compilations

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Q: Should I issue management letters for preparation, compilation, or review engagements?

A: While not required, it is advisable to provide management letters when performing SSARS 21 services. Why? Two reasons: (1) It’s a way to add value to the engagement, and (2) it’s a way to protect yourself from potential litigation. Clients do–sometimes–sue CPAs in these so-called “lower risk” engagements. If we see control weaknesses (while performing a compilation for example), we should communicate those–even though standards don’t require it. Then, if theft occurs in that area and you are later sued regarding the fraud, you have a defense. If you don’t issue a management letter, at least send an email regarding the issues noted and retain a copy.

Q: Why obtain an engagement letter for nonattest services such as bookkeeping and tax (standards don’t require it)?

A: In all engagements, we want to state exactly what we are doing. Why? So, it is obvious what the client has hired us to do–and what they have not hired us to do. If a client says, “I told you to do my monthly bookkeeping and to file my property tax returns,” but you have no recollection of being asked to perform the latter, you need an engagement letter that specifies monthly bookkeeping (and nothing else).

Q: Should I say–in a bookkeeping engagement letter–the service is not designed to prevent fraud?

A: We should obtain a signed engagement letter for bookkeeping services, even though not required by standards. And yes, by all means, include a statement that the bookkeeping service is not designed to detect or prevent fraud.

Q: If I note fraud while performing a bookkeeping, preparation, compilation, or review engagement, should I report it to the appropriate levels of management?

A: Standards require this communication for review engagements. I would do likewise for the other services (though not required in SSARS 21).

Q: Am I required to be independent if I perform bookkeeping and preparation services?

A: No, since both are nonattest services.

Q: If I create financial statements as a byproduct of an 1120 tax return, am I subject to AR-C 70 Preparation of Financial Statements?

A: No, you are only subject to AR-C 70 if you are engaged to prepare financial statements.

Q: If I perform bookkeeping services in a cloud-based accounting package such as QuickBooks, am I subject to AR-C 70 (SSARS 21)?

A: It depends. Yes, if you are engaged to prepare financial statements. No, if you were not engaged to prepare financial statements. Who “pushes the button” to print the financial statements has no bearing on the applicability of AR-C 70.

Q: Am I required to have a signed engagement letter for all preparation, compilation and review engagements?

A: Yes.

Q: Can I act as a controller-for-hire and perform a compilation engagement?

A: Yes, but you need to state that you are not independent in the compilation report.

Q: Can I act as the controller-for-hire and perform a review engagement?

A: No. Independence is required for review engagements.

Q: If I prepare financial statements and perform a compilation, am I performing one service (as I did under SSARS 19) or are these considered two separate services?

A: They are two separate services. The preparation is a nonattest service, and the compilation is an attest engagement. Both can be specified in one engagement letter.

Using Slack for CPA Project Communications
Jan 04

Are You Using Slack for CPA Project Communications?

By Charles Hall | Technology

Do you ever find yourself digging through hundreds of emails to find one message? You know it’s there somewhere, but you can’t put your electronic finger on it. Use Slack to communicate by project–that way, you’ll have all messages (by project, e.g., individual audit engagement) in one place.

Using Slack for CPA Project CommunicationsWhat is Slack?

Slack is software designed to allow project teams–e.g., audit team–to send and store messages. Why use Slack rather than traditional email? Messages are stored by channel (by project), making it much easier to see project conversations.

The Slack website says the following:

Most conversations in Slack are organized into public channels which anyone on your team can join. You can also send messages privately, but the true power of Slack comes from having conversations everyone on the team can see. This transparency means it’s quick to find out what’s going on all across the team, and when someone new joins, all the information they need is laid out, ready for them to read up on.

How CPAs Use Slack

How can you as a CPA or auditor use Slack?

Create a channel for each project, and ask all team members to communicate using Slack (rather than email).

In CPA firms, some activities are year-round such as quality control reviews (we perform several hundred a year). Other activities are a true project, such as an audit engagement. Either way, you can use a separate (Slack) channel to communicate and store all related messages.

Using Slack for Quality Control Reviews — An Example

Below you see an example of how Heather, my associate, and I use Slack to communicate about file reviews in our quality control department. By doing so, we can see who is doing what and when. Also, all of the messages are searchable by channel. So, suppose I’m wondering when we reviewed the ABC Bank engagement. I can search the CPR (cold partner review) channel to see who performed the review and when. Notice, in this channel, Heather and I are posting status comments. We do so for the following reasons:

  • To create a history of each review
  • To notify each other that the review has commenced (Slack automatically sends a notification message to those included in a channel)

To select our quality control channel, I click the CPR channel on the left (where all the channels appear). Once I click CPR, I see the most recent messages for this channel.

 

Slack

Made with Stitcher

Audits – Another Example

Think about a typical audit. You have three to five team members, with some individuals coming and going. To maintain continuity, you need a message board that allows all audit team members to see what is going on. That’s what Slack does when you create a channel for a particular audit. Think of it as a message board in the cloud since the designated personnel can see the audit communications with their PC, iPad, or cell phone.

Other Advantages of Slack

Advantages of Slack include the following:

  • Accessibility from all devices, including cell phones and tablets
  • Shareability of documents such as PDFs and spreadsheets
  • Integration with other apps such as Trello and Google Calendar
  • Configurable notifications of messages to team members
  • Private messaging (when needed)
  • Basic plan is free

Give It a Try

The best way to see how Slack works is to try it yourself. You don’t need any training since it’s easy to use. To see more information about Slack, click here.

Risk Assessment at the Assertion Level
Nov 07

Should Auditors Assess the Risk of Material Misstatement at the Assertion Level?

By Charles Hall | Accounting and Auditing

Should auditors assess the risk of material misstatement at the assertion level? Or is it better assess risk at the transaction level (for all assertions at once)? Those who assess at the transaction level think they are saving time. But is it more efficient to assess the risk of material misstatement at the transaction level—or might it be more economical to do so at the assertion level?

Assess the Risk of Material Misstatement at the Assertion Level

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Why Assess the Risk of Material Misstatement at the Assertion Level?

If the goal of assessing risk is to quickly create a risk assessment document (and nothing else), then assessing risk at the transaction level makes sense. But we know the purpose of the risk assessment document is to design responsive audit procedures. Consequently, assessing risk at the assertion level is wiser. 

Why? Let’s answer that question with an accounts payable example. 

Accounts Payable Risk Assessment Example

Suppose the auditor assesses risk at the transaction level, assessing all accounts payable assertions as high risk. What does this mean? It means the auditor should perform rigorous substantive procedures to respond to the high-risk assessments for each assertion. Why? His risk assessment for valuation, existence, rights and obligations, completeness, and all other assertions are high. Logically, his substantive procedures must now address all of those (high) risks.

Alternatively, what if the accounts payable completeness assertion is assessed at high and all other assertions are at low to moderate? How does this impact the audit plan? Now the auditor will create substantive procedures that respond to the risk that payables are not complete such as conducting a search for unrecorded liabilities. Additionally, he may not perform existence-related procedures such as sending vendor confirmations. 

Do you see the advantage? Rather than using a scattered approach—let’s audit everything—the auditor pinpoints his audit procedures.

Planners or Doers

Some auditors are planners. Some are doers

The planners like to perform risk assessment procedures—such as reviewing internal controls.

But those focused on doing say, “Let’s get on with it.” Many such auditors focus on a balance sheet audit approach

If I, on the first day of the audit, immediately perform basic procedures such as reviewing year-end bank reconciliations or sending receivable confirmations, then I am a doer. The audit standards do not smile upon me. Those standards call for the following:

  1. Perform risk assessment procedures
  2. Assess risks of material misstatement
  3. Create an audit plan
  4. Perform the audit plan
  5. Consider whether the initial risk assessment and audit plan is appropriate (if not amend them)

Many auditors start with step 4. Why? Because we think we already know what the risks are. Or worse yet, we are just doing the same as last year without considering risks.

Linkage with Further Audit Procedures

So why do auditors assess risk at the transaction level and not the assertion level? Sometimes, it’s because we plan to do the same as last year without considering risks. Such thinking is dangerous and not in the spirit of the audit standards—and it costs you money!

Risk Assessment

Picture from AdobeStock.com

 

As I perform peer reviews, firms say to me, “I know I over-audit, but I’m not sure how to lessen what I do.” And then they say, “How can I reduce my time and still perform a quality audit?” 

Here’s my answer: “Perform real risk assessments and document the risk of material misstatement at the assertion level. Then tailor—yes, change the audit program—to address the risks. Perform substantive procedures related to the identified risk areas—and slap yourself every time you even think about same as last year. Trust your judgment.”

And what are the benefits of assessing risk at the assertion level?

  • Think more and work less
  • Make higher profits
  • Audit in conformity with standards
  • Peer reviewers will like it

Your Files

Look at two or three of your audit files and review your risk assessments. Are you assessing risk at the transaction level or at the assertion level? Plan to spend more time in performing risk assessment procedures and documenting your risks at the assertion level–and less time performing your back-of-file (substantive) work.

Accountant's iPad
Nov 02

Getting More Done with My Favorite Accountant’s Device

By Charles Hall | Technology

Accountants use all types of electronic devices and software: Caseware, Excel, scanners, Powerpoint, Adobe Acrobat, monitors, QuickBooks, iPhones—just to name a few. For me, the iPad tops them all.

Accountant's iPad

I purchased my first iPad about six years ago for about $500.  Then, four years ago, I bought a second one. A year ago I picked up my third. Now, having spent hundreds of hours on iPads, I am smitten. 

You may be thinking, “Charles, you’re a CPA. How do you and why do you spend that much time on an iPad? Don’t you primarily use a desktop computer?” Yes, my work computer is my primary tool. But in terms of enjoyment, the iPad wins hands down. 

Ways I Use My iPad

“How do you use it?” you say. Here are few ways:

Convenience and Portability

Mostly, I use my iPad at home, seated on my couch. The portability of the device is its primary benefit. It’s large enough to read from and work on—and small enough to take wherever I go.

Your Favorite Device

So what’s your favorite tool and how do you use it?

Pro Forma Information
Oct 17

Are You Up to Speed on the New Pro Forma Information Standard?

By Charles Hall | Preparation, Compilation & Review

The Accounting and Review Services Committee (ARSC) issued SSARS 22 Compilation of Pro Forma Financial Information. You may remember that ARSC did not address pro forma information in SSARS 21. SSARS 22 clarifies AR 120 Compilation of Pro Forma Information and codifies it as AR-C 120.

Pro Forma Information

So what is pro forma information? It is a presentation that shows what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date.

Pro Forma Information

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To understand SSARS 22, let’s answer a few questions.

Examples of Pro Forma Information

Examples of pro forma information include presenting financial statements for the following:

  • Business combinations
  • The selling of a significant part of a business
  • A change in the capitalization of an entity

Again we are providing financial information as though the transaction or event has–already–occurred.

Required Disclosures

In pro forma financial information, what should be disclosed?

  • A description of the transaction (or event) that is reflected in the presentation
  • The date on which the transaction (or event) is assumed to occur
  • The financial reporting framework
  • The source of the financial information
  • The significant assumptions used
  • Any significant uncertainties about those assumptions
  • A statement that the pro forma information should be read in conjunction with the related historical information and that the pro forma information is not necessarily indicative of the results that would have been attained had the transaction (or event) actually taken place

Independence

Must the accountant consider his or her independence? Yes, since this is a compilation engagement. (Note: The preparation of the pro forma information is considered a nonattest service.)

Acceptance and Continuance

Should the accountant perform acceptance and continuance procedures? Yes.

Engagement Letter

Is an engagement letter required? Yes, and it must be signed by the accountant’s firm and management or those charged with governance.

Compilation Procedures

What compilation procedures should be performed?

  • Read the pro forma financial information to determine if it is appropriate in form and free from obvious material misstatement
  • Obtain an understanding of the underlying transaction or event (that the pro forma information is based upon)
  • Determine that management includes:
    • Complete financial statements for the most recent year (or from the preceding year if financial statements for the most recent year are not yet available) or make such financial statements readily available (e.g., post on a public website)
    • If pro forma financial information is presented for an interim period, either historical interim financial information for that period (which may be in condensed form) or make such interim information readily available
    • For business combinations, the relevant financial information for the significant parts of the combined entity
  • Determine that the information in the preceding bullet has been subjected to a compilation, review or an audit
  • Determine that the compilation, review or audit report on the historical information is included in any document containing the  pro forma financial information (or made readily available such as on a public website)
  • Determine whether the significant assumptions and uncertainties are disclosed
  • Determine whether the source of the historical financial information on which the pro forma information is based is appropriately identified

Pro Forma in Conjunction with Other Services

Can the pro forma engagement be performed in conjunction with a compilation, review or an audit? Yes. Alternatively, the pro forma engagement can be performed separately.

Required Documentation

What documentation is to be retained in the file?

  • Engagement letter
  • The results of procedures performed
  • Copy of the pro forma financial information
  • Copy of the accountant’s compilation report

Compilation Report Required

Is a compilation report to be issued? Yes. (See sample report below.)

Is the accountant offering any assurance regarding the pro forma information? No.

Can the pro forma compilation report be added to the accountant’s report on historical financial statements? Yes. Alternatively, the pro forma compilation report can be presented separately.

Effective Date of SSARS 22

What’s the effective date of SSARS 22? The standard is effective for compilation reports on pro forma financial information dated on or after May 1, 2017.

Potential New Service for Your Clients

If you are not already providing pro forma information to clients, consider suggesting this service when appropriate. Clients may find pro forma information helpful in evaluating the potential sale of stock, the borrowing of funds for a project, or the sale of a part of the business.

Sample SSARS 22 Compilation Report

Exhibit B of SSARS 22 provides the following sample compilation report on pro forma financial information:

Management is responsible for the accompanying pro forma condensed balance sheet of XYZ Company as of December 31, 20X1, and the related pro forma condensed statement of income for the year then ended (pro forma financial information), based on the criteria in Note 1. The historical condensed financial statements are derived from the financial statements of XYZ Company, on which I (we) performed a compilation engagement, and of ABC Company, on which other accountants performed a compilation engagement. The pro forma adjustments are based on management’s assumptions described in Note 1. (We) have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not examine or review the pro forma financial information nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, I (we) do not express an opinion, a conclusion, nor provide any form of assurance on the pro forma financial information.

The objective of this pro forma financial information is to show what the significant effects on the historical financial information might have been had the underlying transaction (or event) occurred at an earlier date. However, the pro forma condensed financial statements are not necessarily indicative of the results of operations or related effects on financial position that would have been attained had the above mentioned transaction (or event) actually occurred at such earlier date.

[Additional paragraph(s) may be added to emphasize certain matters relating to the compilation engagement or the subject matter.]

[Signature of accounting firm or accountant, as appropriate] [Accountant’s city and state]
[Date of the accountant’s report]

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