Category Archives for "Accounting and Auditing"

governmental auditing standards
Oct 04

Governmental Auditing Standards: Understand the Requirements

By Charles Hall | Auditing , GAAS , Single Audit , Yellow Book

If you perform governmental audits, you know that different governmental auditing standards can come into play.

In this video, I explain three essential governmental auditing standards. By understanding these, you can properly plan and perform your engagements to comply with professional standards.

I discuss the following audit standards:

To learn more, click the video below. 

 

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deferred inflow and deferred outflow
Oct 02

Deferred Outflows and Deferred Inflows in Governments

By Charles Hall | Accounting , Local Governments

GASB 63 and 65 provide guidance regarding deferred outflows and inflows in governments. This article provides an overview of those standards.

This article will also aid you in differentiating deferred outflows and assets as well as deferred inflows and liabilities (such as unearned revenues). 

deferred inflow and deferred outflow

What is the purpose of GASB 63 and 65?

GASB is using one of its conceptual statements (specifically Concepts Statement 4) to make revisions to reporting requirements (to include deferred outflows and deferred inflows).

Prior to GASBS 63 and 65, debit balances were reported on the statement of net position (balance sheet) as assets; similarly, all non-equity credits were reported as liabilities. These standards add deferred outflows and deferred inflows to the mix.

What are the main points of GASB 63?

This statement distinguishes assets from deferred outflows of resources and liabilities from deferred inflows of resources.

The five elements of the statement of net position are:

  1. Assets
  2. Deferred Outflows of Resources
  3. Liabilities
  4. Deferred Inflows of Resources
  5. Net Position

The three categories of net position are:

  1. Net Investment in Capital Assets
  2. Restricted
  3. Unrestricted

What is the difference in assets and deferred outflows?

Assets and Deferred Outflows

All debit balances in the statement of net position are reported as:

  • Assets
  • Deferred Outflows

Assets represent present service capacity (a resource that the government can use to provide services). Prepaid assets (such as prepaid rent), for example, is an asset since it has present service capacity; it can be used to provide a service.

Deferred outflows (e.g., prepaid bond insurance) represent the consumption of net position in future reporting periods. Deferred outflows have no present service capacity (they are not assets); they simply represent expenses that will be recognized in a future period.  

What is the difference in liabilities and deferred inflows?

Liabilities and Deferred Inflows

All non-equity credits in the statement of net position are reported as:

  • Liabilities
  • Deferred Inflows

Liabilities normally represent a future surrender of resources; deferred inflows do not. A liability (e.g., unearned revenue) represents a obligation. Deferred inflows do not represent an obligation; they are simply revenues to be recognized in a future period (that is, they increase net position in a future period). 

What are the main points of GASB 65?

  • It identifies the specific items to be categorized as deferred inflows and deferred outflows.
  • It clarifies the effect of deferred inflows and deferred outflows on the major fund determination.
  • It limits the use of the term deferred in financial statements.

Examples of deferred inflows and deferred outflows

  • The gain or loss from current or advance refundings of debt (the gain or loss will no longer be netted with the related debt but will be shown separately as a deferred outflow or a deferred inflow)
  • Prepaid insurance related to the issuance of debt (which is a deferred outflow)
  • Property taxes received or accrued prior to the period in which they will be used (which are deferred inflows)
  • Property taxes that are not available for governments funds (the amounts not collected within 60 days of year-end which is titled Unavailable revenue – property taxes and is a deferred inflow)

Debt Issuance Cost

Debt issuance costs should be expensed when incurred. GASB concluded that debt issuance costs do not relate to future periods, and, therefore, should be expensed.

Cash Advances for Expenditure-Driven Grants

Cash advances from expenditure-driven grants should be recorded as unearned revenue (a liability). The key eligibility requirement for an expenditure-driven grant is the use of funds (which does not occur until funds are spent). Any grant funds received prior to meeting eligibility requirements will be shown as a liability. It is improper to use the word deferred for this line item; for example, deferred revenue is not appropriate. The more appropriate title is unearned revenue. Unearned revenue can appear at the fund level and the government-wide level and is reported as a liability (not deferred inflow) in both places. 

Determination of Major Funds

Assets should be combined with deferred outflows of resources and liabilities should be combined with deferred inflows of resources for purposes of determining which elements meet the criteria for major fund determination.

compensated absences
Sep 11

Understanding Compensated Absences: GASB 101 Explained

By Charles Hall | GASB

GASB issued Statement No. 101, Compensated Absences, and updated the recognition and measurement guidance for compensated absences to better meet the information needs of financial statement users.

GASB 101 is one of those standards where you might think you already know what you need to do, but things have changed when you look deeper. You may need to make new compensated absence accruals, ones you’ve never made before.

In this article, I address the following GASB 101 topics:

  • Definition of compensated absences
  • Recognition and measurement criteria
  • Leave that has not been used
  • Leave that has been used
  • Salary-related payments
  • Leave related to defined contribution plans
  • Leave and defined benefit plans
  • Holidays
  • Notes to the financial statements
  • Compensated absence examples
  • The effective date of GASB 101

compensated absences

Compensated Absences Defined

So, what is a compensated absence?

It’s leave for which employees may receive one or more of the following:

  1. Cash payments for time off
  2. Other cash payments for unused leave upon termination or
  3. Noncash settlements, such as conversion to a defined benefit post-employment amount

These payments can occur during employment or upon termination of employment. The most common forms of compensated absences are vacation and sick leave, but it also includes paid time off (PTO), holidays, sabbatical leave, and parental leave.

Termination of employment includes the following:

  • End of active service
  • Voluntary resignation, or
  • Retirement

Compensated Absences Recognition and Measurement

Financial statements using the current financial resources measurement focus recognize expenditures only for amounts to be liquidated with expendable available financial resources. This measurement focus is used in governmental funds such as the general fund.

As you would expect, compensated absences are recognized in financial statements using the economic resources measurement focus, such as enterprise funds (e.g., water and sewer funds) and government-wide financial statements. Such financial statements include short-term and long-term liabilities. Include salary-related amounts (see below) in the compensated absences liability and accrue liabilities for the following:

  • Leave that has not been used, and
  • Used leave that has not been paid for or settled

1. Leave that Has Not Been Used

The statement requires recognizing liabilities for compensated absences when:

a. the leave is attributable to services already rendered,

b. the leave accumulates, and

c. it is more likely than not to be used or paid.

a. Services Already Rendered

So, what are services already rendered? It is the work an employee has already performed to earn the leave. For example, suppose an employee works for a certain period and earns vacation or sick leave according to the employer’s policies. In that case, the leave is considered attributable to services already rendered.

b. Accumulate

What does accumulate mean? Leave that is carried forward from one reporting period to another is that which accumulates. For example, if an employee earns ten days of vacation leave each year and does not use all ten days in the current year, the unused days can accumulate and be carried over to the following year.

c. More Likely Than Not to be Used or Paid

And what is more likely than not to be used or paid? This phrase means there is a greater than 50% chance that the leave will either be taken as time off by the employee or paid out in cash (or through another non-cash settlement, such as conversion to post-employment benefits).

For example, if employees historically use their earned vacation leave within a year or two, the government would consider this leave more likely than not to be used.

Also, if the government typically pays employees for unused vacation days upon termination of employment, the leave is more likely than not to be paid.

Consider the government’s compensated absence policies and historical patterns to evaluate whether the leave is more likely than not to be used or paid.

Measurement Amount

Use the employee’s pay rate as of the date of the financial statements to compute the compensated absence liability. If Joe Johnson’s pay rate is $30 per hour on June 30, 2025, and $35 per hour on June 30, 2026, use $30 per hour for the June 30, 2025, financial statements and $35 per hour for the June 30, 2026, financial statements.

2. Leave that Has Been Used

Report a liability for used leave that has yet to be paid or settled through other means. If thirty people were on vacation the last week of the fiscal year (June 30, 20X5) but the government makes those payments in July, recognize the compensated absence liability for this on June 30, 20X5. Why not accrue such amounts as accrued salaries? Because the liability is related to leave.

Salary-Related Payments

Salary-related payments are additional costs that an employer incurs directly due to the payment of an employee’s salary or wages. These payments are tied to the amount of salary paid to employees and are often mandatory or automatically triggered when salaries are paid.

Examples include the following:

  • Social Security
  • Medicare taxes
  • Defined contribution amounts

Accrue these salary-related amounts (both for unused and used leave) in compensated absences if they are directly and incrementally associated.

Directly means the payment is directly associated with the salary paid.

Incrementally means amounts paid in addition to the salary. In some cases, incrementally associated amounts relate to a portion of the leave. For example, defined contribution payments might be paid for leave used for time off but not for leave related to termination.

compensated absences

Leave – Defined Contribution

Accrue salary-related defined contribution pension and OPEB amounts for unused leave as compensated absences (when they are directly and incrementally associated with leave). Recognize the related expenses as pension expenses or OPEB expenses, as applicable.

Accrue salary-related defined contribution pension and OPEB for used leave as a pension or an OPEB liability, as applicable.

Leave – Defined Benefit

Do not include salary-related payments for defined benefit pensions or defined benefit OPEB when measuring liabilities for compensated absences. Such amounts are recognized in the government’s pension or OPEB liabilities.

The liability for compensated absences concerns only the direct cost of paying employees for leave, not the additional expenses related to the defined benefit pension plan. By keeping these calculations separate, the government avoids double-counting pension-related expenses already accounted for under the pension plan’s liabilities.

Holidays

Do not accrue holidays in compensated absences. (The GASB board says, “The benefit of recognizing them before they are used would be minimal.” So, they chose to provide this exception to the general recognition approach.)

Compensated Absences Notes to Financial Statements

Governments typically disclose beginning debt, increases, decreases, and ending debt in separate columns in the debt disclosure.

Governments can present one of the following for its compensated absence liability:

  • Separate increases and decreases
  • Net increase or net decrease

If you use a net increase or net decrease, disclose it. GASB 101 says the government “should indicate that it is a net amount.”

Below, I provide examples of compensated absence scenarios.

Paid Time Off (PTO)

Some governmental employees can use PTO for vacation time, sick leave, or other time off. If the PTO accumulates and carries over at the end of the year and the government pays for such unused leave upon termination, recognize a compensated absence liability for such amounts. Why? It accumulates, it’s more likely than not to be paid, and the leave is attributable to services already provided.  

Sick Leave

Suppose a government offers sick leave that is earned monthly and carries over at the end of the fiscal year, but they don’t pay for such amounts when the employee terminates. Should the government recognize the sick leave as a compensated absence liability? Yes, but only a portion. Why? The leave accumulates and carries over, but not all amounts will be paid (that is, termination does not trigger a payment)–thus, not all amounts are more likely than not to be used or paid. The government will estimate the amounts more likely than not to be used or paid and will accrue that amount.

In another example, suppose sick leave accumulates monthly, is not paid for upon termination, and does not carry over at the end of a calendar year. If the government has a June 30, 20X5 year-end, should it recognize sick leave for services already rendered as a compensated absence liability? Yes, but only for the amounts likely to be paid by December 31, 20X5. Why? The sick leave accumulates (it carries over from its fiscal year-end of June 30, 20X5) and is for services already provided.

Parental Leave

Suppose a government provides parental leave (e.g., three months off) upon the birth or adoption of a child. Should such amounts be accrued as a compensated absence? Yes, but only when the leave commences. Accrue the entire amount (e.g., three months) as the employee goes on leave.

Effective Date

GASB 101 is effective for fiscal years beginning after December 15, 2023, and all reporting periods after that. Governments can early implement the standard.

Summary

GASB 101, Compensated Absences, updates the recognition and measurement guidance for compensated absences.

Accrue unused and used but not paid or settled compensated absences. Also, include salary-related expenses such as social security.

Accrue compensated absences if:

  1. The leave is attributable to services already rendered.
  2. The leave accumulates.
  3. It is more likely than not to be used or paid.
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.

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