Category Archives for "Preparation, Compilation & Review"

Audit workpapers
Jan 21

10 Steps to Better Audit Workpapers

By Charles Hall | Accounting and Auditing , Preparation, Compilation & Review

In this post, I provide ten steps to better audit workpapers. 

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

Your tickmarks look like something my six-year old created. 

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

Or maybe as a reviewer you stare at a workpaper and you’re thinking, “what the heck is this?” Your stomach tightens and you say out loud, “I can’t understand this.”

There are ways to create greater audit workpaper clarity.

Audit workpapers

10 Steps to Better Audit Workpapers

Here are ten steps to make your workpapers sparkle.

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

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

b.  State the purpose; for example:

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

Or:

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

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

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

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

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

5.  Define tickmarks.

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

7.  Communicate the reason for each journal entry.

The following explanation would not be appropriate:

To adjust to actual.

A better explanation:

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

8.   When in doubt, leave it out.

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

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

Again, does the work paper have a purpose?

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

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

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

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

This goes over better than:

You failed to define your tickmark–again?

Last Remarks

What other ways do you make your audit workpapers sparkle? Comment below.

The AICPA provides a sample workpaper template that you may find helpful. 

You may also be interested in a related post: How to Review Financial Statements.

Also, see Audit Documentation: Peer Review Finding

SSARS 25
Jan 21

SSARS 25: Materiality and Adverse Conclusions

By Charles Hall | Accounting and Auditing , Preparation, Compilation & Review

The AICPA has issued SSARS 25. It is titled Materiality in a Review of Financial Statements and Adverse Conclusions. Below I tell you how this standard affects your future review engagements.

Materiality in Review Engagements

Until SSARS 25, there was no requirement for you to document materiality in review engagements. Some firms, like my own, decided to do so any way. Others have not. Now, there's no choice. SSARS 25 explicitly requires that we determine and use materiality.

Makes sense. The accountant's conclusion says we are not aware of any material modifications that should be made. The conclusion paragraph follows:

Accountant's Conclusion
Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America. 

It would be difficult to plan or conclude a review engagement without knowing what materiality is. SSARS 25 requires that we design and perform analytical procedures and inquiries to address all material items in the financial statements. This includes disclosures.

New Inquiry Requirements

SSARS 25 adds new inquiries of management including:

  • Material commitments, contractual obligations, or contingencies
  • Material nonmonetary transactions
  • Significant changes in the business activities or operations
  • Significant changes to the terms of contracts that materially affect the financial statements
  • Significant journal entries
  • Status of any uncorrected misstatements from the previous review engagement
  • How management determined that significant estimates are reasonable
  • Management's assessment of the entity's ability to continue as a going concern, and whether there are conditions that cast doubt about the entity's ability to continue as a going concern

Related Party Transactions

Additionally, SSARS 25 requires that the accountant remain alert for related party transactions that were not disclosed by management. The accountant should inquire of management about transactions outside the normal course of business. You want to know if related party transactions are being used to make the financial statements look better than they really are. 

Next, you will see that the standard now permits adverse conclusions.

Adverse Conclusions in Review Engagements

In the past, adverse conclusions in a review engagement were not allowed. SSARS 25 changes this. If the financial statements are materially and pervasively misstated, you can issue an adverse conclusion.

SSARS 25 provides an illustrative accountant's review report with an adverse conclusion. (See illustration 7 on pages 85 and 86 of SSARS 25.) That example states the financial statements are not in accordance with accounting principles generally accepted in the United States of America.

Here's the adverse review report conclusion:

Adverse Conclusion
Based on my (our) review, due to the significance of the matter described in the Basis for Adverse Conclusion paragraph, the financial statements are not in accordance with accounting principles generally accepted in the United States of America.

One more thing, SSARS 25 requires a statement in the review report regarding independence.

SSARS 25

Independence in Review Reports

Independence is still required to perform a review engagement. What is different, however, is the accountant must include a statement in the review report saying he or she is independent. That phrase, to be included in the Accountant's Responsibility section of the report, reads as follows:

We are required to be independent of ABC Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements related to our review.

See examples of the independence wording in the illustrative reports in SSARS 25. Those reports start on page 75 of the standard.

So when is SSARS 25 effective?

SSARS 25 Effective Date 

The effective date for SSARS 25 is for periods ending on or after December 15, 2021. Early implementation is permitted.

lacking independence in a compilation
Jan 07

Lacking Independence in a Compilation

By Charles Hall | Preparation, Compilation & Review

Do you lack independence in a compilation engagement? If yes, then here’s how to disclose the impairment in the compilation report.

An accountant can issue a compilation report even though independence is lacking. When independence is impaired, the Statement on Standards for Accounting and Review Services requires that the CPA modify the compilation report. The cause of the impairment (e.g., you own a portion of the business) can be disclosed in the compilation report but is not required. You can, if you prefer, simply say you are not independent; this is what most CPAs do.

lacking independence in a compilation

Lacking Independence in a Compilation – Current Year

The accountant’s compilation report can disclose a lack of independence as follows:

We are not independent with respect to ABC Company.

Just add this sentence separately at the bottom of the compilation report.

Lacking Independence in a Compilation –  Prior Year

If you were not independent in 2020 but you are independent in 2021 (and comparative statements are presented), the accountant’s report can read:

As of and for the year ended December 31, 2020, we were not independent with respect to ABC Company.

Alternatively, the report can read:

As of and for the year ended December 31, 2020, we were not independent with respect to ABC Company. We are currently independent with respect to ABC Company.

Independence in Review Engagements and Audits

CPAs must be independent to perform review engagements or audits. There are no exceptions. See the AICPA Code of Professional Conduct for guidance on independence issues. Independence rules are found in section 1.200.

Independence in Preparation of Financial Statement Engagements

CPAs can perform a Preparation of Financial Statement engagement without being independent. No independence disclosure is required since this service is a nonattest service. 

efficient way to issue financial statements
Mar 20

Issue Financial Statements in the Most Efficient Way

By Charles Hall | Preparation, Compilation & Review

What is the most efficient way to issue financial statements?

Tax basis financial statements without disclosure, using the Preparation of Financial Statements option (AR-C 70).

efficient way to issue financial statements

This answer assumes you are preparing financial statements in conjunction with a tax return and that those financial statements are issued separately—apart from the tax return—to your client.

Continue reading

Special purpose reporting framework
Mar 19

Special Purpose Reporting Frameworks

By Charles Hall | Accounting and Auditing , Preparation, Compilation & Review

In this article, I provide information about various special purpose reporting frameworks (e.g., cash basis, modified-cash basis, and income tax basis) and how you can use them to create financial statements for your clients. 

Suppose you’ve been contacted by your client to prepare their financial statements and issue a compilation report. At first, you think, I’ll create the financials in accordance with GAAP, but then you remember there are special purpose reporting frameworks. Maybe the cash basis or income tax basis is a better option.

Special purpose reporting framework

Continue reading

1 2 3 4
>