As we begin planning for our calendar year-end audits, we should be prioritizing both engagement quality and efficiency. Here are ten ways we can increase small audit profits in the short and long run:
1. Evaluate the worth of audit clients every year. Outplace the clients with the least potential that cause the most headaches!
2. Spend a few hours modifying your purchased practice aids or creating your own practice aids for small audits. Consider using spreadsheet documentation instead of canned electronic risk assessment tools. While purchased practice aids and electronic tools can help auditors to apply auditing and quality control standards, they usually contain information and require procedures that aren’t ordinarily applicable to small audits. Completing all of these practice aids and using electronic tools on small engagements usually is not cost-beneficial.
3. Make sure the engagement leader is involved in all phases of the audit. Delivering the engagement letter, participating in the engagement team planning/brainstorming meeting and reviewing the engagement in stages in the field can minimize engagement time and improve the quality of audit evidence.
4. Assess risk by financial statement classification instead of by individual assertions. Procedures performed at assessed levels of misstatement for financial statement classifications will ordinarily verify all relevant assertions, particularly on small audits. Detailed assessment of risk by individual assertions, therefore, is an unnecessary expenditure of time.
5. Determine tolerable misstatement and the lower limit for individually significant items based on risk at both the financial statement and classification (assertion) levels. For small audits, abandon materiality tables and use 1% of the appropriate base (total assets or total revenues) to calculate planning materiality at the financial statement level. When risk is low at the financial statement level, consider calculating tolerable misstatement at 80% to 90% of planning materiality. When risk is low, consider calculating the lower limit for individually significant items at 60% to 70% of tolerable misstatement.
6. Read the general ledger as the primary risk assessment procedure. Look for unusual matters, general journal entries and other transactions above the lower limit for individually significant items at the financial statement level. Make inquiries and inspect supporting documents as considered necessary.
7. Use internal control questionnaires for reference only. Get rid of internal control memos and prepare electronic flowcharts for major transactions cycles. Use flowcharts to perform and document systems walk-through procedures for use during the current engagement and for easy updating in future years.
8. Use a planning document (memo) to summarize the risk assessment procedures and document audit strategies by financial statement classifications.
9. Use highly effective analytical procedures to verify financial statement assertions whenever possible to reduce or eliminate more costly tests of balances procedures.
10. Discuss the possibility of using an alternative reporting framework with the client and the users of the financial statements to reduce costly accounting and disclosure requirements required by complex GAAP. The income tax basis of accounting, modified cash basis and IFRS for small and medium-size entities are examples that can reduce accounting and disclosure requirements.
This list is just the beginning of changes we can make to our small audit policies and procedures, all of which can contribute to performing high quality engagements in the most efficient ways. If you’d like more information on how to make small audits more profitable, be sure to register for my small audit series of live webcasts by clicking on “Larry Perry Live Webcast Schedule” at www.cpafirmsupport.com .