“Overwhelmed” is the complaint about professional standards I keep hearing from audit personnel, particularly partners and sole practitioners in smaller CPA firms.
One small-firm partner new to audit practice shared that he ordered a set of audit guides and practice aids from a major publisher that were marketed to meet the needs of smaller audits. When the volumes of the hardcopy guide he ordered arrived, he was so overwhelmed he couldn’t determine where to start. He could only re-package and return them!
Obviously, this partner’s complaint is not the first of its kind. Since the 1980’s, CPA firms have been searching for the secret to performing smaller audits that comply with all applicable professional standards in ways that result in minimum audit procedures and documentation. While some CPA firms have found the hidden secret, many have not. This article will reveal the secret that can enable small CPA firm auditors to simplify the small audit process, without the high cost of new technology.
The Essential Ingredients of a Smaller Audit
It is no wonder that most auditors feel overwhelmed, at least occasionally. Complying with specific requirements in auditing standards, understanding increasingly detailed measurement and disclosure principles in generally accepted accounting principles and other financial reporting frameworks, and meeting quality control standards and peer review requirements are just a few of the causes. Let hope arise, there is a solution!
The secret is simple, our focus must be on the end at the beginning. The essence of the Clarified Auditing Standards is to enable an auditor to reduce detection risk to an acceptably low level to support an opinion on the financial statements taken as a whole.
The secret is in the forest (the sum of all evidence collected), not the trees (the individual procedures). Considering the minimum substantive evidence necessary to reduce detection risk to an acceptably low level must be an auditor’s guide to effective planning.
Training and equipping audit staff personnel to think about and plan for substantive evidence, before designing and performing only necessary audit procedures, is a major key to smaller audit quality and profitability. Here are some of the most important considerations for effective and efficient smaller audits.
Considering the Reporting Entity
Auditing standards do not offer parameters for identifying a smaller reporting entity. The Committee of Sponsoring Organizations (COSO), in a 2006 publication, discussed internal controls for a small publicly-held corporations.
Defining a small entity according to its internal controls, the report stated that a small entity’s controls would ordinarily be carried out by one or a few management persons and would be mostly informal, i.e., likely not documented in policy and procedures manuals. Interestingly, the same criteria would be characteristic of smaller non-public entities and non-profit organizations.
The AICPA’s Financial Reporting Framework for Small- and Medium-Size Entities identifies a small reporting entity by its characteristics. Here are a few of them:
- The entity may be closely held and owner-managed
- The entity does not have regulatory reporting requirements that essentially require it to use GAAP-based financial statements
- Management and owners of the entity rely on a set of financial statements to confirm their assessments of performance, cash flows and of what they (or stakeholders) own and what they owe
- The entity does not operate in an industry in which the entity is involved in transactions that require highly specialized accounting guidance, such as financial institutions and governmental entities
- The entity does not engage in overly complicated transactions