In today’s competitive audit marketplace, we certainly can’t afford these and other “nice-to-have” documentation policies, changes in these policies are now necessary to stay competitive.
When I was growing up in the accounting profession, I worked for an international CPA firm. This was back when there weren’t many accounting or auditing standards. True to our conservative accountants’ natures, the firm established practice guidelines and policies for audit engagements in the absence of professional standards.
These conservative guidelines shaped the practice futures of many of the firm’s employees, as well as the standards of the auditing profession today. Performing effective audit planning, developing audit strategies and standardizing engagement documentation began during those times.
Times have changed, however, and so have some of the guidelines we gray-hair auditors have cherished and held dear to our hearts! For example, some of us were told that engagement files had to contain working papers for every general ledger account balance, even if they were immaterial or zero-balance.
Heading the working paper, listing a small or zero-balance from the trial balance and stating something like “Balance not material; no further work considered necessary” was required. After the account balance was indexed and cross-referenced, the initials of a preparer and a reviewer were required, along with the dates of their participation. Sound familiar anyone?
It only takes 5 minutes to do these things we were told. Doing them for 20 or more working papers, however, can cost 100 or more unnecessary, wasted minutes on every engagement! Maybe the firm I worked for decades ago could afford these costs in the name of quality.
Just Enough Audit Documentation
Because many CPA firms use audit guides purchased from major providers in either hardcopy or electronic format, their audit programs, forms, checklists, correspondence and working paper formats for trial balances, lead schedules, analytical procedures and other documentation are obtained from those guides. Some firms have prepared audit documentation on Excel spreadsheets and others still use some standard working papers in hardcopy format.
The key to preparing “just enough audit documentation,” no matter which format is used, is to tailor the audit documentation to support risk-based procedures for each engagement, both in the planning and performance phases of an engagement. For larger audits requiring more engagement personnel, there are advantages to standardizing audit documentation. Standardization avoids wasting time learning how to comply with the preferences of different supervisors and partners.
Staff training on the job, supervision and review time, and engagement wrap-up time can often be minimized as a result of using standard documentation. Although some of the same benefits of standardization are possible on smaller audits, unmodified standard practice aids, correspondence and working papers may result in much more work than is necessary.
Audit time charges may be reduced on smaller audits by eliminating unnecessary practice aids and working papers, by using memos describing work performed and findings instead of traditional working papers or schedules, and by limiting the procedures performed and documented on working papers to the minimum required by auditing standards.
Changing the Course of Things
Forgive me in advance, because what I’m about to say will likely tinker with some of your belief systems, hopefully, you can identify with me. I like doing things my way because it has worked for decades. My professional defense systems are housed in this philosophy: “If it ain’t broke, don’t try to fix it!”
For change to produce higher audit quality and engagement profitability, we must consider changing some of our old ways of doing things. By “we” I mean all auditors, but specifically partners and sole practitioners in smaller CPA firms.
During over four decades of presenting live seminar and webinar training, the complaints of CPA firm staff personnel are indelibly etched in my memory. What is their biggest complaint? It is that they feel many partners and sole practitioners universally ascribe to Frank Sinatra’s philosophy of life, “I did it my way!”
Maybe stated better, is the complaint that CPA firm leaders rarely are willing to change their way of doing things, even though staff personnel have found a better way! “If it ain’t broke don’t fix it,” some of us grey hairs may still be saying.
Obviously, change for change sake is not what we are after. Changing the form and content of some of our audit documentation represents, however, major opportunities to reduce time charges on all audit engagements, particularly smaller ones.
A Few Specifics
Working trial balances, whether compiled in hardcopy or electronic format, are prepared based on a client’s chart of accounts. The number of general ledger accounts determines whether lead sheets are beneficial.
On larger engagements, lead sheets facilitate performing procedures in financial statement classifications by listing all accounts to guide the assigned audit staff person. Grouping accounts on lead sheets often facilitates financial statement preparation; however, most auditing and/or accounting software systems also perform this function. The truth is that on smaller audits, lead sheets may add to the working papers preparation and review work while often providing little additional benefit.
An initial procedure during engagement planning is the calculation of overall materiality, tolerable misstatement, and the lower limit for individually significant items considering the assessed level of risk at the financial statement level. Auditing standards refer to this as “business risk.”
The lower limit for individually significant items at the financial statement level is used for reading or scanning the general ledger account activity to determine unusual transactions and amounts, general journal entries, and smaller account balances for which no work other than basic analytical procedures need be performed. Assessed levels of risk of material misstatement at the account classification levels also drives the calculations of lower limits of individually significant items for material financial statement classifications, i.e., items that must be audited 100 percent.
Working papers or schedules do not normally need to be prepared for general ledger accounts below these calculated lower limits unless there is some qualitative reason to do so, such as a related party transaction or account balance, or an account affected by a restrictive loan covenant. Stating the obvious, audit costs are unnecessarily increased if a staff person performs and documents unnecessary procedures on an unnecessary working paper!
A Few Tips for Small Audit Engagements