In the seventh installment of our small audit profitability series, we'll focus on how to perform engagement reviews to maximize quality and minimize engagement time chares.
In my last article on tax audits, I mentioned my favorite manager, Fred, as an example of how an engagement leader should not function to maximize quality and profits on audits. He performed reviews only during the completion phase of audits, instead of in stages throughout the performance phase. While his approach likely achieved the desired level of quality, it was inefficient and wasted huge amounts of time at the end, both his and that of the engagement personnel.
A Risk-Based Approach
Generally speaking, risk will affect the engagement review process in two areas:
- the complexity and risk of the area
- the experience of the staff
The higher the risk associated with an engagement area, the more time will normally be spent at all levels of review. When the risk is lower, less time will be spent on assessment, particularly by the leaders.
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Quality control standards, however, do require the initials and dates of working paper preparation by the preparer and a review by another engagement team member. Sole practitioners’ self-reviews may be documented in a separate memo or practice aid to ensure compliance with these standards.
More experienced staff members generally require less supervision and review. Enabling others to grow requires allowing them to work in increasingly complicated areas with progressively less supervision. So, as confidence grows in a person's ability, the time spent reviewing his/her work should decrease.
Standardized Policies and Review Approach
The in-charge accountant is responsible for a detailed review of the work of all assistants to determine that sufficient evidence has been gathered to accomplish the engagement objectives and that the engagement procedures and documentation are in accordance with the firm's quality control policies. All working papers reviewed by the in-charge must be initialed and dated (required by AU-C 230). They should also initial working paper conclusions made by engagement assistants.
The engagement leader, a partner or sole practitioner, is responsible for assessing the work performed by the in-charge accountant and the results of that individual’s review of assistants' working papers. The leader's review should normally include all engagement files. The objectives are to determine that sufficient evidence has been gathered to accomplish the engagement goals and that the procedures and documentation are in accordance with the CPA firm's quality control policies and processes.
The leader’s initials on each line of the working trial balance or lead sheets, on the individual working papers and/or on spaces provided on electronic file trees in file container software may evidence documentation of the review as required by firm policy. Depending on the complexity of the audit areas and the experience of the preparer and reviewer, working papers prepared by a staff person and reviewed by the in-charge may or may not require review by the leader. Only working papers reviewed in detail by the leader would normally be initialed and dated.
An engagement partner's quality control review, if performed by an independent partner or outside consultant, should determine that all firm quality control standards have been met. Depending on the complexity of the engagement and the experience of the staff, the partner may or may not choose to review all the files. As mentioned above, initials on the applicable lines of the various documents may evidence working paper reviews by the quality control partner or consultant.
Auditing software file container systems usually contain a space on the file tree next to each practice aid or working paper for the name or initials of both a preparer and reviewer, along with the date the functions were performed. In these circumstances, the related working papers and schedules need separate identifications only if required by firm policy.
Approach to the In-Charge Accountant's Review
A detailed review of assistants' work should be performed as frequently as possible, at least as each section of the assignments is completed. Feedback of the review findings should follow immediately thereafter. The in-charge's review procedures should include at least the following:
1. Review the applicable section of last year's working papers
2. Review the applicable section of the work program (audit plan)
3. Compare trial balance accounts related to the work area to those of the prior period and note variations
4. Briefly review the contents of the working papers
5. Read any conclusions
6. Review the working papers in detail for:
a. Mechanical accuracy
b. Accomplishment of the purposes of the documentation, i.e., evaluating financial statement assertions and accomplishing audit objectives
c. Proper performance of the procedures
d. Reasonableness of judgments
e. Identification and follow-up of exceptions
f. Resolution of problems and questions
7. Determine that all work program procedures have been completed correctly
As a reviewer approaches the working paper examination process consistently, he/she begins to form expectations for the content of most working papers and can complete everything in less time. In fact, as one’s experience increases, the reviewer may develop a “hit list” of common errors made by staff assistants. In my case, the errors I commonly made when I was a staff assistant became my hit list!
The most frequently occurring mistakes should be the first to receive attention. Better still, they should become the subjects for the pre-engagement and on-the-job training meetings!
Approach to the Engagement Leader's Review
On all engagements, the leader should review the work of personnel as frequently as practical. Acceptable reasons for doing so only after completion are rare!
This assessment should be conducted in the field whenever possible. This allows problem resolution while personnel are actually working on the project, prevents typical office interruptions, enables the leader to schedule review time and allows them to be seen by the client’s staff.
CPA firms that require field review whenever possible find it results in the job being performed in a timelier manner as well. The team ends up doing what they are supposed to do, when they are supposed to do it.
Facilitating Leaders' Reviews
The in-charge accountant can facilitate leaders’ reviews in several ways that will help save time. Here are a few:
1. Make sure each section is completed or at least contains a list of open items and unfinished working papers and ensure all assistants' review notes are cleared before the leader looks at them.
2. Ensure each section contains a list of the location of working paper documentation of engagement problems and their resolutions for the leader's early attention and review.
3. Have all working papers prepared by the in-charge accountant listed to facilitate the leader's review.
Documenting the Review Process
Some publishers use a practice aid with a title such as Supervision, Review and Approval Form to document the supervision and review process. Forms designed for this purpose include questions for the in-charge accountant, the engagement leader, the partner or outside consultant performing a quality control review, as well as the partner signing the report. Such practice aids provide assurance that all aspects of the engagement have been considered in the working paper review process.
Preparing Effective Notes
For quality control purposes, auditors are instructed to destroy copies of their notes so the information cannot be used against a CPA firm in the event of litigation. For this reason, auditors must be careful to include any additional audit evidence from these notes on the appropriate working papers and information relevant to next year in the following year’s time control or other files.
Review notes, of course, ensure engagement quality and are the primary tools for on-the-job training activities. The following are some common preparation deficiencies cited by a CPA firm’s staff:
1. Handwriting is unreadable
2. Notes contain insufficient information
3. The purpose or meaning cannot be understood
4. The tone of the writing is condescending and rude
5. Many comments are picayune
6. The writer must be located to explain many notes
7. The notes are negative and rarely include recognition of good work
Review notes should, of course, contain constructive criticism, but, overall, they are intended to build up, not tear down. They are a CPA firm’s most powerful training and quality control tools.
As in-charge accountants and engagement leaders invest time in the supervision and review processes, the engagement team can reap huge dividends from the training and quality control benefits provided for CPA firm staff.
With effective planning and involvement, leaders can ensure audit engagements are completed at the highest level of quality and in the minimum amount of time. After all, these individuals are the pinnacle of a firm’s quality control system.