In the eighth installment of our small audit profitability series, we'll discuss how to reduce budget overruns and enhance time management when performing wrap-ups.
As many auditors have learned, the bulk of wasted time and budget overruns occurs during the completion phase of an engagement. A close look at the reasons for this often reveals failures to perform engagement activities and procedures at the most opportune times. In short, failure to effectively plan an engagement pushes problems into the performance phase and usually into the completion phase. This article will reveal a few secrets for wrapping up smaller audit engagements in record time.
While there may be many activities that contribute to the timely and efficient wrap-up of audit engagements, small or large, these following functions are essential:
Always Communicate the Terms of Engagement
In an earlier article in this series, I discussed the importance of the involvement of the engagement leader (partner, sole practitioner) in delivering and discussing the engagement letter with management and persons charged with governance.
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Section AU-C 210 of the Clarified Auditing Standards indicates that, unless the terms of engagement change, only a written reminder of the prior year’s terms is necessary. However, while communicating simply a short reminder may seem efficient, it can actually make the process longer. The primary purpose of an engagement letter is to clarify the responsibilities of management and the auditor. A reminder of one written a year ago may fall short of this purpose.
As my hair turns white, the wrinkles in my brow grow deeper and my chest slips closer to my waistline, my memory also seems to be affected. Even when I celebrated the first anniversary of my 39th birthday years ago, clearly remembering all the issues connected with a prior year’s audit engagement was sometimes a challenge. These lapses of memory, I’ve found, also exist for the management personnel of many clients I have served. In the rare case of an adversarial challenge against a CPA firm, we may find their memory of the terms of a prior year has disappeared totally.
Creating a new engagement letter each year and presenting it to management by phone or via video conferencing may require 20 to 30 minutes of a leader’s chargeable time. This is a small price to pay in exchange for obtaining important current information affecting the audit and for providing a proactive defense against misunderstandings and failed memories that may arise in the future.
Avoid the SALY Method of Planning
Many of us have heard a supervisor say, “Look at the documentation from the last time the procedure was performed and do the same thing.” This is the “same as last year” (SALY) method. During one of my live seminars, a participant shared she had learned the SALY method can turn into the MILY method, i.e., missed it last year. This happened when the procedures and documentation from the prior period were not correct and she replicated them while performing the current audit. Guess who got the blame!
Particularly for risk assessment procedures, using the SALY method and failing to base the audit strategy and plan on current facts and circumstances will miss the “high-quality” mark. Performing materiality calculations, sampling decision-making, developing audit strategies for financial statement classifications, modifying audit programs and planning audit documentation should all be based on current facts and circumstances. Both quality and efficiency will result.
Consider Standardizing Audit Documentation
In several of my audit seminars, participants discuss the benefits of standardizing audit documentation, both practice aids and working papers. Informal polls indicate about half are for standardization and half are against.
The most common reason for supporting standardization is the elimination of the personal preferences of engagement leaders. This would facilitate engagement personnel preparing most documentation in the same way on many engagements, even though they are performed for different leaders.
Others argued, however, that standardization could restrict their opportunities for eliminating or modifying documentation to increase efficiency.
So, what is the answer? While the nature and extent of audit documentation are certainly unique to each engagement, there is middle ground to this debate. Practice aids purchased from major publishers must, of course, be modified for risk and other circumstances on each individual engagement. Working papers may be standardized for major account classifications, at least to the extent of lead or main schedules, to facilitate the creation of other documentation that may be more efficient.
For example, lead sheets normally facilitate the organization of audit documentation on larger engagements. A working trial balance will likely be more effective and efficient on smaller audits. The templates can be easily modified for each engagement’s circumstances, and standardized Excel working paper templates can provide this foundation.
Maximize the Time Working in the Field
Follow this scenario (many in-charge accountants have experienced it). The in-charge has two or three days left to wrap up the audit in the client’s facility. Near the end of the day, the CFO informs the in-charge that the board of directors will be meeting the next three days in the conference room currently occupied by CPA firm personnel. She also informs the in-charge there is no other workspace available for the engagement team.
As the team is packing up to leave, the in-charge asks the CFO for the 38 schedules and supporting information the CFO has committed to prepare. She responds she has had to prepare for the board meeting and none of the promised schedules have been completed.
Returning to the CPA firm office the next day, the in-charge accountant receives an email from another engagement leader with a list of last-minute review notes that must be cleared immediately so his audit report can be issued. As the in-charge tries to find her two engagement assistants to begin gathering information to draft financial statements and footnotes, she learns another partner has assigned them to one of his audits. And so goes the in-charge accountant’s wrap-up of the audit in process. Here comes budget overrun.
A managing partner in a medium-size CPA firm required his audit managers to study time and billing records to determine the causes of high percentages of unbillable audit time charges. He quickly learned problems like those described above were at the root.
As a result, he required all audits, financial statements and footnotes to be completed and reviewed in the field. His mandate was severe: Don’t come back to the office until the report is ready to issue.
While it took most of a year, engagement leaders and in-charge accountants in this firm began to “plan for finishing.” This is my suggestion to you.
Starting to plan 60 to 90 days or more ahead of the reporting date, meeting with client management before engagement planning begins and training client personnel to prepare schedules and gather information well ahead of the scheduled date of fieldwork were some of the means to the end. And it works: After the rocky transition process, time charges on audits were reduced close to 15 percent for most engagements at this firm.
The bottom line? Even if the audit can’t be completely wrapped up in the field, make arrangements to stay as long as possible. This is a major key to both quality and efficiency.
As discussed in several articles in this series, the continued involvement of the engagement leader is a major key to audit engagement and CPA firm profitability. From the initial delivery of the engagement letter, throughout the performance and into the completion phase, “hands-on” participation by the leader results in the right decisions being made at the right times.
Early contact and communication with client personnel pave the way for an organized and smooth workflow throughout the engagement. “Planning for finishing” enables small and large audits to be completed in record time.