When I reached in-charge accountant level at an international firm years ago, the planning, performance and completion phase of an audit was often totally delegated to me. Some call this the “sink or swim” method of supervision. True, it was a learning experience, but it was very costly!
My lack of experience plus the lack of supervision resulted in lots of mistakes and many budget overruns, mainly because decisions that should have been made and actions that should have been taken at the beginning of the audit weren’t discovered until its end! Seeing the end from the beginning requires anticipating problems and performing problem resolutions and auditing procedures at proper times.
Here’s an unwritten rule for audits: The planning procedures we don’t perform at their most opportune times defer problems to the completion phase. During engagement wrap-up, problem resolution takes twice as much time and is a primary cause of budget overrun! The ORDER in which we perform required procedures can create significant time savings. Some of the key planning activities that will prevent problems from being deferred to engagement completion follow:
• What will the audit report, financial statements and footnotes look like this year? Knowledge of where we are going will always help us get there without false starts and detours! Blocking out financial statements and footnotes (even with unadjusted numbers), considering potential reporting problems and identifying any unusual audit problems will enable the audit team to solve problems early and devote more performance time to high risk areas during engagement performance.
• Is U.S. GAAP a required reporting framework or can another more efficient framework be used? Measurement principles and disclosures for U.S. GAAP are the most complex of any framework, primarily because these standards are rules-based. On the other hand, other comprehensive bases of accounting such as the income tax or modified cash basis are often less complicated and require fewer disclosures. If the user of the financial statements agrees, it may be appropriate for management to consider changing to another reporting framework to save time preparing and auditing financial statements and footnotes.
• Are there any complex accounting standards that require application and does management intend to comply with them? If the reporting entity is required to use U.S. GAAP, complex accounting standards for variable interest entities, guarantees, deferred taxes and others drive up the cost of preparing and auditing financial statements. If the user of the financial statements and management agree, non-compliance with certain standards and a qualified audit opinion may be the most cost-efficient audit strategy.
• What engagement problems occurred last year and are they likely to reoccur? An early review of the prior year’s audit documentation will enable auditors to resolve recurring problems before fieldwork begins.
• What changes in finances or operations have occurred or been made since last year’s reporting date. This and other information should be obtained by the engagement leader when he/she delivers the engagement letter to client management personnel. The information gathered can be documented and forwarded to the in-charge accountant to incorporate in planning activities and in the design of the audit plan. Many unpleasant surprises can be avoided by gathering this information early!
• Are there going concern problems and threats to continued existence of the entity? Management is responsible for identifying threats to continued existence and for designing plans to overcome the threats. Auditors are responsible for evaluating the appropriateness and reasonableness of management’s plans. When such threats exist, additional work will be necessary for both management and auditors. Failure to identify going concern problems before fieldwork begins will result in huge amounts of unplanned wrap-up time!
• Are there any situations in the CPA firm such as staff scheduling problems or conflicting engagements with similar deadlines that could interfere with report delivery deadlines? Setting and communicating reasonable deadlines is the responsibility of the engagement leader. Identifying scheduling problems early will prevent conflicts that can cause missed delivery deadlines.
Failing to consider these key planning activities will certainly result in problem solving and excessive time expenditures during engagement wrap-up. Resolving these issues proactively can result in substantial increases in audit profitability!
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