Increasing Audit Profits Series No. 23—Counting the Costs of “Catch-up” Audit Planning (Part 2)

Aug 18th 2011
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During my career as an auditor and consultant, I’ve worked or consulted for many CPA firms, large and small.  Only during the last few years, however, have I seen some of these firms begin to prioritize engagement planning.  I often joke about audit teams that do their planning in the back seat of the car on the way to a client’s office but in many cases that is the “modus operandi.”  

When the audit team is playing “catch up” because appropriate planning procedures weren’t performed before fieldwork, here are some of the problems and time-wasters that result and negatively affect engagement completion.

First and foremost, the in-charge accountant will be playing catch up from the beginning of fieldwork to the end.  The work flow will be filled with stops and starts and inefficiencies.  Time will likely be wasted due to over auditing and using the same-as-last-year (SALY) method of performing procedures and preparing documentation.  Because of little or no on-the-job training, the in-charge’s supervision and review time will skyrocket!  In addition to all this, the in-charge will probably need an anti-depressant!

Not the least important effect, the impression left with client personnel is often less than favorable.  Clients or prospective clients often evaluate CPAs based on how they run their own shop.  Beginning the engagement with little or no planning, speaks loudly about the way a CPA firm conducts its business.

Failing to Plan Materiality and Sampling

When I was a staff assistant, I was taught that materiality levels were 5% of anything.  We didn’t calculate tolerable misstatement or even a lower limit for individually significant items.  There was very little sampling performed, usually only non-sampling procedures.  We audited just about everything!

When SAS No. 47 on risk and materiality came around in the mid-1980s, we began to see that establishing planning materiality, tolerable misstatement and a lower limit for individually significant items at the financial statement level created opportunities for performing less work.  Accounts on the trial balance that were less than the lower limit of individually significant items, for example, could be often be excluded from our auditing procedures.  

SAS No. 107 increased our opportunities for efficiency by requiring auditors to assess risk and materiality at the assertion, or financial statement classification, level.  It also presented clearer guidance on how risk of material misstatement relates to materiality decisions to enable an auditor to collect sufficient evidence in each engagement’s circumstances.  Failing to plan materiality levels and sampling decisions has the same results as our work years ago:

1.    We meet the requirements of the auditing standards by collecting a lot of evidence.
2.    We usually over audit and perform unnecessary work.
3.    We spend more time than most clients are willing to pay for!

You can obtain more information about the positive results of proper planning from my live or on-demand webcast entitled Eliminating Wasted Time During Engagement Wrap-up.  Syllabuses for this and other webcasts can be obtained by clicking the applicable box on the left side of my home page,


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