Saturday, October 31, 2009

Training Outstanding Auditors

Having struggled through college with mediocre grades, it took me decades to realize that my grades didn’t matter much! I learned almost everything I know after college, on the job. Before you click your back arrow, let me correct myself a little. Grades do matter. Good grades demonstrate a student’s diligence, commitment and achievement, and they are necessary to get a good job. They are, however, only the beginning.

Unfortunately, much of our college learning was lost after we took our exams. Most of us had little practical experience in accounting or auditing and we didn’t have many instructors that had any either. Our lack of experience made retention more difficult. When I started my first day on the job in public accounting, a partner told me to use the records he dumped on my desk to perform a “proof of cash.” I sat there for hours, afraid to ask what a proof of cash was! He should have explained but I should have known!

Two years ago I accepted an adjunct professor position at a technical college to teach management accounting. Since the prerequisites were two basic-level accounting courses, I assumed the students knew and understood basic principles of accounting. When they couldn’t define terms like depreciation, accrual-basis, conservatism, and others, I quickly realized my assumption was faulty! These were good students at a good school, most of which had earned and A or B in basic accounting classes! Because of huge volumes of required reading, piles of homework and frequent exams, learning was mostly short-term. Their grades mattered, but not really.

While this scenario is not descriptive of all secondary education, it is similar to many colleges and universities. Practitioners are realizing that most accounting and auditing training for staff personnel has to occur on the job. Since staff persons with as little as six months experience are functioning as in-charge accountant on some small audits, they must be adequately trained and supervised. In my next blog, I’ll discuss some CPA firms’ approaches to training staff personnel. What is your firm doing?

Tuesday, October 20, 2009

IFRS not OCBOA

Back in May of 2008, the Governing Council of the AICPA voted to designate the International Accounting Standards Board (IASB) in London as an accounting body for purposes of establishing international financial accounting and reporting principles. What this means is that AICPA members have the option to use International Financial Reporting Standards (IFRS) as an alternative to U.S. generally accepted accounting principles.

Under Rule 202, a member who performs professional services shall comply with the standards promulgated by the designated bodies. Additionally, a member may not say that financial statements are in accordance with generally accepted accounting principles unless they follow the standards promulgated by a standard setter listed in Appendix A of Rule 203.

The list of designated accounting bodies includes the Financial Accounting Standards Board (FASB), the Governmental Standards Accounting Board (GASB), the Federal Accounting Standards Advisory Board (FASAB), and the IASB.

There have been questions as to whether IFRS and IFRS for Small and Medium Entities (IFRS for SMEs) fall under “other comprehensive basis of accounting” or OCBOA. The answer is that they do not. IFRS and IFRS for SMEs are GAAP.

More information on financial statements prepared on a comprehensive basis of accounting other than GAAP is found in AU Section 623 Special Reports. It includes income tax basis, cash basis, and modified cash basis among others.

CPAs may need to check with their state boards of accountancy to determine the status of reporting on financial statements prepared in accordance with IFRS or IFRS for SMEs within their individual state.

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Tuesday, October 13, 2009

ASUs on Revenue Recognition

On September 15, 2009 the FASB Accounting Standards Codification™ (Codification) became the source of authoritative U.S.GAAP. Rules and interpretive releases of the SEC are also sources of authoritative GAAP for SEC registrants. The FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead it will issue Accounting Standards Updates (ASU). ASUs are not considered as authoritative in their own right, instead they will serve to update Codification; provide background information about the guidance; and provide the bases for conclusions on the change(s) in the Codification.

As of this writing the FASB as issued 14 ASUs. Many of them are technical corrections to SEC material contained in the Codification. However, you should be aware of two of these Updates, 2009-13 and 2009-14. Both of these Updates have to do with revenue recognition.

ASU 2009–13 Revenue Recognition (Topic 605), Multiple–Deliverables Revenue Arrangement, (a consensus of the FASB Emerging Issues Task Force).

This Update addresses the accounting for multiple–deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. It requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The amendments in this update will affect accounting and reporting for all vendors that enter into multiple– deliverable arrangements with their customers when those arrangements are within the scope of Subtopics 605–25 (Revenue Multiple–Element Arrangements).

ASU 2009–14, Software (Topic 985) Certain Revenue Arrangements that Includes Software Elements (a consensus of the FASB Emerging Issues Task Force).

This update changes the accounting model for revenue arrangements that include both tangible products and software elements. The amendments also provide guidance on how a vendor should allocate arrangement considerations to deliverables in an arrangement that includes both tangible products and software.

ASUs are available for download at http://www.fasb.org/.

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Saturday, October 10, 2009

Can Owner/Manager Controls Be Audited?

Many auditors believe that owner or manager controls are unauditable because their performance is usually not documented. Interestingly, new risk assessment standards in 2007 identified inquiries and observations as acceptable procedures for testing controls. For example, obtaining a copy of a bank statement and asking a business owner how she approaches its preliminary review before reconciliation may provide evidence that the assessed level of risk of material misstatements for cash is less than high. This procedure will produce reliable evidence when the integrity of management is high.

An auditor’s evaluation of management’s integrity as high has at least two significant affects on small audits. First, a strong control environment reduces risk at the financial statement level. Lower risk mean less evidence is required to reach a conclusion on the financial statements as whole. Second, high management integrity means higher reliance can be placed on responses to inquiries in tests of key controls, thereby reducing the amount of other substantive evidence necessary at the assertion level.

The answer to the headline question above is yes, owner/manager controls can be audited. Not only are they auditable, selecting and serving clients employing management personnel with good character and high integrity can increase both engagement and firm profits! What has been your experience? Post your comments and questions below.

Saturday, October 3, 2009

How Does Management Integrity Affect Audits?

We’ve heard it referred to as the “tone at the top.” The character and behavior of an entity’s management sets the standard for other personnel. Despite elaborate codes of conduct, sanctions and whistle-blowing provisions, employees will follow their leaders. Even when leaders use the “do as I say, not do as I do” philosophy of management, subordinates will do as their leaders do.

From the five elements of internal control developed by the Treadway Commission in the late 1970s, we recognize management’s role as the “control environment.” The control environment of an entity is the backbone of its internal control. The smaller the entity, the more directly management’s practices affect control risk. The existence of key, or entity level, controls performed diligently by an owner or manager can reduce control risk, even when there is limited segregation of duties.

Key controls, like inspecting supporting documents when signing checks, or receiving and reviewing bank statements before a bookkeeper reconciles an account, can provide assurance that misstatements due to error or fraud will not go undetected. In other words, control risk can be less than high!

Based on the assumption management’s integrity is high, the following table demonstrates a good system of internal control for a small entity.


BOOKKEEPER

OFFICE MANAGER

OWNER/MANAGER

RECORDS ACCTS. RECEIVABLE

RECEIVES VENDOR INVOICES

SIGNS CHECKS

RECONCILES PETTY CASH

RECEIVES CASH AND MAIL

PREPARES/REVIEWS DEPOSITS

PRINTS CHECKS

MAILS CHECKS

MAKES BANK TRANSFERS

MAKES GENERAL LEDGER ENTRIES

APPROVES INVOICES

RECEIVES BANK STMT. BEFORE REC.

RECONCILES BANK STATEMENTS

APPROVES PURCHASE ORDERS

APPROVES BANK RECONCILIATIONS


APPROVES PAYROLL

REVIEWS SALES INVOICES./AGINGS


DISTRIBUTES PAYROLL

MAKES DEPOSITS


DISBURSES PETTY CASH
























Do you think these controls can be audited? Why or why not? If so, what affect can management's integrity have on a small audit? Post your comments below.