Boosting the Quality and Efficiency of Smaller Entity Audits

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    by Phil Cowperthwaite, Member, IFAC SMP Committee

    Jul 10, 2013
    Article for Member Bodies

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    • Phil Cowperthwaite, Member, IFAC SMP Committee

    Boosting the Quality and Efficiency of Smaller Entity Audits

    The pace of change and increased complexity in audit and financial reporting standards over the past few years has been dramatic and may weigh disproportionately on smaller accounting practices who typically audit smaller entities. This burden is being exacerbated by the difficult economic environment, which is prompting clients to put pressure on their accountants to lower fees. As a result, it is getting harder for practices to maintain sufficient profitability from audit work.

    The good news is that automation, made possible by recent developments in technology and by process improvements, can help practices simultaneously boost the quality and efficiency of their audit work—in turn, lowering costs and ensuring its profitability. 

    Increasing Audit Quality          

    Automating your micro-entity audit practice provides an opportunity to improve audit quality at both firm-wide and individual engagement levels. At the firm level, setting up standardized templates helps ensure that all phases have been completed in every audit. Customized checklists can be updated as needed and incorporated into individual engagement files at the beginning of every engagement.

    File automation can significantly increase quality at the engagement level as well. If you import data from one application program to another, data conversion errors should be eliminated and grouping and arithmetical errors can be minimized.

    A word of caution: as every audit is unique, make sure you customize each and every file. The generic firm template is a great place to start but it is only a start. Customization for things such as industry characteristics and internal controls are as essential as fully automating the underlying file structure.

    Boosting Engagement Efficiency

    Much of the tangible output of auditing is very similar from file to file: individual practitioners typically use common file structures and similar checklists and forms. In addition, commercial audit file, spreadsheet, word processing, and database platforms often allow for seamless and rapid data sharing between applications and client files. None of these features are new, but are you using them to maximum advantage? There are many easy-to-implement ways to increase the efficiency of every micro-entity audit. The trick is to be creative and use your imagination. Here are a few suggestions.

    Pre-Engagement Phase

    When using commercially available software for micro-entity audit engagements, you can:

    • Roll forward last year’s electronic file almost instantly;
    • Call the client, or send an email, to discuss timing, and ask if there were significant events/changes over the past year; and
    • Assuming not, email an engagement letter, an audit strategy letter, and a list of the materials you will need when you visit the client to begin the audit. All of these documents should have been already prepared as part of the file update.

    Engagement Processing and Assembly

    Following the pre-engagement phase, ask your client to email you a trial balance in a format you can import into the audit file.

    Fieldwork Phase

    An efficient automated audit of a micro-entity might progress as follows:

    Arrive at the client’s office with the rolled-forward audit file. After an initial discussion with the client, update your rolled-forward schedules, documenting your knowledge of the client’s business for any industry, environment, and entity control changes since last year.

    Program the engagement and performance materiality calculations and sample size calculations, based on the imported trial balance.

    Review the multi-year account analyses (e.g., key ratio analysis such as gross profit percentage), all of which can be pre-programmed.

    Print confirmations required and have them signed at your client’s office.

    Review for relevance and complete the rolled-forward engagement checklists. (Again, a word of caution: avoid falling into the trap of simply repeating last year’s procedures without having first used your professional judgment).

    Draft key points for communication to management and those charged with governance as required by International Standard on Auditing (ISA) 260, Communication with Those Charged with Governance, and ISA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management, at the client’s office as they arise and review them with the client to ensure you have your facts right.

    Forming an Opinion Phase

    Review the post-fieldwork analytical review automatically updated for your audit adjustment.

    Email the adjusted trial balance and proposed audit adjustments to your client.

    Email the client the letter of representation and an updated ISA 260 audit summary document.

    Email/mail a copy of the signed auditor’s report and an invoice once appropriate personnel have accepted responsibility for the statements.

    The above assumes you have taken time to standardize data fields across all your client files. Client names and address fields, year-end and other dates, and other standard documentation can all be programmed into a master file containing individual templates for correspondence, planning lists, etc. Firm-wide standardization is essential if you want to maximize efficiency with automation.

    Be Smart About the Automation Process

    There are a number of cautions to heed before embarking on even a modest automation project.

    1) Be realistic. The initial automation process will likely take longer than you think.

    2) Spend time up-front to get it right. If you have an error in your template, you will have to fix it each time you use it. That significantly increases the cost of automation.

    3) Aim for consistency across clients. Using standardized templates for analytical schedules, financial statements, statement coding, and file indexing avoids having to reinvent the wheel on every micro-entity audit engagement.

    Summary

    Automation of your practice is an exacting process requiring project management skills and a significant time commitment from senior members of the firm. If you have the discipline to make it happen, automation will pay off over the long term many times over.

    IFAC Resources

    IFAC hosts a range of resources and tools, including guides and articles, to help implement audit and quality control standards: See Resources and Tools at www.ifac.org/SMP

     

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