These lists were compiled from the input of hundreds of participants at my
seminars and workshops as well as more then thirty years of public practice.
Ten Most Common Mistakes Made
by Accountants and Auditors
- Not Using Engagement Letters on Every Engagement
Engagement letters have proven to be the most effective factor in
reducing the risks of litigation and improving relationships with our clients. Although
new SAS 83 makes it clear that written engagement letters are preferable for audit
engagements, the underlying reasons to use written engagement letters apply just as much
to compilations, reviews, tax returns, consulting engagements and every special engagement
- Insufficient Planning
When we need to redo work done incorrectly or waste time using an
inefficient approach to the engagement, we recognize how much better we could have
performed, if only we knew then what we know now. Planning helps us reduce these errors.
- Not Understanding our Client and Their Business
Much of our wasted time and many of the most famous frauds took place
because the accountants compiling, reviewing, or auditing the information did not
understand the nature of the companys business. In addition, knowing more about our
clients helps lead us to additional engagement opportunities.
- Not Speaking to the Predecessor Accountant Whenever Possible
Many of the reasons we are required to communicate with the predecessor
accountant on audit engagements is just as applicable on compilations, reviews, or tax
engagements. Are we any less interested in whether there is a lack of integrity on the
part of management? Do we care any less whether the potential client paid his/her
accounting bills on time?
- Spending Too Much Time in the Wrong Areas
Often we approach the end of the engagement, with very little time left
in our budget. When the final reviewer asks questions regarding the "big
picture" we are looking for ways to quickly handle the problems. We then take
shortcuts in completing the checklists and preparing the financial statements, yet the
financial statements are the only part of the engagement that most of our clients see.
Questions related to the big picture are often the ones that could have prevented the
subsequent client relationship disasters and litigation.
- Doing Too Much Work
Although this might seem like a necessary outcome of the problems firms
seem to be having with peer review and litigation, it is often this criterion that causes
client relationship problems. Much of the time spent on the additional work is not because
it is needed to fulfill the requirements of the engagement or the profession. Instead it
is done because it has always been done this way before. We call it SALY (same as last
year). This problem of doing too much work is not related to following up on information
that appears to be incomplete or in conflict with other known information. This can be
explained to the client or the peer reviewer but some audit and accounting procedures are
performed on every engagement no matter the risks or materiality.
- Not Training the Client to do More of the Work
The most effective way to reduce the time spent on an engagement AND
to help the client understand the costs of performing the engagement, is to train client
personnel to prepare more of the preliminary working papers. When properly planned, this
training can be a valuable learning experience for all involved. We are now in a better
position to evaluate client personnel, a requirement of the engagement, and provide
competent, timely information to the client regarding his/her accounting personnel.
- Not Following Up on Incorrect, Incomplete or Unsatisfactory Information
Surprisingly, the outcomes of most litigation did not rest on some
expert or jury second-guessing the accountant with the benefit of years of hindsight. For
every expert one side can find to testify that they would have interpreted the information
a different way, your side can find two more who will agree with your interpretation.
Instead, the problem is usually the result of an accountant not recognizing that there was
a problem or not responding to unusual information brought to his/her attention.
- Documenting Our Work
During peer reviews, most of the letters of comment relate to poor
documentation of work performed. In discussing the shortfalls with the firms, the peer
reviewer often finds that the work was performed, but that there is little, if any,
documentation in the workpapers supporting the procedures performed.
- Not using OCBOA Financial Statements in More Situations
Many clients do not need GAAP financial statements. In fact, even when
GAAP financial statements have been designated in loan or partnership documents,
accountants have often been successful in modifying the agreement to provide tax basis or
modified cash basis financial statements for third party users. It is important that we
meet the needs of the users of the financial information. But when their needs can be met
at a lower cost, we often can play the role of educator for these users.
Not Spending Enough Time Evaluating our Clients
Probably the biggest mistake we make is in not carefully evaluating
the potential our clients have in meeting our goals and the goals we have as
professionals. The old adage that "20 percent of our clients cause 80% of our
problems" continues to be an important but overlooked truth. Problem clients cause us
to spend inordinate amounts of time neglecting our clients who pay their bills and
appreciate our services.
Ten Best Ways to Reduce Your Time
While Performing Substantive Audit Tests
Modify Your Use of Cash Confirmations
Place your primary reliance on the bank reconciliation and bank
statement. Fill in the amounts on the confirmation, address the confirmation to a specific
bank officer, send confirmations only on material accounts, and consider not sending them
Carefully Consider Your Accounts Receivable Confirmations
Do not send confirmations when you know from past experience that you
will not get replies. SAS 67 discusses the requirements for alternative procedures, types
of confirmations, documentation standards, etc.
Stratify Your Sample
This is one of the most effective ways to reduce your audit time on the
intensive audit areas, particularly accounts receivable and inventory.
Eliminate Accounts Payable Confirmations
This will not apply to all engagements. But when existence of
accounts payable is not an area of high risk, the use of confirmations is not an efficient
use of audit time. The primary audit test for accounts payable should be the search for
Use Separate Debt Confirmations
Specifically designed debt confirmations, mailed to the bank officer
who handles the loan will greatly reduce the incidence of incorrect confirmation replies.
It is also important to confirm specific debt covenants.
Train your client to provide schedules in formats you can use. Provide
proformas, where necessary. Get your client to reconcile differences, foot schedules, and
obtain explanations which you can then verify.
Plan for the Difficult Areas
Anticipate the problems that destroy your budgets. Meet with the client
before the audit begins, hold a pre-audit conference, attend the client's pre-inventory
count meeting. Many of the problems that arise during an audit can be prevented with
Increase Your Use of Analytical Review procedures
Significant time is wasted on most audits verifying immaterial
balances. Prepaid expenses, other assets, accrued liabilities, depreciation and interest
expenses are a few of the more common areas which can often be audited through analytical
Use Technology to Improve Your Audit Efficiency
There are many good computer software packages that can improve the
efficiency of your audits. These include pre-designed audit programs, trial balance
software that can automatically calculate ratios, sample selection software, and industry
comparison information. Be careful not to use technology just for the sake of using
technology. Audit judgement is still the most effective tool in performing an effective,
Use Checklists, Where Possible
It is virtually impossible to remember all of the procedures,
disclosures, and other requirements of GAAP, SAS, GAAS, GASB and SSARS. Be sure you are
using the current version and you will be well on your way to reducing time in performing
your substantive tests.
Ten Steps to
- Know your Clients and their Business
SAS 55 requires that we gain an
understanding of the internal control structure of our clients. But
knowing your client is a much broader concept that is not limited to
SSARS 1 states that in performing a
compilation or review the accountant must obtain:
A general understanding of the
entity's business transactions
The form of its business records
The stated qualifications of its
The accounting basis on which the
financial statements are to be presented
The form and content of the
In addition, accountants must either
have or obtain knowledge of the accounting principles and practices of
the industry in which the entity operates.
If our professional literature requires
the above procedures in a compilation or review, we certainly have to
meet at least these standards in the performance of an audit.
Plan the Engagement
Engagement plans can
be either formal or informal. This applies to both audits and other
types of engagements. The decision often depends on the complexity of
the entity, the number of staff participating, and the size and
culture of the firm performing the engagement. To meet the
requirements of peer review, many firms are turning to preprinted
forms prepared by companies whose forms and checklists have undergone
their own peer review.
Two of the most
commonly used systems are the AICPA Engagement Manuals and
Practitioners Publishing Company (PPC) Guides
Any format used for
planning the engagement should include the following information:
A review of
existing financial information
An evaluation of
A calculation of
materiality to the various audit areas
the planning process
It is during this
step that the greatest potential for efficiency (or waste) takes
place. Based on the evaluation, the auditor must decide where to place
the emphasis during the audit procedures. Should compliance testing be
performed? Do we increase or decrease our substantive procedures?
One of the most
difficult questions to answer is how much planning is enough. When do
we cross the line from proper planning to inefficient use of our time?
My experience has shown that approximately 15% of total audit hours
should be spent up front in the planning process. The payback from
proper planning is significant. The loss of efficiency from
overplanning is small. My suggestion would be to error on the side of
of the most misunderstood parts of the planning process is the
determination of materiality. As accountants, we are charged with the
responsibility to determine if the financial statements are fairly
presented. Errors or misstatements that are not "material" will
not affect our responsibility.
publications have attempted to quantify the calculation of
materiality. However, the author believes that most of these
calculations do not include a key factor that must be considered - the
users of the financial statements. (This factor has been codified
in SAB 99)
various users of financial statements often have different concerns
when evaluating financial statements. For example:
users of public company financial statements are primarily
concerned with earnings per share.
to a company are primarily concerned with how they will be repaid.
users of not-for-profit financial statements are concerned about
how management has utilized the funds over which they have
of these users will make very different determinations of whether a
financial statement is fairly presented. The necessary disclosures or
amount and classification of financial information will differ.
While the various
formulas for calculating materiality offer a good starting point, they
must be modified, when necessary, for the primary users of the
financial statements. When there are multiple users of the financial
statements, the most conservative determination of materiality must be
Use Analytical Review Procedures
SAS 56 requires that analytical review procedures be
performed in the planning stage as well as in the review process. But what
types of analytical procedures should be performed? More importantly, how can
we turn this requirement into an advantage?
The major types of
relationships that should be considered include:
Comparison to prior periods
There are a couple of misconceptions
regarding the requirement to perform analytical procedures that we need to
Most of the comparisons that
should be used can be obtained quite easily through the use of a trial balance
package such as ATB or FAST.
There are numerous sources of
comparison industry statistics. Some of the best are:
Robert Morris Associates'
Annual Statement Studies
Prentice Hall's Almanac of
Business and Industrial Ratios
Dun & Bradstreet's
Industry Norms and Key Business Ratios
Value Line Investment
Standard & Poor's
Statistics of Income, IRS
What advantages are there to performing
preliminary analytical reviews?
To gain a better understanding of the
client's business and industry
To plan where errors are most and least
likely to occur
To identify financial problems
To help your clients do a better job in
running their business and thereby strengthening your relationship
Review the Plan - Ineffective Planning
can be Costly
The two most damaging consequences of under or
A blown budget
A blown audit
By not understanding the client's business, many
engagements are performed SALY (same as last year) or SALE (same as last
engagement). It is possible to significantly reduce the time spent on specific
audit areas by understanding where the risks are and how the accounting
information is gathered and recorded.
More importantly, by not properly understanding the
operations of the business or how the financial statements will be used, it is
possible to totally miss the key audit issues.
ESM is one of the most famous audit failures that
resulted from a firm not understanding how the major product (repurchase
agreements) worked or what audit evidence should be obtained (observation of
In addition, part of the peer review process is to
analyze the time and procedures spent on the planning process. The reviewer
will look at the number of hours and the timing of hours spent by the manager
and partner to determine if they were sufficiently involved in the planning
Use an Engagement Letter
No discussion of planning would be complete
without a discussion on engagement letters. Although our literature does not
require the use of a written engagement letter, there is probably no more
important tool that we can use to limit our exposure to litigation.
But engagement letters are much more important
than just a document to help us in case of litigation. Its most valuable asset
is in establishing a clear understanding of the purpose of the engagement with
our clients. It serves as a point of reference for the services we expect to
perform and the limitations on those services. The engagement letter should
also include a clear delineation of what we charge, how we expect to get paid,
and what will transpire if we do not receive payment on a timely basis. It is
here that firms include any interest charges, arbitration or meditation
You might also want to include a list of any
schedules or assistance which the client is expected to provide. By including
this with the engagement letter, it is easier to tie the fee and the
performance of the client together.
Many insurance companies today require
engagement letters for all engagements. Experience has shown that
relationships with even long standing clients have not been damaged by the use
of engagement letters. Clients have come to recognize the changes which
insurance, litigation, and professional standards have generated.
Evaluate Internal Controls
Because most audits of small companies do not
rely on their clients' system of internal controls, our discussion will be
SAS 55 (as amended by SAS 78) requires the
auditor to obtain a sufficient knowledge of internal control in order to plan
It defines the entity's internal controls as
consisting of five parts:
- Control environment
- Information and communication
- Control activities
- Risk assessment
The second requirement of the SAS is to assess the level of control risk.
This step is critical and must be clearly documented in the workpapers. The
auditor may assess control risk at the maximum level or at a level below
In theory, the maximum level states that a material misstatement that
occurs will most likely not be detected by the internal control structure. In
practice, this might not be the case.
- Coordinate your Testing with your Evaluation of Control Risk
When the auditor assesses control risk at below maximum, he or she is
obligated to test the system of internal controls. Therefore, the assessment
of control risk is often a question of audit efficiency and not necessarily
one of effectiveness of the client's system of internal controls. This is the
key element in the evaluation of internal controls for purposes of performing
What the auditor must assess is the time it
would take to test the system of internal controls versus the reduction in
substantive tests. If there is no savings in time or effectiveness by placing
reliance on the system of internal controls, there is no need to test it.
Could there be other reasons to test internal
Could the auditor place reliance on just one element of the internal
controls? Again yes.
It is not an all or none situation, but it is important to remember:
The primary purpose to test the system of internal controls is because it
will reduce your substantive tests by an amount sufficient to decrease the
overall time on your audit.
|Author's note: SAS 80 was issued in December 1996 to
warn auditor's that technology may have placed a new requirement
beyond those stated in SAS 55 and SAS 78. When significant
information is transmitted, processed or accessed electronically, it may
not be possible to totally eliminate the risks of detection by
performing only substantive tests. Tests of controls may have to be
- Gather Sufficient Evidential Matter
Evidential matter consists of the underlying accounting data and all
corroborating information. These include the books of original entry such as
general and subsidiary ledgers and documentary materials such as invoices,
checks, confirmations and information obtained by the auditor from inquiry,
observation, inspection and physical examination.
The usefulness of evidential matter is often
rated based on its source. The following presumptions can be used:
Independent sources provide greater assurance
than those secured solely from within the entity.
The more effective the internal controls, the
more assurance it provides about the reliability of the accounting data.
Direct personal knowledge through physical
examination, observation, computation and inspection is more persuasive than
information obtained indirectly.
The amounts and kinds of evidential matter
required to support the auditor's opinion are a matter of professional
judgement. In most cases, the auditor will find it necessary to rely on
evidence that is persuasive rather than convincing. An auditor must work
within economic limits. The opinion, to be economically useful, must be formed
within a reasonable length of time and at a reasonable cost.
Review the Results
This is the
final step and one that is too often neglected. Time is running short. The
budget may be exceeded. Our thoughts may be "let's get the financial
statements out the door." But remember that the financial statements may be
the only part of the engagement that your client sees. Take the time necessary
to see that they are correct and reflect the image that you want your firm to
It is best to
have someone independent of the engagement take a final look at the results.
That person should have access to anything they want to look at - financial
statements, workpapers, planning memos, checklists.
One of the "games" I have
used is... if you had only 30-seconds, what story would you want the financial
statements to tell? What is the essence of those statements? Sometimes that
story does not come across. Perhaps there is something you can do at very
little cost that will totally change the picture.
If the company exceeded
expectations, have you included a budget to actual comparison?
If they are showing
exceptional growth have you included a column in the income statement
showing percentage increases?
If they are in financial
trouble, is there a going concern paragraph in your accountantís report
and an explanation in the footnotes of how the company is planning to meet
Part of exceeding your
clientís expectations is providing what others donít at a reasonable cost.
By implementing these ten steps
to improving efficiency, you should be well on your way to: