These lists were compiled from the input of hundreds of participants at my seminars and workshops as well as more then twenty years of public practice.

• Ten Most Common Mistakes Made by Accountants and Auditors
  
• Ten Best Ways to Reduce Your Time while Performing Substantive Audit Tests
  
• Ten Steps to Improving Efficiency
  

Ten Most Common Mistakes Made
by Accountants and Auditors

1. 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 we perform.

2. 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.

3. 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 company’s business. In addition, knowing more about our clients helps lead us to additional engagement opportunities.

4. 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?

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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

1. 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 at all.

2. 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.

3. 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.

4. 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 unrecorded  liabilities.

5. 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.

6. Client Assistance

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.

7. 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 proper planning.

8. 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 review procedures.

9. 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, efficient audit.

10. 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 Improving Efficiency

1. 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 audits.

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 accounting personnel
  

• The accounting basis on which the financial statements are to be presented
  

• The form and content of the financial statements

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.

2. 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 audit risk
  

• A calculation of overall materiality
  

• Analytical review procedures
  

• Allocation of materiality to the various audit areas
  

• Documentation of 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 overplanning.

 

3. Determine Preliminary Materiality

One 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.

Various 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)

The various users of financial statements often have different concerns when evaluating financial statements. For example:

1. The users of public company financial statements are primarily concerned with earnings per share.
   

2. Lenders to a company are primarily concerned with how they will be repaid.
   

3. The users of not-for-profit financial statements are concerned about how management has utilized the funds over which they have control.

Each 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 used.

 

4. 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

Comparison to budgets

Ratio Analysis

Comparison to industry

There are a couple of misconceptions regarding the requirement to perform analytical procedures that we need to dispel:

• Analytical procedures take a long time to perform.
  

• Comparable industry information is impossible to find.

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:

• Trade Associations
  

• 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 Survey
  

• Standard & Poor's Industry Surveys
  

• 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

5. Review the Plan - Ineffective Planning can be Costly

The two most damaging consequences of under or misplanning are:

• 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 collateral).

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 process.

 

6. 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 clauses.

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.

 

7. Evaluate Internal Controls

Because most audits of small companies do not rely on their clients' system of internal controls, our discussion will be brief.

SAS 55 (as amended by SAS 78) requires the auditor to obtain a sufficient knowledge of internal control in order to plan the audit.

It defines the entity's internal controls as consisting of five parts:

• Control environment
• Information and communication
• Control activities
• Risk assessment
• Monitoring

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 maximum.

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.

 

8. 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 the audit.

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 controls? ...Yes

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 performed.

 

9. 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.

 

10. 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 portray.

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.

Examples:

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 accountant’s report and an explanation in the footnotes of how the company is planning to meet that problem?

Part of exceeding your client’s expectations is providing what others don’t at a reasonable cost.

By implementing these ten steps to improving efficiency, you should be well on your way to:

• Pleasing your client
  

• Pleasing your boss
  

• Satisfying the users of the financial statements
  

• Keeping yourself out of trouble