December 20, 2022

Setting the Stage

The clock starts now for planning calendar year-end audits. Here’s how to be proactive and prepare yourself for busy season.


Busy season for auditors is just around the corner. The last few months of the year are critical ones for public accountants, because they are the time when you can be proactive in planning audits. A good rule of thumb is that you should spend about 20 percent of your time planning for an audit engagement. That means the time to get started is now! Here are three ways to properly prepare yourself for busy season:

 

Step #1

Have a sit-down with your clients. Now is the ideal time to have conversations with your clients’ leadership. Schedule a conversation (and take notes!) so that both of you can be more prepared for the months ahead. You’ll want to discuss what’s going on with the business and what they’ll need to do to prepare for the audit. Take this opportunity to convey the importance of management playing an active role in the audit. You can discuss what management should expect and how they should prepare employees to gather information and answer questions in a timely manner. This discussion will help set the stage for an effective engagement.

 

Step #2

Consider new pronouncements that will affect this year’s audits. It’s always key to assess whether there are significant new pronouncements that will affect the next round of audits. The big news this year is the Financial Accounting Standard Board (FASB) lease accounting standard (ASC 842) will take effect for private companies with fiscal years ending after December 15, 2021. The new standard will, for the first time, generally require companies to bring their long-term lease obligations onto their balance sheets. Certain industries, including telecommunications and real estate, will be severely impacted, but all businesses, large or small, that participate as a lessee in leasing transactions will be affected to some degree.

Now is the perfect time to have a discussion with your clients to make sure they’re up to speed with the new requirements and have been properly implementing them. Unfortunately, the new leasing requirements are too comprehensive for some small and mid-size businesses — particularly those who don’t have an astute Chief Financial Officer on staff — to manage. If you find your client is in a situation where they’ve been procrastinating with implementing the new leasing standards, you need to come up with a game plan to help them without jeopardizing your independence in the audit. In some cases, you may advise your client to secure another partner to help with implementation.

 

Step #3

Perform interim procedures. To increase audit efficiency, consider performing an interim for the first three quarters of the calendar year. Doing so helps you get a better understanding of your client’s business and related risks, so you’ll better be able to figure out what and where are the key risks that they should pay more attention to when you design audit procedures. An interim audit also reduces the work when the year-end audit comes. For instance, operating expenses might be tested during interim audit for the first nine months, and the rest will be completed at the year-end audit. The upshot? Taking some time to plan for this year’s busy season will save you considerable time down the road — when you need it the most.

 

Collemi Consulting leverages more than two decades of experience to provide trusted technical accounting and auditing expertise when you need it the most. One example: We’ve spent the past three years working with CPA firm leadership and their respective clients to understand the new leasing standards. To schedule an appointment, contact us at (732) 792-6101.

 


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By Jennifer Ruf March 24, 2025
As audit season is in high gear, it’s important for auditors to step back and plan how they are going to audit a client’s books and records. What are the red flags you’re looking for when it comes time to throw open the books and look through a huge swath of journal entries to pluck out the ones that are questionable, and need to be questioned? First off, it’s important to understand how journal entries are created at the company being audited. For an auditor, that means looking at the internal control environment to understand how a journal entry is created: Who’s authorized to create one and who can create one. You have to understand the process. How does it start and how is the entry eventually recorded onto the financial reporting system? Once you know that, you can determine whether someone can come in and override the system, or if someone can pretend to be someone else and start recording journal entries onto the system. That will help you figure out what to look for to decide what entries to pull out and ask management to get back up information to support and validate those entries. Finding the needle The key here is not to just go through the mechanics, but to really go through the exercise so you can determine if management is playing games in the recording of those transactions. You have to be able to get comfortable with that, and that means you need to be able to document what you’re looking for. Because what the auditor is really doing is looking for a “needle in the haystack”, to identify the transactions that don’t look right, that don’t make sense in the ordinary course of business. For example, if the business is not open on weekends, are transactions being posted on a Saturday or Sunday, or even on holidays? If you see rounded numbers or accounts that are seldom used, those can be red flags as well. Sometimes it can be as simple as asking managers and others like accounting, data entry and IT personnel if they’ve observed any unusual accounting entries. Depending on the size of the company and scope of the work, you might need to use computerized audit software program — some of them with AI built in — that can scan the entries to identify anomalies. Red flags When an auditor is looking for evidence of management override of controls, they can look for some of these 12 red flags indicators: ● Top-side entries ● Entries made to unrelated, unusual or seldom-used accounts ● Entries made by individuals who typically don't make entries. ● Entries recorded at the end of the period ● Post-closing entries with no explanations ● Entries made before or during the preparation of financial statements with no account numbers ● Entries that contain rounded numbers or a consistent ending number ● Entries processed outside the normal course of business ● Accounts that contain transactions that are complex or unusual in nature ● Accounts that contain significant estimates and period-end adjustments ● Accounts that have been prone to errors in the past ● Accounts that contain intercompany transactions When testing non-standard journal entries and other adjustments, you should look for documentary evidence indicating that they were properly supported and approved by management. Finally, remember that while most fraudulent entries are made at the end of a reporting period, you shouldn't ignore the rest of the year  Collemi Consulting leverages nearly three decades of experience to provide trusted technical accounting and auditing expertise when you need it the most. We regularly work with CPA firm leadership to help them reduce risk and maximize efficiencies. To schedule an appointment, contact us at (732) 792-6101.
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