May 2, 2021
Successfully Preparing For Year-End Audits of Privately-Held Clients
Year-end is typically a busy time for external auditors, even without the added stress of the COVID-19 pandemic. But as most CPA firms know, the hectic atmosphere is not a reason to neglect a highly-developed, measured, methodical year-end audit strategy plan.
In addition to meeting a CPA firm’s quality control standards, audit engagements are subject to a peer review or outside monitoring process — and a peer review report with a rating of pass with deficiencies, or fail, may shake the core confidence of a CPA firm’s leadership, clients and the public interest. Collemi Consulting professionals have been called in when CPA firms have encountered negative peer review results, and we’ve been asked to address some commonly cited matters.
To begin with, a well-crafted audit will address and satisfy the following issues:
- Common peer review challenges
- Audit planning and supervision
- Audit risk and risk assessment procedures
- Obtaining and documenting an understanding of the audit client and its environment, including its internal controls
- Materiality considerations
- Linking audit procedures to mitigate the risks identified and reach audit conclusions
- Required auditor communications
The auditor’s overall objective when conducting a risk-based approach to audits of financial statements is to provide reasonable assurance that the financial statements, as a whole, are free from material misstatement, enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).
Avoidance of Common Peer Review Issues
Frequently cited mishaps with respect to risk assessment include:
- Failure to link the substantive procedures performed to the results of the risk assessment
- Audit procedures not linked to the client’s financial statement and relevant assertion-level risks for significant classes of transactions, account balances, or disclosures
- Designing audit procedures with little regard for the results of that assessment as required by AU-C 315, Understanding the Entity and its Environment and Assessing Risks of Material Misstatements.
Risk Assessment Shortcomings
Peer reviewers often cite shortcomings in auditors’ understanding of the entity and its control environment. This includes a failure to understand the entity’s internal controls. When conducting your risk assessment, it’s useful to remember that your assessment will generally be more effective at the start of the engagement, and that internal control procedures may be performed before the risk assessment document is completed. The auditor, however, is not required to test internal controls unless mandated under certain circumstances.
Other critical points to keep in mind include the importance of having strong audit workpaper documentation; and that the risk assessment process is an iterative one: repetition in order to generate a sequence of outcomes. Also, the AICPA Professional Standards have changed over the last decade due to the issuance of the suite of risk assessment standards and Clarity requirements.
Please note that practice aids are no substitute for understanding the Professional Standards. Although auditors are only required to document their understanding of the factors that help them draw conclusions, auditors are still responsible for maintaining adequate documentation, and it’s their responsibility to meet Professional Standards.
Audit Documentation Dilemmas
Audit documentation is defined as “the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached.” Audit documentation should be sufficient to enable an “experienced auditor” — one who is independent and competent enough to challenge the engagement team’s procedures and conclusions — to understand such characteristics as the nature, timing, and extent of the audit, the results of the audit procedures performed, and any significant findings or issues.
Properly executed, audit workpaper documentation can stand on its own without any verbal explanation by the auditor if it answers the 5 “W” and 1 “H” questions: Who?, What?, When?, Where?, Why?, How?
Audit documentation serves as:
- Evidence that the audit was properly planned and performed in accordance with auditing standards generally accepted in the United States of America (U.S. GAAS) and Evidence of the auditor’s basis for a conclusion
To further increase audit quality, audit documentation should provide sufficient and appropriate evidence that:
- Risk assessment procedures were performed
- There was appropriate response to address the risk of misstatement at the financial statement level
- The nature, timing and extent of audit procedures performed were adequate for the engagement
- There was linkage of those procedures with the assessed risks
- The results of the audit procedures
- Conclusions reached
- Significant risks were reasonably considered
Audit workpapers should also reflect justification for any departures from presumptively mandatory requirements. They should also identify individuals who performed the work, when it was completed, the person who reviewed the work, and the date and extent of the review.
Audit workpaper documentation should also identify characteristics of the specific items tested, and discuss significant findings or issues with management or those charged with governance. Any information that contradicted or was inconsistent with the final conclusion on a significant audit finding or issue that was addressed should also be documented.
Don’t Forget About Litigation Attorneys
Over the years we’ve worked with litigation attorneys who have shared some “flash points” with us about notes and other workpaper matters that can come back and haunt the auditor. To be on the safe side, these are some real-life phrases and other items that should not make an appearance in your audit workpaper files:
- Extraneous remarks or irrelevant memoranda, like “the client’s books are a complete mess” or “these expenses seem questionable”
- Auditor statements that discredit their own work: “close enough for government work”
- Personal files containing memos, schedules, and other matters related to an engagement
- Superseded or outdated workpapers
Elements of properly prepared workpaper files include: initialing and dating each audit program step, signing off any audit program step as not applicable “N/A,” or as not considered necessary “N/C/N”, followed by an explanation. Any “Open Items Lists” should be reviewed and any conclusions regarding unique issues should be thoroughly documented. Additionally, time budgets explaining any overages and underages should be maintained, and the completion date should be documented. Professional Standards require that workpapers should be retained for a minimum of five years from the report release date — although practice, legal, regulatory, or other factors may dictate a longer retention period.
Don’t Forget Your Independence
The AICPA Code of Professional Conduct requires auditors to be independent in both fact and appearance. Auditor independence issues can be classified into four high-level areas:
- Financial interest
- Family relationship
- Management function
- Management decision making
In order to perform permissible non-attest services, the audit client must first agree to:
- Make all management decisions and perform all management responsibilities
- Designate an individual with suitable skills, knowledge, and/or experience, preferably within senior-level of management, to oversee the performance of the non-attest services
- Evaluate the adequacy and results of the non-attest services
- Accept responsibility for the results of the non-attest services
- Establish and maintain internal controls, including monitoring ongoing activities
Auditors should exercise caution when it comes to certain “independence” matters that can raise red flags about their independence in a peer review or litigation matter. Some areas include:
- Providing multiple non-attest work products
- Significant concentration of revenue coming from one audit client
- Taking on management responsibilities
- Providing consultation that goes beyond routine advice
- Inadvertently engaging in other non-compliance activities like performing non-attest services for a company before it becomes an attest client; loaning staff members to an attest client; certain mergers or purchase of a CPA firm; employment of, or association with, an attest client; performing attest services for a client with unpaid fees; and engaging a client employee
Other red-flag issues include financial interests in an attest client and their affiliates, the adequacy of fees being charged, and the existence of group audits.
Generally speaking, group audits should be far more common than they actually are! On top of that, the new group audit requirements kick in next year, with some major changes: They have created a whole new class of “referred-to” auditors that must be considered when performing a group audit. And it’s time and past time to start preparing for that now. The American Institute of Certified Public Accountants’ (AICPA) Auditing Standards Board (ASB) issued SAS 149 that revises the definition of a “component auditor” and takes an updated risk-based approach to planning and performing a group audit. Issued in March 2023, SAS 149 goes into effect for audits of group financial statements for periods ending on or after December 15, 2026. Before we get into that, it’s vital to know that numerous times, auditors miss the fact that a group audit is necessary in the first place. That’s because determining what is and isn’t a “component” can be simple, but it’s not always obvious. Depending on how management runs its operations, a company can be a single entity with two or more different business activities means a group audit is necessary. When dealing with a single entity, many times, auditors see a single business or business line and miss what is really a separate “component” requiring a group audit, unless they have a consolidation of two or more subsidiaries staring them in the face. The question you should be asking yourself is, does the company have multiple product lines, service lines, branches, or anything else where the CFO and the CEO of the company manage their operations by tracking the performance of those multiple product or service lines? Are there multiple locations or divisions? It doesn't necessarily mean the company has to have a subsidiary or another legal entity that they control. Auditors are required to use professional judgment to determine whether a business activity represents a component, regardless of whether it is a separate legal entity. The current standard Group financial statements can include aggregated financial information from entities or business units like branches or divisions. If business units with separate management, locations, or information systems are aggregating financial information, you need a group audit. Here are some examples: Combined financial statements, when for example two companies are owned by the same person Consolidated financial statements, in which a company owns another company A joint venture A company organized by geography, for example American, Canadian and European units, each with their own general ledger A company with different business activities where performance is tracked separately A company that reports an equity method investment on its balance sheet Look at business activities first and determine if they are significant in terms of dollar amounts, or materiality, or if there’s a high risk in that part of the operations. Follow the flow of the numbers! SAS 149 kicks in Alongside the work of component auditors cited — for whose work the group auditor is responsible — there’s a new category: Referred-to auditors These are secondary auditors, brought in to issue their own opinion on a particular part of the operations that the group auditor will reference in their work. The new group audit standards make clear that the work of the referred-to auditor is relied upon in the final group audit, but was not carried out by the group auditor. These referred-to auditors are not component auditors under the terms of SAS 149, Special Considerations — Audits of Group Financial Statements (Including the Work of Component Auditors and Audits of Referred-to Auditors). SAS 149 is effectively telling group auditors to say very clearly, “Hey, we didn’t look at this part of the operation but we are referring to and relying upon this opinion.” The new standards also make clear that component auditors are part of the engagement team, whereas referred-to auditors are not. Risks grow For all that, the addition of referred-to auditors is not SAS 149’s most significant change: It provides an updated risk-based approach to planning and performing group audits. Under the existing standard a group engagement team is required to identify significant components at which to perform audit work. However, SAS No. 149 directs the group auditor to use professional judgment in determining the components at which to perform procedures, based on assessed risks. Just like the auditor is required to use professional judgment in determining what should or shouldn’t be a group audit. Collemi Consulting leverages over 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.
Once you reach a certain point in your career, say five to ten years in, it’s a good time to start getting involved with professional organizations ranging from associations, not-for-profits and state boards and committees. There are a lot of benefits to getting involved in professional organizations that start with making new relationships and even getting new clients, but go far beyond that. There are plenty of soft skills to be learned from being active in your profession. One is simply learning how to deal with businesses, professional boards and with non-profits. These are organizations that will ultimately be important to you and your practice, and knowing how to navigate them is a skill that will stand you in good stead throughout your career. A good place to start is with your local chapter of your State Society, the National Society of Accountants (NSA) and American Accounting Association (AAA), as well as your state board of accountancy . But there are others as well, even local and state Chambers of Commerce . Benefits include: Refining existing skills: You will utilize skills like financial management, budgeting and bookkeeping in new contexts. Gaining leadership and project management experience: Volunteering often means taking on leadership roles and overseeing projects. Staying current with industry trends and regulations: Staying up-to-date is a byproduct of getting involved. Expanding professional networks: Volunteering provides the opportunity to meet and build relationships with other accountants and business executives, work with leaders in your field, and meet potential mentors. Building a strong reputation: Actively contributing to a board or committee can enhance your standing within your field, which can be valuable for gaining new clients and career advancement. Increasing visibility: getting involved in projects and committees distinguishes you from peers and can demonstrate a commitment to your career. Professional development : Many organizations offer professional education courses, workshops and conferences that go beyond your required continuing professional education (CPE) requirements. Credentials and certifications: Many industry organizations offer professional certifications and credentials that can help differentiate you from your peers. All of these benefits can be tied back into your career and professional development. As your involvement grows over time, so will the benefits. You’ll develop a professional network of likeminded leaders in their fields of expertise that will help you advance your career both inside and outside of the organizations for which you volunteer. And as your commitment to these organizations grows over time, so will your leadership in them. Committee memberships will become committee leadership, with the resulting increase in visibility and prestige. Participation at events will turn into speaking opportunities and a higher professional profile. You’ll have the opportunity to influence policy and the direction of your whole industry. Your professional network will expand with higher-level and more advanced professionals within your field over time. You’ll also build a stronger resume, one that demonstrates both your commitment to your field and your expertise in it. Working with organizations outside your professional field like a chamber of commerce or local/state government can bring many of these benefits as well: Networking and meeting potential new clients, raising the profile of yourself and your firm, and simply learning how to interact with businesspeople and executives outside the profession. Five or ten years into your professional life is a good time to start branching out a little bit and do work that’s outside your firm. Beyond all this, there is a sense of personal fulfillment that giving back to your profession and community can bring. It’s important to get involved in issues that are important to you. Collemi Consulting leverages over 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.
Nine months ago, we warned that two new sets of quality control and management standards were coming due on December 15, 2025 and strongly advised public accounting firms not to wait until the last minute to begin implementing them. Well, it’s now the last minute. With just six months left until the the American Institute of Certified Public Accountants’ (AICPA) new Statements on Quality Management Standards (SQMS) and the Public Company Accounting Oversight Board’s (PCAOB) new QC 1000 quality control standards go into force, there’s no time left to delay or procrastinate. Here’s a short overview of each set of standards and what’s necessary, but you can find our full blog for the AICPA’s new SQMS here , and the PCAOB’s new QC 1000 standards here . Both will require extensive effort to come into compliance. The AICPA’s SQMS The SQMS are what we here at Collemi Consulting & Advisory Services like to call the “thinking standards.” This means you really have to think it through and customize it for your attest practice, based on the type of clients you have and the services you provide, as the SQMS now takes an entirely new, risk-based approach to quality. There are now eight SQMS components, including two completely new ones: Risk Control, and Information and Communication. The new risk assessment process requires firms to establish specific quality objectives, meaning they must “identify and assess quality risks, and then they must design and implement responses to those risks that are tailored to the firm’s unique circumstances.” Information and communication requires the establishment of processes that support the SQMS, including reliable internal and external sources of information. It also mandates the creation of a culture that supports and reinforces the responsibility for sharing information with colleagues and the firm. All of the six other quality objectives have new requirements as well: ● Governance and leadership ● Relevant ethical requirements ● Acceptance and continuance of client relationships and specific engagements ● Engagement performance ● Resources (formerly Human Resources) ● Monitoring Firms have three responsibilities between now and December 15: 1) Continue using the extant standard (Statement of Quality Control Standard (SQCS) No. 8 (Redrafted) 2) Perform the risk assessment and gap analysis, and then design and implement the new standards. 3) Consult with your peer reviewer before final implementation Firms then have until Dec. 15, 2026 to carry out an annual evaluation of their new quality management system. The PCAOB’s New QC 1000 Standards The PCAOB’s new QC 1000 standard is intended to make independent registered public accounting firms who audit issuers (public companies) and broker-dealers significantly improve their quality control (QC) systems. It applies to all PCAOB-registered member firms. Those that audit more than 100 issuer clients annually have more extensive requirements to contend with. The new standard enables firms to identify their specific risks and design a quality control system, including policies and procedures to guard against those risks. The goal is to create what the PCAOB refers to as a “a continuous feedback-loop for improvement.” QC 1000 has quality control requirements that do not appear in other QC standards. They tend to be more prescriptive and more tailored to the U.S. legal and regulatory systems. There are 10 areas in which the QC 1000 goes beyond what can be found in other existing standards. These are: ● Evaluation and Reporting ● Governance and Leadership ● Ethics and Independence ● Monitoring and Remediation ● Quality Objectives ● Information and communications ● Resources ● Risk Assessment Processes ● Roles and Responsibilities ● Documentation That’s not even an exhaustive list, and it’s coming into effect at the same time as the AICPA’s SQMS. Our recommendation is to make two completely separate documents rather than trying to roll it all into one giant document. It’ll be too confusing, especially for people who might not have to audit both public companies, broker-dealers and private companies. We also advise you to appoint a separate champion within the firm for each of the two different sets of standards. Otherwise it just gets too complex. Like we said, time is running out. It’s time to get it done or get help doing it. Collemi Consulting leverages over 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.
When questions or technical issues arise, it’s important that they be resolved in a timely and efficient manner. That means consulting with other members of the engagement team or someone either in the firm or outside of the firm with more expertise or experience. This is especially important when there is a difference of opinion or uncertainty about a technical question, the application of Professional Standards procedure, the application of firm policy, or the application of a rule, regulation, or procedure from a regulatory agency. First off, a CPA firm should have an up-to-date library, as well as industry and other specialized materials related to their client’s industry. This is an important tool for answering questions or settling differences of opinion. As there are many issues/challenges that can cause this kind of question or difference of opinion to arise, and in many cases in-house library resources won’t be enough. When differences arise These difficult or contentious issues begin with any engagement in which a modified or adverse report is likely to be issued. Then there’s any engagement involving material litigation of a first-time or complex technical pronouncement. Other issues that can arise include industries with specialized accounting treatments, auditing or reporting requirements, or with complex or unusual transactions. Emerging practice problems also fall into this category. Having choices among accounting principles generally accepted in the United States of America (U.S. GAAP) either initially or when an accounting change is made is another situation in which questions can arise. So is the need to reissue an audit report, consider omitted procedures after a report has been issued, or the discovery of facts that were not known when the report was issued. More serious issues include any restatement to financial statements upon which a report was issued. These cases require consultation with the managing partner and quality control partner and their approval of the resolution. Restatements are considered contentious or difficult issues, and must be carefully documented at every stage. Then there are questions or differences of opinion about documents to be filed with a regulatory agency, and especially meetings with regulatory agencies in which the firm will be called upon to defend the application of U.S. GAAP or auditing standards generally accepted in the United States of America (U.S. GAAS) that have been questioned. When questions arise First of all, anytime there is a question requiring consultation or a difference of opinion arises either within the engagement team, or between the engagement partner and the engagement quality control reviewer (EQCR), the issues must be discussed between the parties involved. If any member of the team disagrees with the resolution, it should be escalated based on the CPA firm’s quality control policies and procedures. Second, look for people within the firm with the knowledge, seniority or experience to bring expertise to the question. The quality control partner will be a good resource for finding these experts. Third, if someone with the requisite know-how can’t be found within the firm, or that person is unable to satisfy the difference of opinion, it’s time to look outside the firm. CPAs at other firms, consultants, the AICPA Technical Hotline, AICPA Audit Quality Centers,and other professional and regulatory bodies are all sources of quality control services and expertise. When looking for an outside subject matter expert (SME), consider their professional certifications, licenses or other qualifications that demonstrate expertise. Also look at the reputation and standing of the person in question. Of course, look for any relationship with the client. Consulting specialists Certain audit or attestation engagements may require the firm to consult with specialists including actuaries, appraisers, attorneys, and even engineers or geologists, among others. Following the guidance in AICPA Professional Standards at AU‐C 620A and AT‐C 105 when such consultations are necessary is vital. The nature and scope of consultations on contentious or difficult issues should be agreed-upon by all parties. The results of those consultations must be well-documented so as to ensure that the issue which required outside expertise is clearly stated. So must the results of the consultation, the decisions made and the basis upon which they were made, and how those decisions were implemented. The documentation must show that the conclusions reached were understood by both the persons consulting and the consultant. When escalating isn’t enough If the difference of opinion cannot be resolved by any of the aforementioned steps, it’s time to bring the matter to the managing partner and/or quality control partner. The managing partner and/or quality control partner will resolve the dispute, possibly in consultation with other experts or regulatory entities. The resolution must be documented, and the report should not be released until differences of opinion are resolved. At this point, anyone who still disagrees with the outcome will document their difference of opinion on the matter. At every stage of this process, it is the engagement partner who has responsibility for ensuring that differences of opinion are resolved, and that they are properly documented. Collemi Consulting leverages over 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.