Every year, your audit firm will conduct a fresh risk assessment before the start of fieldwork. Why? Because your auditor wants to mitigate the risk of expressing an incorrect opinion regarding the accuracy and integrity of the company’s financial statements. Inadvertently signing off on financial statements that contain material misstatements can open a Pandora’s box of risks — from shareholder lawsuits to increased regulatory oversight. 3-prong assessment Audit risk is a combination of three components: 1. Control risk. Sometimes a company’s internal controls are inadequate to prevent or detect material misstatements. Control risk increases when the company fails to deploy and enforce effective internal controls, or when employees or third parties override them without the company discovering their actions. 2. Inherent risk. This term refers to susceptibility to a material misstatement, regardless of whether the company has strong internal controls. Certain transactions and industries present greater inherent risk than others. For example, companies operating in developing countries face a greater threat of bribery and corruption by government officials, regardless of the internal controls they put in place. Inherent risk is also greater when accounting transactions are complex or involve a high degree of judgment. 3. Detection risk. Audit procedures are […] Read More
Complex accounting estimates — such as allowances for doubtful accounts, impairments of long-lived assets, and valuations of financial and nonfinancial assets — have been blamed for many high-profile accounting scams and financial restatements. Estimates generally involve some level of measurement uncertainty, and some may even require the use of outside specialists, such as appraisers or engineers. As a result, examining estimates is a critical part of an audit. Companies that understand the audit process are better equipped to facilitate audit fieldwork and can communicate more effectively with their auditors. Here’s what you need to know about auditing the use of estimates as we head into next audit season. Audit techniques Some estimates may be easily determinable, but many are inherently complex. Auditing standards generally provide the following three approaches for substantively testing accounting estimates and fair value measurements: 1. Testing management’s process. Auditors evaluate the reasonableness and consistency of management’s assumptions, as well as test whether the underlying data is complete, accurate and relevant. 2. Developing an independent estimate. Using management’s assumptions (or alternate assumptions), auditors come up with an estimate to compare to what’s reported on the internally prepared financial statements. 3. Reviewing subsequent events or transactions. The reasonableness […] Read More
Financial statements help investors and lenders monitor a company’s performance. However, financial statements may not provide a full picture of financial health. What’s undisclosed could be just as significant as the disclosures. Here’s how a CPA can help stakeholders identify unrecorded items either through external auditing procedures or by conducting agreed upon procedures (AUPs) that target specific accounts. Start with assets Revealing undisclosed liabilities and risks begins with assets. For each asset, it’s important to evaluate what could cause the account to diminish. For example, accounts receivable may include bad debts, or inventory may include damaged goods. In addition, some fixed assets may be broken or in desperate need of repairs and maintenance. These items may signal financial distress and affect financial ratios just as much as unreported liabilities do. Some of these problems may be uncovered by touring the company’s facilities or reviewing asset schedules for slow-moving items. Benchmarking can also help. For example, if receivables are growing much faster than sales, it could be a sign of aging, uncollectible accounts. Evaluate liabilities Next, external accountants can assess liabilities to determine whether the amount reported for each item seems accurate and complete. For example, a company may forget to […] Read More
Time flies when you’re busy running a business. But it’s important to occasionally pause and assess interim performance — otherwise you’re likely to be surprised by the year-end results. When reviewing midyear financial reports, however, recognize their potential shortcomings. These reports might not be as reliable as year-end financials, unless a CPA prepares them or performs agreed-upon procedures on specific accounts. Diagnostic benefits Monthly, quarterly and midyear financial reports can provide insight into trends and possible weaknesses. Interim reporting can be especially helpful for businesses that were struggling at the end of 2017. For example, you might compare year-to-date revenue for 2018 against 1) the same time period for 2017, or 2) your annual budget for 2018. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives, implement a new ad campaign or alter your pricing. You can also review your gross margin [(revenue – cost of sales) ÷ revenue]. If your margin is slipping compared to 2017 or industry benchmarks, find out what’s going wrong — and take corrective actions. Don’t forget the balance sheet. Reviewing major categories of assets and liabilities can help detect working capital problems before […] Read More
Tyler, Simms & St. Sauveur, CPAs, P.C.
Phone: +1 (603) 653-0044