Monthly Archives: June 2018

Using analytical procedures in an audit provides many benefits

Category : Blog , sccm

Analytical procedures can make audits more efficient and effective. First, they can help during the planning and review stages of the audit. But analytics can have an even bigger impact when used to supplement substantive testing during fieldwork.

Defining audit analytics

AICPA auditing standards define analytical procedures as “evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.” Analytical procedures also investigate “identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.” Examples of analytical tests include trend, ratio and regression analysis.

Using analytical procedures

During fieldwork, auditors can use analytical procedures to obtain evidence, sometimes in combination with other substantive testing procedures, that identifies misstatements in account balances. Analytical procedures are often more efficient than traditional, manual audit testing procedures that typically require the business being audited to produce significant paperwork. Traditional procedures also usually require substantial time to verify account balances and transactions.

Analytical procedures generally follow these five steps:

1. Form an independent expectation about an account balance or financial relationship.
2. Identify differences between expected and reported amounts.
3. Investigate the most probable cause(s) of any discrepancies.
4. Evaluate the likelihood of material misstatement.
5. Determine the nature and extent of any additional auditing procedures needed.

When using analytical procedures, the auditor must establish a threshold that can be accepted without further investigation. This threshold is a matter of professional judgment, but it’s influenced primarily by the concept of materiality and the desired level of assurance.

For differences that are due to misstatement (rather than a plausible explanation), the auditor must decide whether the misstatement is material (individually or in the aggregate). Material misstatements typically require adjustments to the amount reported and may also necessitate additional audit procedures to determine the scope of the misstatement.

Your role in audit analytics

Done right, analytical procedures can help make your audit less time-consuming, less expensive and more effective at detecting errors and omissions. But it’s important to notify your auditor about any major changes to your operations, accounting methods or market conditions that occurred during the current accounting period.

This insight can help auditors develop more reliable expectations for analytical testing and identify plausible explanations for significant changes from the balance reported in prior periods. Moreover, now that you understand the role analytical procedures play in an audit, you can anticipate audit inquiries, prepare explanations and compile supporting documents before fieldwork starts.

© 2018

Republican Tax Bill

Category : Blog , sccm

A legislative draft of the second Republican tax bill is expected after July 4. It’s expected to focus on making permanent or extending the individual tax cuts enacted by the Tax Cuts and Jobs Act, which are set to expire by 2025. Areas under consideration include lower individual income tax rates, the expanded child tax credit and the increased standard deduction. It may also tackle retirement and education provisions. A legislative outline is expected by August, with votes in the fall depending on when U.S. House of Representative leaders want to schedule them.

Does it match?

Category : Blog , sccm

What if you receive a CP2000 letter from the IRS? CP2000 letters are sent to taxpayers if their tax return information doesn’t match information from third parties, such as employers and banks. The IRS says in a new fact sheet that the letter isn’t a formal audit notification. Rather, its purpose is “to see if the taxpayer agrees or disagrees with the proposed tax changes” made by the IRS. The fact sheet also contains information on IRS Notice CP3219A, which is sent if a taxpayer doesn’t respond to the initial letter. See the fact sheet at

Spotlight on auditor independence and hosting arrangements

Category : Blog , sccm

With Independence Day coming up, it’s a good time to check up on auditor independence issues. This is especially important in 2018. Why? New rules go into effect this fall that may warrant changes to the services provided by your audit firm. If you discover potential issues now, there’s still plenty of time to take corrective action before next year’s audit begins.

What’s independence?

Independence is one of the most important requirements for audit firms. It’s why investors and lenders trust CPAs to provide unbiased opinions about the presentation of a company’s financial results. The AICPA and the Securities and Exchange Commission (SEC) have rules regarding auditor independence. Even the U.S. Department of Labor has issued independence guidance for auditors of employee benefit plans.

The AICPA specifically goes to great lengths to explain how auditing firms can maintain their independence from the companies they audit. In short, auditors can’t provide any services for an audit client that would normally fall to management to complete. Auditors also can’t engage in any relationships with their clients that would compromise their objectivity, require them to audit their own work, or result in self-dealing, a conflict of interest, or advocacy.

Independence is a matter of professional judgment, but it’s something that accountants take seriously. A firm that violates the independence rules calls into question the accuracy and integrity of its client’s financial statement.

What’s changing?

Today, some businesses have chosen to host their company’s data with their audit firm. In response, the AICPA’s Professional Ethics Executive Committee announced a change to the profession’s independence rules. As of September 1, 2018, to maintain independence, auditors can’t perform any of the following services for their audit clients:

  • Serve as the sole host of a client’s financial or nonfinancial records.
  • Function as the primary custodian of a client’s data, meaning that a company must access the data in the CPA’s possession to possess a complete set of records.
  • Provide business continuity and disaster recovery support services.

Not all custody or control of a client’s records results in hosting services, however. The new rule narrowly interprets hosting services to mean the audit firm has accepted responsibility for maintaining internal control over data an audit client uses to run the business. Accepting responsibility to perform a management function explicitly compromises auditor independence.

Finding a host with the most

Is your audit firm responsible for managing your company’s data? If so, it may be time for a change. Data migration isn’t necessarily time consuming, but it may take time to find a new hosting company with the right balance of security and services to meet your data storage and access needs. Contact us to evaluate your hosting arrangement and, if necessary, identify an alternate provider to stay in compliance with the AICPA independence rules.

© 2018

Category : Blog , sccm

The House GOP budget may open the door for more tax cuts. House Republicans’ newly unveiled budget plan would allow lawmakers to use the reconciliation process to implement a second tax cut (or “Phase 2”) of the Tax Cuts and Jobs Act (TCJA). Under reconciliation, the bill would require only a simple Senate majority for passage instead of the usual 60-vote threshold. The House Ways and Means chairman indicated that a possible tax bill would mostly be directed at making permanent the TCJA’s individual tax rates and possibly other provisions set to expire in 2025.