Auditing/Accounting Project

Case analysis:

What will be required of you?

  • You will need to know how to convey your thoughts concisely.
  • You prerequisite knowledge of accounting matters or knowledge on how to research technical accounting knowledge will be needed. In order to identify accounting issues you must have some technical knowledge. If your technical knowledge is weak you should assume that most accounting issues in cases contain issues that you need to identify. If it gives you information about the clients revenue recognition and it “seems ok”, go research it in the CPA handbook to make sure it the client isn’trecognizing revenue too early for example and it should be set up as unearned revenue instead.
    • CPA handbook will give you information for Accounting Standards for private enterprises (ASPE) and forInternational Financial Reporting Standards (IFRS) – usually for public companies
    • You will need to look up the section and draw from the criteria make a proper assessment – such as IFRS 18 for Revenue or ASPE 3400 for Revenue
    • You might want to refer to old intermediate financial accounting textbooks as well
  • Displaying logical thought process – ability to identify issues & assess the issue, evaluate the alternatives, and make well-reasoned recommendations.

Lay out of a Case:

  1. Body:
    • You will find the required – what you need to do& who it should be reported to.
    • You will find out what your role is
    • Who the key players are
    • Reveals important dates to help understand your timeframe such as clients year-end or when issues or big things took place.
    • Background on client, the industry, and relevant changes
    • You may also find out a “big picture issue” such as going concern or fraud
  2. Exhibits:
    • Quantitative (e.g., financial statements)
    • Quantitative exhibits facilitate analytical review such as ratio analysis and other forms of number crunching. They may also integrate with, or tie into, other issues.  For example, by performing ratio analysis on a balance sheet, you may determine that a debt covenant has been broken and that the banker may call the company’s loan.

 

 

 

 

Steps in case writing:

  1. Read requirementsat the bottom of the 1st
    • What is your role? Are you acting in this case as an independent CPA or the controller? If you are a CPA you would have to be objective and unbiased protecting the interest of all users of the financial statements. If you are the controller reporting to VP you could bias your response towards the objectives of the financial reporting alternatives (without being unethical) either way you need to know your role in order to set the content and tone.
    • What is being asked of you? What is the nature of the deliverable – i.e. report, memo, discussion notes, quantitative? Your report should be in the format that is indicated – it could be more than one for example could be a report to partner and a report to Board of Directors
    • Who are you writing this report/memo/discussion to?Knowing who you are writing to is essential when writing a memo or other report as it sets the tone and the content of the report/memo. If it is to the audit partner you wouldn’t devote any time to explain basic issues, however if it is to the bookkeeper who is not as knowledgeable you would.
  2. With the requires in mind – do your first read of the whole case
    • Note the titles of the information given
      • Is it an excerpt or extracts?
      • If information is labeled as audited– if so, it is more creditable
    • Underline anything that seems important or seems like an issue
    • Highlight important numbers in the body so they stand out
    • Think about why the information has been given to you
    • Note any “triggers”
      • These are things that are described in absolutes
      • If client assert that something is working perfectly, especially if it was broken before, there is probably an underlying issues
      • Be wary of anyone who is in over there head. An example is a bookkeeper with limited knowledge may be prone to making errors when dealing with complex situations
    • When you get to exhibits scan them see if anything jumps off the page at you such as a large loss or profit or a new account – don’t do detailed analysis yet
  3. Perform a detailed read and crunch some initial numbers
    • Perform initial analytical review of FS and perform any calculations that the company depends on such as covenants or perform ratio and trend analysis – remember to come back and assess again after you find out materiality. You will want to look into accounts that have
      • Large changes
      • No changes
      • New accounts
    • Pay close attention to dates – what does the timeline look like?
      • This will help you to ensure your comments are relevant – if you are an auditor appointed after year end some procedures won’t make sense to do.
    • Start thinking and writing down any issue you come upon.
      • Accounting issues – if there is detail about an accounting policy or how they are accounting for something you probably should look into it!
      • Control issues
      • Go back and review triggers you highlight and see how they tie in
    • Identify and stay alert for non-directed issues – This is piecing together other small issues and tying them into a larger “big picture issue”
      • Does your analytical review of FS lead you to detect a trend in loss profits margins
      • Are they close to breaking a covenant?
      • Is there significantcontingent loss not recognized?
        • This looks like a going concern problem! Big picture issue!
  1. Start writing doing the required:
    • Make sure your memo or report flows in a logical sense
      • Should have a intro
      • State the issue
      • Should analysis the issue (be thorough but concise) – depending on what the issue is (accounting, control, audit planning memo) it will look slightly different
      • State the impact of the recommendation or findings
      • Conclude
    • If talking about accounting issue use this as your basis for writing:
      • What is the issue/Case fact: The client seems to be recognizing revenue early – they are recognizing revenue when they accept cash payment however the service has not yet been performed.
      • Handbook criteria: As per ASPE 3400 or IFRS 18 revenue criteria is only met when ….
      • Recommendation / Implication/ Effect on accounts: As per handbook the client is recognizing revenue too early therefore overstating revenue and understating deferred revenue. This will have an impact on covenants, bonuses, etc. (what is important in the case)
    • If we are talking about risk
      • Overall financial statement level risk -Can break these between IR &CR
      • Assertion level risk -Can break these between IR &CR
      • Give factors that increase and decrease (balance discussion)
    • If we are talking about materiality
      • Who are the users
      • What do they care about – choose the base and why you chose the %
      • Do we need PM?
    • Audit procedures:
      • Why – Are you testing this? High risk account (case fact)
      • What – Are you testing? Assertion – Occurrence/existence/etc.
      • How – Are you going to test it? BE SPECIFIC – inspection/observation (good words) & with what documentation – invoices, agreement, etc.
    • Controls:
      • Weakness
      • Implication
      • Recommendation
    • Don’t forget to always conclude!
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