March 11, 2019

Navigating COVID-19 Audit Challenges

Social distancing and other pandemic safety measures present challenges. Here's how to navigate around them.

Under the new remote work environment in which many CPA firms and their clients now find themselves, external auditors have had to modify some of their traditional audit procedures.

As part of an annual audit engagement of a manufacturing client, a mid-sized CPA firm in the New York Tri-State area would normally perform an inventory observation — but travel restrictions and other COVID-19 obstacles made an on-site visit risky, if not impossible. The CPA firm contacted Collemi Consulting for advice and we suggested an alternative approach: do a remote physical inventory observation, using either a tablet or a smartphone.

A limited number of the manufacturing firm’s employees were still working on-site, wearing personal protective equipment (PPE) — so, under the audit engagement manager’s video-supervision, the employees could do a count, open boxes for testing, and perform other tasks as needed. Audit documentation requirements could be met through still photos, videos and the engagement team’s detailed notes.

The ongoing COVID-19 pandemic has had a significant economic and financial impact on businesses, and has also presented numerous challenges for auditors as they attempt to comply with their professional responsibilities and regulatory requirements. Consequently, audit engagement teams should also be prepared to address a wide range of issues.

Difficulty accessing client records — especially for clients who still maintain their records in hardcopy
Disclosure of enhanced risks and uncertainties; especially significant estimates and vulnerabilities due to concentrations in revenues, material, labor, specific markets, geographic and other areas
Adjusting procedures to address potential fraud risks
Obtaining audit evidence in cases where a client location is either closed or key personnel are not on-site
Confirmations may be a viable alternative to obtain audit evidence
In addition to video-enabled observation, clients that are unable to perform physical inventory counts at year‐end may decide to perform them on an alternative date, or perform alternative procedures if the client is using a cycle count procedure and a perpetual inventory system

In addition to coping with remote physical audits, particular focus should be on understanding the internal controls of the remote environment, increases in going concern assessments, significant financial reporting and disclosure implications, and the likelihood of not issuing an unmodified opinion.

In order to understand the client’s remote environment internal controls, especially in an unstable period, engagement teams should inquire whether any changes to internal controls occurred after preliminary work commenced. Often, those controls may have changed to accommodate remote work forces, and engagement teams will need to evaluate the degree of reliance that can be placed on those controls — especially since they may have been in effect for only a brief portion of the current year.

Obtaining an understanding of controls may be achieved remotely, but inquiry alone is not sufficient to determine whether they have also been implemented. Auditors will need to consider what evidence can be obtained remotely to determine if effectively designed controls have been placed in operation, and a scope limitation may need to be issued if they are unable to obtain sufficient appropriate audit evidence.

The pandemic is driving more uncertainty, which may cause deterioration in a company's operating results and financial position and lead to a higher incidence of going concern assessments. It could be extremely difficult for auditors to evaluate management’s assessment of conditions, or events that may have an effect on the company’s ability to continue as a going concern.

Significant financial reporting and disclosure implications could include adjustments to fair value measurements, as well as impairments to goodwill, indefinite-lived intangible assets, long-lived assets, and such other intangibles and tangibles as receivables, inventory, contract and deferred tax assets.

Auditor’s report implications could include increased use of Emphasis of a Matter (EOM) paragraph(s) triggered by an auditor determination that the COVID-19 pandemic is a major catastrophe that has had — or continues to have — a significant effect on the client’s financial position, results of operations and cash flows.

COVID-19 has had an unprecedented impact on many businesses, and external auditors are now challenged with having to continue to conduct audits in accordance with Professional Standards and comply with rules and regulations during the upheaval. Trusted technical consultants can provide valuable and insightful guidance to audit engagement teams, enabling them to provide the highest level of service to their clients while protecting the public interest.

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The Siren Song of Private Equity Acquisitions

By Jennifer Ruf • April 30, 2025

The wave of mergers and acquisitions in the accounting industry over the past five years or so shows no sign of abating as small and mid-size public accounting firms seek to gain the size that lets them invest in new technology and recruitment, and gain other advantages of economies of scale. While there are lots of arguments to be made in favor of joining forces with other CPA firms, it’s still a fraught process with many potential hurdles. And it’s not just other public accounting firms doing the merging and acquiring. The private equity firms that have been rolling up small and mid-size CPA firms into larger ones come with plenty of benefits, notably the ability to make the investments needed to compete at a time when automation and artificial intelligence (AI) are bringing a sea change into the accounting business, and competitors are getting bigger. But they also come with their own baggage, such as questions of conflicts of interest and compliance with the auditor independence rules, as well as a focus on the more profitable tax and advisory service side of the firms. The money from an acquisition can be enticing, but it’s important to go into it knowing that there’s a price to be paid for it, and what that price is. And how to go about paying it if you do decide to join forces with a private equity firm. Private equity pros Private equity firms have been competing to invest in large public accounting firms, but also to buy out and roll up small and mid-size firms for two core reasons. One is a steady and predictable revenue stream, particularly on the audit side, which is very enticing to them. The other is the revenue potential of expanding the more lucrative tax and consulting side of the business. But they also see the opportunity to grow the CPA firms and make them more profitable by investing in things like staff training, recruitment and cutting edge technology like AI that can transform the accuracy and efficiency of audit processes. And, of course, strategic acquisitions that can further strengthen the business. Another thing they can do is centralize certain auditing tasks like data processing or routine testing, even moving it offshore for cost efficiency. This can give the core auditing team more time for the deep dive and the ability to focus on more value-added services. Private equity cons On the con side, the focus on consulting can lead to the auditing quality side being given less priority for investment and growth. With a focus on short-term profit, private equity funding can come with pressure to focus attention on the higher margin consulting side of the business. Private equity firms are often eager to scale up the tax and consulting sides of the business, to the point of sometimes creating an alternative practice structure (APS) by investing in or acquiring just those parts of a firm and leaving the audit side, with its need for independence and smaller margins, alone. Which calls into question the benefits of a private equity investment, at least on the auditing side of the business. Then there’s the threat to auditor independence of having an owner or partner with a large portfolio of companies like tech firms that can provide other services to audit clients. And even when there is no actual threat, these perceived conflicts of interest can be a red flag to audit regulators and standard-setters. Private equity questions When you’re looking at an investment or acquisition by private equity there are questions to be asked that aren’t always obvious, or at least that don’t have simple answers. It’s easy enough to start a conversation about auditor independence and the appearance of impairment or conflicts of interest with the auditing side of the business, but it’s also easy enough to promise that these issues won’t be a problem. You have to be aware of the other types of services that they're planning to provide to that same client, because that could have an impact on whether or not you can perform the audit or the review work that you’re doing without violating the AICPA’s Code of Professional Conduct. That’s particularly true with small CPA firms focused on the auditing side of the business instead of consulting, which will suddenly find themselves paired with a large and aggressive tax and consulting business. But whatever size your practice is, you’ll have to update policies and procedures and be cognizant of the need to create an infrastructure that acknowledges the potential conflicts that come with a private equity firm’s offer. 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.

Testing of Non-Standard Journal Entries to Identify Questionable Transactions

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.