October 16, 2023

The "Write" Stuff

Strengthen your audit documentation and business communications skills!

Auditors are relied upon for their ability to analyze and audit financial statements and footnote disclosures, but equally as important is their ability to write — and communicate — effectively. Whether it’s preparing audit documentation or replying to a client’s email, the ability to communicate accurately and clearly is key. When performing an audit of financial statements are involved, written proof is always critical, so it’s imperative to be able to communicate these matters in a concise and articulate way in order to satisfy Professional Standards, regulators and standard-setters.

Here are some tips to add polish to two common types of communications auditors use:

The ABCs of Audit Documentation

For auditors, being able to draft audit documentation that can stand on its own without any verbal explanation by the engagement team is the goal. Prepare audit documentation sufficient to enable an “experienced auditor” who has no previous connection with the engagement to understand the nature, timing and extent of the auditing procedures performed, the results of audit procedures and evidence obtained and the significant judgments made and conclusions reached on significant findings or issues. Well-written audit workpaper documentation can be a great asset in enhancing audit quality as well as helping audit engagement teams plan and perform their audits, enable them to demonstrate accountability for their work, and will serve as a record of matters of continuing significance to future audits of the same entry. For each required audit procedure, auditors should document:

Identifying characteristics of specific items tested
Who performed and date of performance
Who reviewed and date/extent of review

Here are some important tips to follow:

Time is of the essence. Documentation should be prepared on a timely basis. The longer you wait, the less information you will be able to recall.

Don’t over-write. Can you have too much audit documentation? Actually yes; it’s very common. Don’t overburden the engagement partner, engagement quality control reviewer, peer reviewer, regulators, standard-setters and others with items that do not support material transactions and testing procedures. And be sure to remove superseded workpapers, open items listings, and items in the trash folder.

Include these essential items. Ensure that your audit workpaper documentation includes:

Overall responses to address the assessed risks of misstatement at the financial statement level
Nature, timing, and extent of further audit procedures
Linkage of procedures with the assessed risks at the relevant assertion level
Results of those audit procedures
Conclusions reached by team
Significant issues, findings, and judgments
Nature of findings or issues discussed
When and with whom discussions took place
Document how inconsistencies were addressed

Be mindful of legal considerations. Avoid including commentary or information that could call the audit into question. For instance, do not make extraneous remarks (example: “This client’s books are a mess!”) or statements that may discredit your work (example: “Close enough for government work!”).

Retention of work papers. In keeping with Professional Standards, workpapers for audits of privately-held companies should be retained for a minimum of five years from the report release date.

Crafting Better Emails

As the most common method of quick communication between auditors & CPAs and clients, emails are often used to respond to requests, ask a quick question or quickly summarize an attachment. The most important thing to remember when writing an email is that people are busy and may receive hundreds of emails. The key to writing an effective email is to tell recipients only what they need to know in as short a manner as possible.

A general rule of thumb is to use the inverted pyramid principle of putting the most important things at the top so they won’t get missed. If you have to write more than a paragraph, consider using bullet points so that the reader can move quickly through the text. To make things easy for the reader, use a strong, descriptive subject line (example: “Filing deadline for the financial statements is October 15th” or “Quick question about your footnote disclosure”) so that the reader understands the importance of the content.

Finally, don’t try to cover too much in one email; you may confuse and overwhelm the recipient. If you find that the email is getting too lengthy, consider cutting it into smaller topic-based emails that get sent to the client at staggered dates. Most importantly, remember that emails become official documents that may be referenced at a later date. With that in mind, pick up the phone if you want to share highly confidential or sensitive information.

Need more help? Invest in your professional development by taking a professional writing course tailored toward auditors and CPAs.

It’s important to remember that the world of accounting and auditing can be daunting for outsiders — even for professional staff with years of experience. As an auditor, you can bridge this gap by ensuring your communications are clear and to the point. Your clients will appreciate that as much as they value your analytical and technical skills.

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.

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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.