Below is a list of things I've learned. Take the ones you like. Also, my rough notes from some podcast episodes are listed as well.
Use google more than you would expect to, especially for excel tips.
If you're good, you'll get more flexibility. Good means reliable, hardworking, having a sense of urgency and owning your work.
People like early risers, if you're in first, that will get you noticed.
Exercise, it will help your focus and mood.
Terms defined easily as you need to know them
a. Invoice (noun or verb) - When your client performs a service for a customer or sells a customer something, they send them a piece of paper detailing what they did, when they did and how much the customer has to pay. The customer collects money after the event takes place. Your client will also receive invoices from vendors (people they buy stuff from) in the same manor. Ex: ABC, Co. invoiced XYZ, Co. for services provided on 11/30/14 in the amount of $200,000.
b. PO - Purchase Order. When a company wants to buy something, they will write all the details of that purchase down on a piece of paper called a Purchase Order (PO). They send that to the vendor (people they buy stuff from) and the vendor fills that order. After the vendor fulfills the order, the vendor will invoice the buying company. (aka will send them an invoice)
c. OPEX - Operating Expenses. These are expenses that don’t directly impact the company’s ability to make money. For instance, internet, utilities, and rent on a building, are operating expenses.
d. Substantive - When used to described tests (substantive tests) or evidence (substantive evidence) this typically relates to testing or evidence that supports numbers on the financials, or a part of a calculation that ends up being a balance in the financials.
a. Keep it simple. Cash is typically generated by Companies from selling goods/services, selling fixed assets/properties, and via investment.
b. Companies typically have several bank accounts which are separated by business function (i.e. payroll account, accounts payable, income accounts). These accounts need to be reconciled each month to ensure that the cash in the bank account can be sort of agreed back to the books, or make sense of the difference. You guys have learned these differences, so I'm not going into it yet. First I want to give a little overview of what a concentration account is. This was a tricky concept for me. Typically a Company has one main standard business account which carries a balance and series of underlings/minion accounts to handle the dirty work. These minion accounts are for business purposes, as stated, like paying salaries, receiving monies for goods/services, or paying the light bill. These accounts carry no balance and are called Zero Balance accounts. The client will only put enough money in the account to pay bills, and then the rest (if there's leftover) will be sent back to the concentration account. Receipt accounts all get sent (or swept) to the concentration account. It’s like a Senior to Staff relationship; the functional accounts do the real work, carry a zero balance and give everything they have to the concentration account.
c. How to audit? You ask the bank to tell you how much money the client has. It’s that simple. You'll need a bank confirmation and the company's recon for every bank account. You take bank confirmations and agree the ending balance, reported by the bank, to the Company's "per bank" line on the recon. The noise between the "per bank" and "per books/GL" amount will be reconciling items, like checks written but not cashed called "outstanding checks", these will decrease the "per bank" amount. You can get a listing of these items from which you will select a sample. You get a copy of the checks and the subsequent bank statement to ensure they were in fact written prior to year end, but not cashed until after. The other big reconciling item are the deposits in transit. These are checks/wires received by the Company, but not yet cleared by the bank. These will add to the bank balance. Get a listing of these amounts, select some and ensure they were properly dated within the year under audit but that they cleared the bank the following month. Overall, remember, a simple bank recon formula is "Bank Balance + Deposits in transit - outstanding checks equals Book/GL Balance. Don’t Forget to: Remember to ask for the correct date of confirmation (the period end/year end date), and you as the auditor must send/receive the confirm, not the client.
2. AP (existence/accuracy testing)
a. This is a very simple area. I've been on engagements where we simply do no EA testing for AP as you get a lot of comfort from the search. Nonetheless. AP and Simple Accrueds (as I will call them) are the amounts owed to vendors for goods that are resold, or overhead costs. This test is to be performed over trade AP simple accrued liabilities (not complex estimates like workers comp accrual, bonus accrual, etc.) You simply obtain the clients listings of AP (there will likely be multiples, and you should have them already), agree the balance, or balances (if more than one listing) to the trial balance account, or accounts. Then you run your sampling plan over the balance, it will spit out a number of items to test, and you make some selections. For Trade AP, you will need to get The Vendor Invoice.
3. Search For Unrecorded Liabilities
a. The search for unrecorded liabilities is often referred to as the search. Quick background is that at each period end, the Company will scour their desks, emails, purchasing coworkers and bug their vendor contacts to see if there were any services rendered as of the period end (i.e. 12/31) that haven't been received by mail or EDI. They record all their findings in Accrued AP (or a goods-received but not billed account). If we simply look in that account, we definitely won’t find what's not there right? So what we do is perform our search to find any of those invoices. The main way we do this to look at payments the company has made since year end. Right? If we are trying to find out what they'd owed at 12/31, and its now feb 15, let’s just look at everything they've paid through feb 15 and see if they had it accrued on their listing. It’s like if you want to know how much money someone has, you’re not just going to look in their wallet right? You would find a bunch of other ways to find out. This is the general idea of testing completeness. Anyways, here's what you'll need and what you do:
Get a listing of checks and wires paid from year end through the most recent date, also called a disbursements listing
Get the details of all AP and Accrual accounts (this could be many)
What do to:
Scope the listing based on some metric, (your boss will probably help here), to pick checks over a certain number (and a few under). Obtain the check and the invoices that those checks paid (usually the check register/detail) will help you see what invoices made that up. You may also need shipping documents. You use the invoice and shipping docs to see what period the invoice related to. If the item related to the period under audit (i.e. before 12/31), then search the AP and accrual listings to make sure it was included in there. If you can't find it, talk to the client, if they can't show you where it was accrued, then it’s probably an exception. If the invoice/shipping docs show that related to goods/services after period end (after 12/31), then make sure it’s no included in those listings.
You can stop here if you just wanted to know how to search, but there are Additional Considerations and tests you can do/your firm will likely have you do.
You have to check the completeness of the check and wire listings. The check listing should be sequentially numbered, just get the check listing in excel and sort the check numbers, then run a formula to ensure there are no breaks in the sequence. Email or tweet me if you need a simple formula. For any breaks, obtain those voided checks. Also, you should get the listing from the week prior to year end (i.e. 12/24-12/31) and make sure that the last check number is one less than the first check number of the 1/1 listing). For instance, if check number 2798 was the last check number of the year under audit, then the first check in the subsequent check listing should be 2799. For wires, just get the subsequent bank statements and make sure there were no other outgoing wires that were not on the list. Boom.
Open bin search: This is simply looking at the file of invoices that haven't been processed yet. Grab a handful (or logical sample) and make sure the invoices didn't relate to the year under audit.
There will be more procedures your firm will require, I'm sure of it, but this is the bulk of the work.
4. Inventory Counts
a. As you prepare for your first holiday at your new company, you've probably been made aware that you will be on "reserve" for inventory counts around 12/31. What a fun way to spend Christmas or new years. I know, I've been there. Throughout my first 2 years, I did 21 inventory counts. The beauty was, I got really good at them and was able to turn them into some fun. I will give you the high level, then some specifics, then some tips I've learned. Then I'll talk cycle counts
So what’s the purpose of all this? All the counts are to test a sample of management's already counted items to ensure they've done a good job. Ideally, there should be no variances as management has already counted and adjusted their records. The floor to sheet counts are performed to ensure that management hasn't missed anything. The tag listing is to ensure that management has counted everything; it’s a bit of a weird test when the company used blind count sheets, but it’s still pushed for by current accounting firms, so do it. Just pick a sample of tags from their tag listing, find them on the floor, then pick a sample of the tags from the floor and trace them back to the listing (don't pick the same tags!) Then get any voided tags, and get the first and last tag to make sure you have a complete population. The shipments in and out will help the team, that eventually does the test documentation, ensure that nothing was moving during the count, which ensures cutoff.
5. The most Important Assertions? P*Q explanation)
a. First and foremost I want to talk about the Assertions that tend to take the most time, bear the most risk and the majority of what you'll be working towards validating during your time. Don't worry if the term "assertion" is a little foreign, by the end of the episode, you'll get it. Completeness, Existence, Accuracy and Valuation are probably the most important assertions to you.
b. Completeness is the idea that a balance is complete, i.e. there is nothing missing from it. For instance, in AP, you want to make sure that the balance is not lower than it should be. How would this happen? Imagine a 12/31 client gets a new printer that cost $500 on December 15, but the printer company hasn't asked for money yet as of 12/31 (i.e. invoiced), and the client doesn't put the $500 in their AP listing, then their listing would be considered incomplete.
For Existence, Accuracy and Valuation, I like to combine these and use inventory as an example. I break it down to a simple equation, Quantity X Cost - reserves gets you EAV of inventory. So imagine inventory, there is a certain number of items, times a certain cost per item is a nominal value, however, these not all this nominal value is correct, because stuff can be damaged, or not worth anything, so a reserve must be set against them. So in this case, quantity = existence, cost equals accuracy, and valuation equals the reserve in this case. I like to think of existence in terms of quantity, or kind of "yes or no". To leave inventory and do another example, let’s talk Fixed Assets, does the asset exist? Yes or no. In determining accuracy, how much did the asset cost? And to determine the full asset value, you have to figure out if there are any damaged or impaired assets, which would then require a write down.
Some of the other assertions you'll deal with are presentation and disclosure, which essentially means, are the balances correctly incorporated in the financials. For instance, you wouldn't call cash a long term asset, so the P&D assertion, or the risk related to the P&D assertion for cash (in this case) is that it’s not properly classified. Something also to remember is that not all firms follow the AICPA or PCAOB assertions exactly, but they substantially are all the same.
Another tip is that the Rights and Obligations assertions are generally not a relevant risk associated with P&L accounts, because they relate to assets/liabilities
Also, back to completeness. This assertion is often tricky because your senior, or manager, will always ask, how did get completeness of this listing, or of this account, or there is a big risk of understatement, etc. So get this concept down and it will help you find ways to get comfort over the completeness assertion which will help your everyday work.
11. Types of test (sampling, specific, attribute, MUS)
a. This episode is about types of substantive testing approaches. If you are not clear what that that means, Check out the Controls vs. Substantive episode. So back to it. You've probably heard the different types of tests and might be a little overwhelmed. Each firm has a little different name for them, Sampling Plan, Statistical Sample, underlying data, attribute, MUS, bla bla bla. I'm going to narrow it down and make it easy. There are 4 types of tests, three of which are for the same purpose. That means there are really only two different approaches to testing. One- you can test a balance, meaning, you’re getting support for figures within that balance. Simply, you get a listing, or detail of an account, or subaccount, run a sampling approach to get a sample size, and then get those. These types of tests are for testing dollar values directly. The other method to test attributes, or non-monetary values. You may still test numbers, but not a monetary balance, typically. In these tests, you’re making sure that other stuff is correctly stated by the company. I'll give you an example for each. The monetary balance test, as I'll call it would be like getting an AP listing, picking a sample of invoices from vendors, and making sure the dollars agree to the listing. The attribute test would be like subset of payroll testing. Let’s say you want to test that the company has appropriately got the hire dates of personnel included in their payroll system. You pick a sample of people from the employee roster, get their signed new hire form, and agree those hire dates to the employee roster. The difference lies in what an exception does. In a money value test, an exception means their account balance is off by the amount you find in your testing. IN attribute testing, it means something way before the account balance is off. So, next, let’s talk about the different types of actual tests. For attribute tests, your firm will typically have one set of rules that is not connected to the account balance. It is simply based off of number items in a population (i.e. if there were 20 people on that employee roster vs. 2500, the sample would be different). There's typically one approach there. For the money value test, there are really two main approaches: 1. Statistical Sampling Plan, or Monetary Unit Sampling, 2. Non-Statistical Sampling Plan.
12. Controls vs Substantive
a. Frequency vs. based on materiality
This one will be quick. There are two types of tests. Controls vs. Substantive. A controls test is used to ensure that controls in place are operating effectively, and have nothing directly to do with numbers under audit. A substantive test will give you comfort over numbers on the financials that are under audit directly. For example, a simple control is that monthly bank reconciliations are performed. The accounting clerk will get the bank statements and balance that the company has on their books, then compare them to see what the difference is. Once they identify the differences, the account is considered reconciled, and them someone will review the recon. The purpose for this control is to ensure that the bank balance and the book balance aren't unexplainably different. And how good they are at reconciling their books through the year indicates how accurate their books will be at year end. So, that's where the 'indirect effect on year-end numbers' concept comes in. While the bank recons in June won’t have an impact on year-end numbers, their control effectiveness can give clues as to whether or not they are. Another example is the approval of Purchase Orders. Let’s say an office manager wants to buy new printer cartridges. Someone should be approving the request (aka purchase order) for these cartridges. Also, once the cartridges come in, and the invoice comes in (which is a request for payment from the seller), someone should match the PO to the Invoice to make sure it was an approved purchase, and so the dollar amount is correct. The amount that gets paid, let’s say its $200, goes into the company's operating expenses line in their income statement. This balance grows each time there is a transaction. Therefore, testing control effectiveness over the approval of the PO and the matching of dollar amounts between the invoice and PO will impact the year the end financials.
For a substantive test, typically you just get a listing of transactions that sit in a given account, and test them. For example, let’s say you want to test the above mentioned operating expense account...