MNCPA PERSPECTIVES

When shortcuts lead to detours

Sep. 5, 2017  |  Faye Hayhurst, CPA

CPAs are smart people. Earning an accounting degree and passing the CPA exam are basic evidence of that. And sometimes, smart people think something over and resolve it without putting it down in writing, or perhaps write the answer but not how it was achieved. A little shortcut.

To any smart people who are reading this and who perform audits, PAY ATTENTION: this shortcut isn’t going to cut it anymore.

CPAs want to do a good job. CPAs who are auditors work to keep up on auditing standards and perform the testing or other procedures required by standards. And yet, sometimes, the files where the auditor literally “shows their work” can leave a reviewer of such work scratching his or her head, trying to determine exactly what work was done.

What do the auditing standards require? Paragraph .08 of AU-C Section 230 (Audit Documentation) requires the auditor to prepare audit documentation that is sufficient to enable an experienced auditor to understand all of the following:

  • The nature, timing and extent of the procedures performed
  • The results of the procedures and the evidence obtained
  • Significant findings or issues, conclusions reached, and professional judgments in reaching the conclusions

At this year’s Peer Review Conference in Nashville, the AICPA instructed peer reviewers to expect to see that documentation. For example, if an audit step says, “consider XYZ,” merely signing off on that step is not going to be enough. Yes, the auditor may have done a thorough consideration of everything relevant to XYZ, but a mere sign-off does not convey, among other things, the nature or extent of the consideration, or any professional judgments involved. And while a conclusion (no additional procedures are necessary) may be implied, it’s not stated.

What happens if a peer reviewer concludes that documentation was inadequate? It’s very likely to lead to a matter, a finding or even a deficiency being identified by the reviewer. It could also lead to the engagement reviewed being classified as “not conforming with professional standards in all material respects.” These latter results can have serious consequences.

And that’s only the peer review impact. Regulators – the Department of Labor, for example – have their own penalties, and can also refer a firm to the AICPA for investigation of whether there’s been a violation of the Code of Professional Conduct in the performance of the audit. Dealing with an ethics investigation is certainly a detour no one wants!

This stepped-up focus on documentation rubs some the wrong way, especially CPAs who know they have been doing the work required by the standards. But if the evidence of that work can’t be understood without supplementary explanations, it arguably doesn’t meet professional standards.

The conference speakers stressed that documentation doesn’t have to be lengthy. A sentence or two may be all that’s needed to clearly communicate the requirements of AU-C 230.

And here’s another benefit of good documentation: Not only will it satisfy peer reviewers and regulators, it will make next year’s audit that much easier. Because truth be told, without good narrative, many of us can’t recall what we ourselves were thinking when we prepared a spreadsheet or signed off on something months earlier.

The AICPA wants to help CPAs who may be looking for guidance on how to improve their documentation. To that end, they’ve created and made available resources on their website, at no charge, to AICPA members and nonmembers alike. Some of these include:

Make life easier for the peer reviewer or regulator who reviews your work, but most of all for yourself. Because shortcuts are going to end up causing lengthy detours of time and effort, and perhaps even a crash of professional reputation.


Topics: Accounting and auditing, Peer Review

Faye Hayhurst, CPA

Faye Hayhurst is the MNCPA director of finance and administration. She is committed to using numbers to tell relevant stories, although she also employs words, charts and occasionally clothing to communicate a message. While some have questioned her about the pressures of being the CPA for the MNCPA, Faye considers presenting financial information to fellow CPAs a dream job. Outside of storytelling with numbers, Faye enjoys directing her church's handbell choir, visiting national parks and other scenic places, and checking out the chocolate products at Trader Joe's. Faye can be reached at 952-885-5540 or fhayhurst@mncpa.org.

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