Print Edition
      November 2012

Automating audits

By Phil Cowperthwaite
Illustration: Sara Tyson

When it comes to automation, there are some pitfalls to the process, but in the long run there is a payoff

With reformatted audit standards and changes in accounting frameworks to contend with, auditors of small and medium-sized entities (SME) in Canada are facing some challenging times. These changes are occurring at the same time as those happening in sales tax, personal and corporate income tax rules, along with sweeping reviews of those in the charity and not-for-profit sectors in Canada.

Many see this increase in complexity weighing disproportionately on smaller accounting practices, making it more expensive and less efficient for auditors to add credibility to their SME clients’ financial statements.

However, there have been significant advances in technology that make coping with change easier  — social networking, cloud computing and powerful yet affordable application software can all make audits more efficient. These tools reduce file assembly time, increase compliance with firm and engagement level quality control, and make the change-management process easier.

Boosting engagement efficiency
Much of the physical output of auditing is very similar in a firm from file to file.

In addition, common spreadsheet, word processing and database platforms allow for seamless data sharing. This can make rapid data sharing between auditors and clients, and between audit files, painless.

None of these features is new, but many auditors are not using them to maximum advantage. Just a few easy-to-implement suggestions can significantly increase the efficiency of every audit of a micro-entity.

Example: engagement management and planning
For each month’s upcoming micro-entity engagements, use commercially available software to do the following:

Total time:  about 20 minutes, plus two minutes per electronic file roll forward.

Example: engagement processing and assembly
Once your audit working paper file has been rolled forward electronically ask your client to email you a trial balance in a format that you can import into your file; and  import the data and prepare a draft statement for the client.

Assuming you have already mapped the trial balance in the prior year and the client has no wholesale changes in his or her account numbers and composition, this process should not be time consuming.

In this case, mapping refers to establishing a code whereby each client account is assigned one set of standardized numbers that, in turn, can be used to group like accounts for financial statement preparation and other purposes. Mapping enables the practitioner to standardize preparation of documents such as lead-sheets, analytical review schedules and, most importantly, financial statements.

Total time: about 30 minutes or less.

If any changes to note disclosure are required copy and paste new notes from pre-written notes saved in your master file; email proposed drafts to the client; and  note that statements at this stage are solely the client’s, as they are based on unaudited numbers.

Only a minimal amount of up-front time is needed to prepare for the audit engagement.

Fieldwork phase
An automated audit of a micro-entity might go as follows: arrive at the client’s with the rolled-forward audit file and draft statements on your notebook. After an initial discussion, update your rolled-forward schedules documenting your knowledge of the client’s business for any industry, environment and entity changes, and your documentation of controls relevant to financial reporting.

If you use preestablished engagement and performance materiality levels numbers (e.g., a fixed percentage of revenue), have the calculations programmed based on the imported trial balance.

Review the preliminary analytical review based on the draft statements. The numerical analysis should be automatically generated in a preprogrammed working paper based on the mapping in the file and developed in prior years.

Review account analyses (e.g., yield and other key ratio analytics, such as gross profit percentage), all of which should also be in a preprogrammed working paper developed in a prior year.

Print all confirmations required (bank accounts, investments, receivables, grants, loans) at your client’s office and have him or her sign them on the spot for mailing back at the office.

Complete this year’s engagement checklists, which should be in the file in electronic form as part of the file roll-forward process.

Write management letter points as they arise in this year’s template (e.g., general observations, potential issues, recommendations). Review comments with the client on site.

Forming an opinion phase
Automation benefits continue after the fieldwork has been completed, making communication with your clients, among other tasks, lightning quick.

The above assumes you are using an audit file application program and have taken time up front to standardize data fields across all your client files. Client names and address fields, year-end, and other dates and standard documentation can be programmed into a master file containing individual master copies of correspondence, planning lists and other items.

These master documents can then be copied into specific engagement files year after year. No more needs to be done unless client-specific changes are required to comply with professional standards. Firm-wide standardization is essential if you want to maximize efficiency with automation.

Increasing audit quality
Automating your micro-entity audit practice is an opportunity to improve audit quality at both individual engagement and firm-wide levels. If you set up a firm-wide standard engagement template for every phase of the audit, you can then help ensure that all phases have been completed in every audit. Checklists customized by your firm can be updated as needed and rolled into individual engagement files at the beginning of every engagement. This will make the process of change as painless and efficient as possible.

File automation can significantly increase quality at the engagement level. If you import data from one application program to another, manual data-conversion errors will be eliminated. Grouping and arithmetical errors can also be minimized if you aggressively use the mapping feature available in most automated audit software programs.

However, be cautious — ensure that schedules programmed in prior years are updated for this year’s inevitable changes in accounts. As every audit is unique, every file needs to be customized. The generic firm template is a good start, but it’s only a start. Customization for industry peculiarities, internal control specifics and the changes required for unique client characteristics are as essential as fully automating the underlying file structure.

Be smart about automation
There are a number of cautions to heed before embarking on even a modest automation project.

Be realistic. The initial automation process will likely take longer than you think. Patience and understanding that once complete the rewards far outweigh the costs are required. Choose a method that fits your firm. For example, while many practitioners use in-house resources to automate, many outsource a total firm automation overhaul. Regardless of how the project is executed, the result of automation is always worth the effort.

Spend time up front to get it right. One gram of planning is worth a kilo in back-end effort. A tiny error in your template may require you to re-import everything to fix each engagement file. It is hard to get it entirely right the first time in any mass change project. However, getting it as correct as you can is essential.

Aim for consistency. While every audit is unique, standardized templates for analytical schedules, financial statements, statement mapping and file indexing all negate the need to reinvent the wheel for every micro-entity audit engagement. To determine if a standardized template is possible, consider this guideline: if you have to do something twice, you can probably save time by preparing a programmable template the first time.

Know more about the technology you use than your staff. This is more than just a lofty goal. What if your designated audit-software guru leaves? Who will fix the sort table that no longer works? Who will fix the addition check function so you don’t have to spend hours adding multicolumn statements? If you run a small office and are going to pick up some new software, you owe it to yourself and your staff to figure out its capabilities and drawbacks. Only then can you fully understand how best to use it in a manner that suits you and your client base. Direct knowledge is essential when crafting efficient micro-entity audits.

Automation of your practice is an exacting process. It requires organization, a significant time commitment from senior members of your firm and project-management skills. You need to be persistent and willing to focus intensely during the conversion period. If you have the patience and discipline to make it happen, automation will pay off over the long term many times over.

Phil Cowperthwaite, FCA, is a partner of Cowperthwaite Mehta and a member of the IFAC’s Small and Medium Practices Committee

Technical editor: Ron Salole, vice-president, Standards, CICA

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