Category: Article

During the pandemic, many audit procedures have been performed remotely, forcing auditors to rely more heavily on analytical procedures, such as trend, ratio, and regression analysis, than in the past. But so-called “analytics” isn’t a novel concept for auditors. They’ve been using analytics for decades to make audits more efficient and effective.

Audit analytics

The American Institute of Certified Public Accountants (AICPA) publishes guidance on using analytics during a financial statement audit. The auditing standards define analytical procedures as “evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.”

Auditors use analytics to understand or test financial statement relationships or balances. The type of procedures is customized, depending on the size and complexity of the company.

Five steps

When performing analytics, auditors generally follow this five-step process:

1. Form an independent expectation based on the company and its industry
2. Identify differences between expected and reported amounts
3. Brainstorm all possible causes for the discrepancy
4. Determine the most probable cause(s) for the discrepancy
5. Evaluate discrepancies to determine the nature and extent of any additional auditing procedures

Any discrepancy is compared to the auditor’s threshold for analytical testing. If the difference is less than the threshold, the auditor generally accepts the recorded amount without further investigation and the analytical procedure is complete. If the difference is greater than the threshold, additional procedures may be needed.

A closer look

Additional investigation is required for significant fluctuations or relationships that are materially inconsistent with other relevant information or that differ from expected values. For differences above the threshold, the auditor will likely inquire about the reason.

Many discrepancies have “plausible” explanations, usually related to unusual transactions or events or accounting or business changes. Plausible explanations typically require corroborating audit evidence. For example, if a manufacturer’s gross margin seems off, the accounting department might explain that its supplier increased the price of raw materials. To corroborate that explanation, the auditor might confirm the price increase with its top supplier.

In some cases, a discrepancy may warrant more in-depth testing. Other times, the analytical test or the data itself is problematic, and the auditor needs to apply additional analytical procedures with more precise data.

For differences that are due to misstatement (rather than a plausible explanation), the auditor must decide whether the misstatement is material (individually or in the aggregate). Material misstatements typically require adjustments to the amount reported and may also necessitate additional audit procedures to determine the scope of the misstatement.

Creating a paper trail

Auditors document analytical procedures in audit work papers. These are the files the auditor creates to support their audit conclusions. In general, work papers document the procedures applied, tests performed, information obtained, and conclusions reached in the audit.

For each analytical procedure performed during the audit, the work papers will explain the factors considered when developing the expectation and how the expectation compares to the recorded amounts or ratios developed from recorded amounts. The auditor also must document the results of any additional auditing procedures — such as management inquiry, research, and testing — performed in response to significant unexpected discrepancies.

Help us help you

Analytical procedures can help make your audit less time-consuming and more effective at detecting errors and omissions. You can facilitate these procedures by forewarning your auditors about any recent changes to the company’s operations, accounting methods, or market conditions. This insight can help auditors develop more reliable expectations for analytical testing and identify plausible explanations for significant changes from the balance reported in prior periods.

In addition, now that you understand the role analytical procedures play in an audit, you can anticipate audit inquiries, prepare explanations, and compile supporting documents before the start of audit fieldwork. Contact a member of your KraftCPAs audit team for more information.

© 2021

Users of QuickBooks already know how it’s transformed their daily bookkeeping practices. Users can create sales forms like invoices quickly and find them when they need them. Customer and vendor records are organized and stored neatly for fast retrieval. And it’s easy to accept online payments, track inventory, and record billable time.

But if you’re not using QuickBooks’ built-in reports, you’re missing out on one of the software’s most powerful components. While you can look at lists of invoices, sales receipts, and payments, you can’t see in a few seconds who owes you money and how late they are in paying, for example. You’re not able to get an instant overview of who you owe. You can’t call up a customer’s history instantly, and it will take an enormous amount of time to see which of your items and services are selling and which aren’t.

These are just a few of the insights you get from using QuickBooks reports. Beyond learning about your company’s past and present financial states, you can make better business decisions that will improve your future.

Before you start

QuickBooks’ reports are exceptionally customizable, as you’ll see. But before you start creating them, you should see what your general report options are. Open the Edit menu and select Preferences, then Company Preferences (which only administrators can modify).

You’ll see that you can control your reports’ general settings. For example, some reports can be created on the basis of either Accrual or Cash. You can designate your preference here. Do you want the aging process to begin on the due date or transaction date? How much information should appear when Items or Accounts are displayed? What additional data should appear on your report pages (Report Title, Date Prepared, Report Basis, etc.)? You can specify your own Format or just accept the Default.

Note that Statement of Cash Flows is an advanced report, one we don’t recommend you try to modify or analyze on your own. We can help with that when the report is needed, which is usually monthly or quarterly.

When you’re done here, click OK.

Learn what’s there

The best way to familiarize yourself with the reports that QuickBooks offers is to open the Reports menu and click Report Center. The content here is divided by type (Customers & Receivables, Sales, Purchases, etc.). Click around these lists and use the icons in each box to Run the current report, get more Info on it, mark it as one of your Favorites, or view a Help file. You can choose the date range before you run it with your company’s own data.

Customizing your content

We mentioned before how customizable QuickBooks’ reports are. Customization options vary from report to report, but we’ll look at one example here. You’re likely to want to run Sales by Item Detail frequently to see what your most popular items are as well as what’s not doing so well. Find it in the Report Center by clicking the Sales tab, selecting it, and clicking Run. If you don’t have a lot of data in QuickBooks yet, open one of the sample files that came with the software (File | Open Previous Company).

With the report open, click Customize Report in the upper left corner and see that there are four tabs here. Click on each to see what your options are.

• Display. Includes options like Report Date Range and Columns.
• Filters. What cross-section of your QuickBooks data do you want to see? Choose a filter, and the middle column will change to reflect your options there. You can add and remove as many filters as you’d like.
• Header/Footer. If you want to change the settings you established in Company Preferences, you can do so here.
• Fonts & Numbers. Contains display options.

When you’ve finished customizing your report, click OK to create it. Your modified report format will not be saved unless you click Memorize and give it a name.

You can customize and run many QuickBooks reports yourself, or reach out to a KraftCPAs QuickBooks Professional for help understanding how QuickBooks reports can help you make better business decisions.

© 2021

After the unprecedented year we’ve just experienced, the last thing you need is to have your accounting data compromised or stolen. It would be impossible to reconstruct your QuickBooks file from scratch, and you can’t afford to have a hacker steal any of your funds.

There are multiple steps you can take to protect yourself from threats, both internal and external. QuickBooks itself offers some safeguards. Strong company policies can also help safeguard against data theft or destruction. And some of your security guidelines should just come from using common sense.

Here’s a look at what you can do.

Keep your systems safe

There are countless ways you can protect your data by maintaining the integrity of the computer that’s running QuickBooks. Some involve the same steps you would take to safeguard all the applications and information you have stored there. You should have reputable antivirus/anti-malware software installed. Use strong passwords. Keep up with system updates.

Updates and backup

QuickBooks’ own updates are critical, too. You can start these manually, but we recommend setting up automatic updates. Open the Help menu and click on Update QuickBooks Desktop. Click the Options tab to access this tool.

Frequent, safely stored backups are another essential element of overall data security. If your system is compromised by an intruder, you’ll need to be able to restore your most recent QuickBooks file when it’s safe again. Go to File | Back Up Company to set up either a local or an online backup. Use one of these tools at the end of any day you’ve entered anything on QuickBooks. We can help you with backup if you’re not sure how to do it.

Networks and smartphones

If you have multiple PCs that run on a network, it’s important to maintain that system’s health, too, since an intrusion at one workstation can affect everyone. You can do this by:

• Discouraging employees from browsing the web excessively and downloading unnecessary software.
• Encouraging responsible handling of emails (no clicking on unknown attachments, no personal email on work computers, etc.)
• Installing network monitoring software or hiring a managed IT service that only charges when you need them.

Do your employees have company-issued smartphones? Make sure their security systems are sound. Set policies to protect them. For example, tell employees they should never use them on a public wi-fi network or install personal apps on them.

Internal fraud possible

No business owners anticipate that their own employees would steal from them. But it happens, and it can do tremendous financial damage. Minimize your chances of being victimized by limiting the access that employees have to sensitive information.

Go to Company | Set Up Users and Passwords, then click Set Up Users. You should be listed there as the Admin. Click Add User and supply a username and password. If you’re not sure how many users are supported on your license or need to add more, contact us. Click Next and then click the button in front of Selected areas of QuickBooks. Click Next again. On the next several screens, you’ll designate that user’s access in areas including Purchases and Accounts Payable and Checking and Credit Cards. When you come to the end of the wizard, click Finish.

You might consider running a background check when you hire someone who will have access to QuickBooks. It’s become a more common business practice.

QuickBooks provides additional tools that can be helpful in tracking down suspicious activity. You can view the Audit Trail, for one. Go to Reports | Accountant & Taxes | Audit Trail. This report displays a comprehensive list of transactions that have been entered and/or modified.

There are other reports that may be helpful, like Missing Checks, Voided/Deleted Transactions, and Purchases By Vendor.

A never-ending process

It’s so easy to get caught up in the daily work of running your business that you forget to take the steps required to keep your QuickBooks data — and all your computer hardware and software — safe. We get that.

Further, you might think that you’re an unlikely target because you’re a small business. Hackers count on you thinking that, though the reality is that you don’t have to be a big corporation to be the victim of cybercrime. Whether or not criminals get access to your funds, they can do a lot of damage that will end up costing you more time and money than you might think.

It’s important to stay vigilant. Security should be considered whenever you deal with financial transactions – especially where the internet is involved. If we can be of assistance as you set up safeguards and company policies, let us know. As always, reach out to KraftCPAs for answers to any questions you might have about QuickBooks operations.

© 2021

For internal auditors, knowing how the audited organization (i.e., board members, audit committee members, management) defines value is one of the most important, yet most challenging, aspects of the profession.

Auditors routinely issue reports that include findings and recommendations related to user provisioning, formalized policies and procedures, undocumented reviews, and outdated system patches. These are relevant internal control issues that need to be corrected but are commonplace and not shocking to audit committees. Recently, KraftCPAs presented an audit report that addressed a programming error in the company’s three-way match process. The error would allow a payment to be processed when there was a significant difference between the purchase order price and invoice price. During the presentation, the audit committee chair asked, “How did you find that?” with a sense of amazement. This is when you know you have provided value as an auditor.

Value is different for everyone and can change based on circumstances. Accordingly, there isn’t an instruction manual that can be followed to ensure that your internal audit function is delivering value. However, the Institute of Internal Auditors (IIA) provides a framework that can set a foundation for credibility and provide the conditions necessary to deliver value to the organization.

Credibility bridges the gap between those moments of value-added amazement and keeps your internal audit function relevant. The IIA’s Quality Assurance and Improvement Program (QAIP) is the framework that helps build and maintain that credibility.

The IIA’s International Standards for the Professional Practice of Internal Auditing (the Standards) establishes a road map for what the internal audit function should do. The QAIP, which is required by the Standards, is an ongoing program that provides a structure to increase the quality and value of internal audit services.  It includes an assessment of the efficiency and effectiveness of the Internal Audit function, along with compliance with the Standards. It also provides the information needed for improvement and gives the best opportunity to deliver value.

For most, when a defined set of standards developed by a recognized professional organization are followed, credibility is immediately established. Credibility is further reinforced if the organization is assessed by a third party and found to be compliant with those standards.

All internal audit organizations should have a QAIP, but it’s required for organizations that use the phrase “… conforms with the International Standards for the Professional Practice of Internal Auditing” in their audit reports or other information describing their audit services.

The Standards establish how the internal audit activity should be structured. They also establish the activities that should be performed in three core components: governance, professional practices, and communication. Activities from these core components are assessed as part of the QAIP. QAIP assessments consist of three elements as well: ongoing monitoring, periodic self-assessments, and external assessments.

Sustainability for the QAIP is obtained by developing processes and templates that are repeatable and enforce compliance with the Standards.

One component of a QAIP that seems to be the most daunting and keeps internal audit functions from fully complying with the Standards is the required assessment by an independent third party every five years. Yes, even auditors try to avoid being audited. This fear comes from a lack of preparation. There is no secret to how the external assessors will perform their assessment. In fact, the QAIP provides the framework to prepare an internal audit organization through a self-assessment using the guidance used by external assessors.

Beyond the structure provided by the QAIP, relationship building is the most important factor in an internal audit function’s quest for delivering value. Having the right relationships and aligning audit activities with the strategic goals of the organization can lead to those value-added moments. This is the only way value can truly be understood. Relationships can be built and maintained through annual risk assessments, seeking management feedback, communicating the results of audit activities, and offering to help.

Many years ago, KraftCPAs inherited an internal audit function that had lost the trust of management and the audit committee. There were many challenges, but the top priority was to build relationships, establish credibility, and cultivate trust. This was accomplished by seeking constant feedback from management and offering to help, instead of being critical of mistakes and minor issues. Over the years, the client offered a “thank you” many times for guidance through the development of new controls during the implementation of new processes or systems. The prior audit team frequently declined to help in those situations.

Implementing a QAIP can seem like an uphill task, but most Internal Audit functions are inherently doing most of the required activities. With just a little guidance and developing repeatable processes, any internal audit function can be successful. In fact, there is no mystery to how it works. The IIA provides all the guidance and tools necessary.

You know your QAIP is successful if the result of your external assessment is that the audit function “generally conforms” with the Standards, or, more importantly, the organization is seeking internal audit’s help and advice outside of routine audits.

If you need help establishing an internal audit function that adds value, your audit activity needs assistance establishing a QAIP, or your audit function needs an independent external assessment to demonstrate compliance with the Standards, KraftCPAs has the knowledge and experience to help.

© 2021

If you operate a small business or starting a new one, you probably know you need to keep records of your income and expenses. In particular, you should carefully record your expenses to claim the full amount of the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns if you’re ever audited by the IRS or state tax agencies.

Certain types of expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special record keeping requirements or limitations on deductibility.

It’s interesting to note that there’s not one way to keep business records. In its publication “Starting a Business and Keeping Records,” the IRS states: “Except in a few cases, the law does not require any specific kind of records. You can choose any record keeping system suited to your business that clearly shows your income and expenses.”

That being said, many taxpayers don’t make the grade when it comes to record keeping. Here are three court cases to illustrate some of the issues.

Case No. 1: Without records, the IRS can reconstruct your income

If a taxpayer is audited and doesn’t have good records, the IRS can perform a “bank-deposits analysis” to reconstruct income. It assumes that all money deposited in accounts during a given period is taxable income. That’s what happened in the case of the business owner of a coin shop and precious metals business. The owner didn’t agree with the amount of income the IRS attributed to him after it conducted a bank-deposits analysis.

But the U.S. Tax Court noted that if the taxpayer kept adequate records, “he could have avoided the bank-deposits analysis altogether.” Because he didn’t, the court found the bank analysis was appropriate and the owner underreported his business income for the year. (TC Memo 2020-4)

Case No. 2: Expenses must be business-related

In another case, an independent insurance agent’s claims for a variety of business deductions were largely denied. The Tax Court found that he had documentation in the form of canceled checks and credit card statements that showed expenses were paid. But there was no proof of a business purpose.

For example, he made utility payments for natural gas, electricity, water, and sewer, but the records didn’t show whether the services were for his business or his home. (TC Memo 2020-25)

Case No. 3: No records could mean no deductions

In this case, married taxpayers were partners in a travel agency and owners of a marketing company. The IRS denied their deductions involving auto expenses, gifts, meals and travel because of insufficient documentation. The couple produced no evidence about the business purpose of gifts they had given. In addition, their credit card statements and other information didn’t detail the time, place, and business relationship for meal expenses or indicate that travel was conducted for business purposes.

“The disallowed deductions in this case are directly attributable to (the taxpayer’s) failure to maintain adequate records,” the court stated. (TC Memo 2020-7)

We can help

Contact us at KraftCPAs if you have questions or need assistance retaining adequate business records. Taking a meticulous, proactive approach to keeping records can protect your deductions and help make an audit much less painful.

© 2020