Category: Article

Businesses and nonprofit organizations continue to adapt to new lease accounting standard rules, the result of several years of federal planning and adjustments.

Accounting Standards Codification 842 (ASC 842) now applies to private companies and nonprofit organizations with fiscal years beginning after December 15, 2021, and it significantly changes the accounting for leases.

Still not sure how ASCS 842 will affect you or your balance sheet? Let’s start at the beginning.

Allocate resources

To implement the new standard, first decide who on your team will be responsible for implementing it. That person should review all current leases and review and, going forward, approve all new leases that are applicable to ASC 842. A program such as Microsoft Excel can help with some of the math and calculations, or look into any of the specialized lease software currently available.

Definition of a lease

ASC 842 defines a lease as a contract “that conveys the right to control the use of an identified asset… for a period of time in exchange for consideration.”

When reviewing any lease contract, look for these three elements:

• A clearly identified asset.
• Specified rights to control the identified asset. Consider options to extend the lease, cancel the leases, and the likelihood that those options are exercised.
• Hidden servicing contracts. Look closely for leases or contracts embedded in those agreements that also could be subject to ASC 842.

Under ASC 842, a lessee can choose a short-term lease accounting policy that’s less than 12 months and doesn’t have an option to purchase the chosen asset. A short-term lease accounting policy will  recognize the lease payment over the lease term on a straight-line basis and, as a result, right-of-use assets and lease liabilities would not be recorded for short-term leases.

Lease classification

ASC 842 retains the two-model approach of classifying leases as operating or finance leases (formerly capital leases). Regardless of the classification type, most leases will be recorded on the balance sheet as a right-to-use asset or liability.

If one or more of the following criteria are met at the start of the lease, the lease would be considered a finance lease:

• The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
• The lease grants the lessee an option to purchase the underlying asset, and the lessee is reasonably certain to exercise the option to purchase.
• The lease term is for a major part of the remaining economic life of the underlying asset.
• The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying assets.
• The underlying asset is of such a specialized nature that it’s expected to have no alternative use to the lessor at the end of the lease term.

If none of these lease classification criteria are met, the lease is classified as an operating lease.

Discount rate

To determine the current value of the sum of the lease payments, apply a discount rate. Three discount rate options are provided under ASC 842:

1. Rate implicit in the lease. The rate implicit in the lease should be used if readily determinable.
2. Incremental borrowing rate. When the rate implicit in the lease is not readily determined, the incremental borrowing rate will appl. The incremental borrowing rate is the lessee’s rate for a hypothetical, collateralized loan with similar terms as the lease.
3. Risk-free rate. Nonprofit entities may elect an accounting policy to use the risk-free rate for a period similar to the lease term. The risk-free rate is the rate of a zero-coupon U.S. Treasury instrument.

How to account for the leases

The initial accounting for the leases is the same whether it’s a finance or operating lease.

On the start date of the lease, the lessee records a lease liability for the present value of the sum of the lease payments and a right-of-use asset equal to the lease liability. The subsequent accounting for the lease costs and amortization of the right-of-use assets varies depending on the classification as a finance or operating lease.

For a finance lease, the asset is amortized straight-line over the lease term or the useful life of the underlying asset. Interest costs are recognized for the accretion of the lease liability and recognized as interest expense.

An operating lease is recorded as a lease or rent expense and is recognized on a straight-line basis over the lease term.

Implementation options

ASC 842 went into effect for calendar years beginning with the December 31, 2022, year-end financial statements. There are two options for initial implementation:

The effective date method. Using this option, the lessee will implement the standard effective January 1, 2022, and not restate the 2021 or prior comparative financial statements. The accounting standard change is made through a cumulative-effect adjustment recognized as of the effective date.

The comparative method. With this method, all periods presented will fall under ASC 842 guidelines. The accounting standards change is made through a cumulative-effect adjustment recognized as the beginning of the earliest period presented.

Changes to your financial statements

Balance sheet. Right-of-use assets and lease liabilities should be presented as a separate line item on the balance sheet or disclosed separately in the notes to the financial statements. If they aren’t presented separately on the balance sheet, the note must indicate which line items on the balance sheet include the right-of-use assets and lease liabilities.

An example of the balance sheet changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Footnotes to the financial statements. Expanded disclosures required for both lease classifications include:

• Description of leases.
• Terms and conditions, including purchase options and termination penalties.
• Judgment and assumptions made, including capitalization thresholds.
• Amortization of right-of-use assets, interest costs, and periodic lease expense associated with leases.
• Discount rate(s) (weighted average).
• Remaining lease terms (weighted average).

Application of the standard will not result in any adjustment to equity for treatment of either type of lease.

This is an example of the footnote disclosures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASC 842 has been debated and adjusted quite a bit over the past several years before finally going into effect, so the end result can be confusing and tedious. Contact us or any of the professionals on our assurance services team if you have questions about how ASC 842 applies to you.

© 2022 Kraft CPAs PLLC

 

An external audit can help a business or nonprofit organization avoid costly and embarrassing errors, and proper preparation can greatly ease the process, minimize surprises, and potentially reduce costs.

These key steps could help simplify and maximize your next audit:

Keep a positive attitude

CFOs, finance directors, and controllers sometimes see audit fieldwork as a disruption to their workplace routine.  Cooperation and planning with your audit team can lead to a more efficient process, allowing you to get back to normal business.

Audits aren’t intended to be adversarial. An external audit team is a professional resource that can provide assurance about your financial reporting to financial statement users, such as lenders and investors.  An audit can also provide fresh insights, accounting advice, and solutions to strengthen internal controls and minimize risks.

Before fieldwork begins, gather your accounting team to explain the purpose and benefits of your upcoming audit. It may be important to distinguish your financial statement audit from an IRS audit, which could lead them to be guarded and skeptical. Be open and candid to put minds at ease and lessen anxiety.

Assign a liaison

Pick a knowledgeable person in the accounting department to be the auditor’s go-to source for questions and document requests. This will minimize confusion and duplication of effort within the accounting department, and it could minimize the time that external auditors are on your premises.

Establish a timeline

Creating a schedule for your audit team that includes the most important dates can make a difference in the time required between starting the audit to receiving a final report. Good communication on the timeline will benefit everyone. Consider the following dates:

• Preliminary planning time
• Start of fieldwork
• Agreement on adjusting journal entries and the adjusted trial balance
• Presentation of a draft of the financial statements
• Final issuance in time for deadlines, governance meetings, or bank requirements

Review this timeline for potential scheduling conflicts such as vacations, holidays, medical leaves of absence, business conferences, and regulatory deadlines.

Reconcile accounts

Before fieldwork starts, all transactions should be entered into the accounting system for the year, and each account balance should have a schedule that supports its year-end balance. Amounts reported on these schedules should match the financial statements. Be ready to explain and provide evidence supporting any estimates that underlie account balances, such as allowances for uncollectible accounts, warranty reserves, or percentage of completion for work-in-progress inventory.

Ideally, a separate member of the accounting department should review the schedules for errors, discrepancies, and unexpected variances based on the company’s budget, expectations, or the prior year’s balance. An internal review is one of the most effective ways to minimize errors and adjust journal entries during a financial statement audit.

Assemble information to provide auditors

Auditors are grateful when clients prepare their own audit workpapers to support account balances and transactions. Your accounting team already created many of these schedules when they reconciled account balances to the general ledger. Examples generally include:

• Preliminary trial balances and financial statements
• Bank reconciliations
• Accounts receivable aging reports
• Fixed asset listings (including purchases, disposals, and donations)
• Schedules of prepaid items, accrued expenses, and repairs and maintenance expenses

Review last year’s audit document request and collect the prepared-by-client (PBC) work papers. The audit team may not be aware of all significant activity that took place during the year. There may be additional documents that would be helpful if provided early in the process to help avoid last-minute questions. Examples of these may include:

• Significant sales contracts
• New leases
• Loan agreements
• Insurance policies
• Minutes of board meetings noting significant decisions
• Legal documents
• IRS or other notices

Compile these documents in your audit binder before your audit team arrives. Providing information piecemeal can delay the fieldwork process and may cause the audit team to have to fit in working through open items after the scheduled fieldwork timeframe has passed.

Evaluate internal controls

Patching gaps in internal controls minimizes the risks of fraud and financial misstatement. If you correct any deficiencies in internal control policies (such as a lack of segregation of duties, managerial review, or physical safeguards) or documentation of these controls before fieldwork, your audit will proceed more smoothly, and it could result in fewer recommendations to report when the audit is completed.

Remember that the COVID-19 pandemic has changed how transactions are processed by accounting teams, because those teams might work remotely rather than on-site. Your auditor will be on the lookout for changes that your company made (or should have made) in response to remote working arrangements. He or she needs to be able to determine whether the controls were adequately designed, put in place, and operate effectively. Changes made to the financial reporting process should be communicated to the audit team during planning through updating internal control forms or other means.

The audit can be beneficial

Financial statement audits should be a learning opportunity and an investment in your company’s future. Preparing for your auditor’s arrival not only facilitates the process and promotes timeliness, but also helps build a beneficial partnership between in-house and external accounting resources.

The KraftCPAs assurance services team can work with you to get ready for your next audit. Reach out to one of our professionals if you have questions.

© 2022 KraftCPAs PLLC

You likely keep a very close watch on the money that comes into your business. You record payments as soon as they come in and deposit them in a bank account. But are you as careful tracking your purchases?

It’s easy to go out to lunch with a client and forget to save the receipt. It’s not that much money, right? Or you quickly stop to pick up supplies at the office supply store and forget to record the purchase. When you disregard even small expenses, you can have two problems. First, your books won’t be accurate. And second, you never know how an extra $42.21 under Meals and Entertainment might affect your income taxes.

QuickBooks Online offers two ways to enter expenses:

• create a record on the site itself, or
• snap a photo with your phone using the QuickBooks Online mobile app to document the money spent

Here’s how these two methods work.

Documenting at your desk

Let’s say you just had lunch with a vendor to discuss some products you’re planning to buy for a project you’re doing for a customer. You charged it to your company credit card, which you track in QuickBooks Online. You still have to enter it as an expense on the site so that when your credit card statement comes, you can match the credit card transaction to the expense you recorded.

Hover over Expenses in the navigation toolbar and click on Expenses. Click the down arrow in the New transaction button and select Expense. Fill in the fields at the top of the screen with details like Payee, Payment date, and any Tags you want to specify. Under Category details, select the correct category from the drop-down list and enter a Description and Amount.

Since you’re going to bill this to the customer as a part of your project fee, click in the Billable box to create a checkmark. Select the Customer/Project. Add a Memo to remind yourself of the reason for the lunch (very important!) and attach a photo of the receipt if you take one. Click Save. Your record of the lunch will now appear on the Expense Transactions screen. It will also show up in the Expenses by Vendor Summary and Unbilled Charges reports, among others.

Recording on the road

In the example we just went through, attaching a photo of the receipt was the last thing we did to record an expense in QuickBooks Online. There’s another way to document a purchase that starts with a photo of a receipt and should save you a bit of data entry: using the QuickBooks Online mobile app. The app uses Optical Character Recognition (OCR) to “read” the receipt and transfer some of its data to fields on an expense record.

(If you haven’t installed the QBO app on your smartphone, you should. You can do a lot of your accounting work that synchronizes automatically with QBO. It’s free, too.)

Open the app and log in. On the opening screen, you’ll see an icon labeled Snap Receipt. Click on it, and your phone’s camera will open (you’ll be asked for permission to use it). Position your phone over the receipt and move it around until you see the blue box covering the content of the receipt.  Take the picture. You’ll see it displayed on the phone with a message saying, “Use this photo.” If it seems OK, click the link.

A message on the screen will tell you that the upload is complete and that the app is extracting the information from it. Click “Got it!” Then it should only take about a minute for your receipt to appear in the list on the Receipt snap screen. You’ll see the details that the app has pulled from your receipt. Tap the matching expense and click Done on the next screen.

When you’re back at your computer, open QuickBooks Online and go to Transactions|Receipts. At the end of the row that contains your receipt, click the down arrow next to Delete and select Review. QBO will display the partially completed receipt form next to the photo you took of the receipt. Fill in any missing fields and save the transaction. Click Create expense on the screen that opens. Then open the Expenses menu and select Expenses, and there should be an entry for the receipt you just added.

This tool isn’t perfect, of course. Every receipt has different fields in different places, and sometimes they’re just not very readable. But in our tests, the app picked up an average of four fields.

Documenting your expenses using one of these two methods is so important. It will help you remember why you stored the receipt and make your reports more accurate. As long as you categorize each transaction correctly, it will make your tax preparation easier and faster and ensure that you’re charging customers for billable expenses. And if you’re ever audited, your careful work will come in handy.

QuickBooks Online is a great way to handle your expense management, but there are enough moving parts in these recording tools that you may have questions. Reach out to me or any of our QuickBooks ProAdvisors at KraftCPAs for help along the way.

© 2022 KraftCPAs PLLC

Many companies will put diversity, equity, and inclusion (DEI) issues on their agendas for 2022. Increasingly, investors, lenders, customers, employees, and new recruits want to know the extent to which boards and management teams are diverse in terms of race, ethnicity, gender, and sexual identity. These groups increasingly recognize the quantitative and qualitative benefits that diversity offers.

In a corporate boardroom, diversity can enhance the audit committee’s ability to monitor financial reporting. Academic research has found that boards with diverse membership have better financial reporting quality and are more likely to hold management accountable after a poor financial performance. This concept also extends to private companies, where management teams with people from diverse backgrounds and/or functional areas expand their company’s abilities to respond to growth opportunities and potential threats.

On a broader level, getting input on major decisions from people from a wide variety of backgrounds and experience levels helps enhance corporate value. Plus, providing an equitable and inclusive workplace is good corporate citizenship.

How diverse, equitable, and inclusive is your workplace?

A company’s leadership sometimes perceives DEI issues differently than its frontline workers do. Assembling a formal DEI task force can help company leaders get a more objective picture of strengths and weaknesses in these areas.

One of the group’s first tasks should be creating a survey to distribute throughout your organization. Once the responses have been tallied, the task force should meet regularly to discuss the findings and, if necessary, take corrective actions.

Reporting hotlines can also provide insight into DEI issues. In some cases, management may be blind to harassment and discrimination that’s happening on the frontlines by co-workers, suppliers, and customers. Remember, some forms of harassment and discrimination can be subtle. Frank insights from rank-and-file employees, customers, and suppliers can be eye-opening — and discussions about real-life incidents can lead to awareness and change.

How effective is your DEI program?

Another critical task for the diversity-and-inclusion task force is developing a list of quantitative metrics — such as recruitment, retention, and pay rates for minorities and women — to help track progress over time. Historical results can be used to benchmark your company against competitors and establish goals for the future.

Your company can also make DEI surveys or focus groups part of its annual review process. To encourage participation in DEI initiatives, consider tying part of executive leadership bonuses to achieving quantifiable goals. Alternatively, if goals aren’t met, evaluate why and whether the program may need to be redesigned to be more effective.

Conducting DEI surveys creates an expectation that management intends to implement changes to become more diverse, equitable, and inclusive in its business practices. So, it’s important to communicate with employees about the company’s DEI initiatives. These communications should showcase the company’s strengths and the steps it has taken to improve weaknesses.

In addition to providing footnote disclosures in their financial statements, some companies issue separate DEI reports to highlight improvements made during the current year and other additional planned DEI initiatives.

The use of an outside consultant can make these reports more objective and professional. Plus, outsiders can conduct training programs for managers and employees, along with providing guidance on DEI best practices that have been successful at other companies.

Diversity counts

Building an effective DEI program doesn’t happen overnight. It takes time, attention, and a commitment from the company’s leadership. Contact me to discuss best practices and how your financial reporting process can be used to highlight your progress in these areas.

© 2021 Kraft CPAs PLLC

The holiday season is here, and that might put you in the mood to donate to a charity or bestow gifts or assets to loved ones. Even though the act of giving is the ultimate reward, don’t overlook the tax rules designed to encourage charitable giving.

Donating to charities

In the past, taking the standard tax deduction meant losing out completely on possible deductions for charitable gift-giving. Under a temporary rule in effect for 2020 and 2021, taxpayers can claim a limited charitable deduction in addition to the standard deduction on their personal income tax returns. The deduction is for cash donations to public charities only and is limited to $300 for single filers or $600 for a married couple filing jointly.

What if you want to give gifts of investments to your favorite charities? There are a couple of points to consider.

First, don’t give away investments in taxable brokerage accounts that are worth less than what you paid for them. Instead, sell the shares and claim the resulting capital loss on your tax return. Then give the cash proceeds from the sale to charity.

The second point applies to securities that have appreciated in value — these should be donated directly to charity. That’s because if you itemize, donations of publicly traded shares owned for more than a year result in charitable deductions equal to the full current market value of the shares at the time the gift is made. In addition, if you donate appreciated stock, you avoid the capital gains tax on those shares. Meanwhile, the tax-exempt charity can sell the donated shares without owing federal income tax. Keep in mind that your charitable deduction for donating appreciated stock will be limited to 30% of your adjusted gross income (20% if given to a private foundation).

Donating from your IRA 

IRA owners and beneficiaries who have reached age 70½ are allowed to make cash donations of up to $100,000 a year to qualified charities directly out of their IRAs. You don’t owe income tax on these qualified charitable distributions (QCDs), but you also don’t receive an itemized charitable contribution deduction. (Get in touch with your KraftCPAs tax advisor if you’re interested in this type of gift.)

Gifting assets to family and other loved ones

The principles for tax-smart gifts to charities also apply to gifts to relatives, meaning that it is more advantageous to sell investments that are now worth less than you paid for them and then claim the resulting capital losses on your personal income tax return, rather than gifting the stock directly to loved ones. You can give the cash proceeds from the sale to your loved ones instead.

Likewise, you should give appreciated stock directly to those to whom you want to give gifts. You will avoid paying tax on the unrealized gain, and if they sell the shares, they’ll pay a lower tax rate than you would if they’re in a lower tax bracket.

In 2021, the amount you can give to one person without gift tax implications is $15,000 per recipient. The annual gift exclusion is available to each taxpayer; so, if you’re married and make a joint gift with your spouse, the exclusion amount is doubled to $30,000 per recipient for 2021.

Make gifts wisely

Whether you give to charity or loved ones this holiday season — or both — it’s important to understand the tax implications. For answers to your specific questions, reach out to me or any member of the KraftCPAs tax team.

© 2021 Kraft CPAs PLLC

It’s not uncommon to consider a move to another state during retirement – maybe to be closer to family, find more suitable weather, or maybe just a change of scenery. But before you put much thought into your out-of-state relocation, be sure to factor in state and local taxes. Establishing residency for state tax purposes may be more complicated than it seems.

What are all applicable taxes?

It may seem like a good option to simply move to a state with no personal income tax. But, to make a good decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes, and estate taxes.

If the state you’re considering has an income tax, look at what types of income it taxes. Some states, for example, don’t tax wages but do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions, and Social Security payments.

Is there a state estate tax? 

The federal estate tax currently doesn’t apply to many people. For 2021, the federal estate tax exemption is $11.7 million (or $23.4 million for a married couple). But some states levy estate tax with a much lower exemption and some states may also have an inheritance tax in addition to — or in lieu of — an estate tax.

How do you establish domicile? 

If you make a permanent move to a new state and want to make sure you’re not taxed in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.

When it comes to domicile, each state has its own rules. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you establish domicile in the new state but don’t successfully terminate domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states could claim that your estate owes income taxes and any state estate tax.

The more time that elapses after you change states and the more steps you take to establish a domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Some ways to help lock in domicile in a new state include:

• change your mailing address at the post office
• change your address on passports, insurance policies, will or living trust documents, and other important paperwork
• buy or lease a home in the new state and sell your home in the old state (or rent it out at market rates to an unrelated party)
• register to vote, get a driver’s license, and register your vehicle in the new state
• open and use bank accounts in the new state and close accounts in the old one

If an income tax return is required in the new state, file a resident return. File a nonresident return or no return (whichever is appropriate) in the old state. For the year of your move, you may need to file a part-year resident return in both states.  We can help file these returns.

Before deciding where you want to live in retirement, reach out to a KraftCPAs professional to weigh the pros and cons. It could help you avoid surprise tax issues later.

© 2021 Kraft CPAs PLLC

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