hen it comes to audit efficiency, sometimes less is more. Many CPA firms have found it’s possible to slash the amount of time involved while still meeting professional standards. They’ve discovered that by working smarter, they can maintain—and even improve—quality even while cutting back on the hours invested in audit engagements and enhancing profit.
Because the most valuable practice ideas often come from the experiences of other CPA firms, the AICPA PCPS task force on adding value to peer review commissioned a survey on best practices in audits of not-for-profit entities among a group of small and midsize firms known to have excellent quality controls. The task force targeted the NPO sector because it poses particular challenges to audit efficiency, given the fact that NPOs often have lean operations and little if any accounting staff expertise. However, the best practices uncovered can be applied to audits in any field. This article reports the survey results and offers personal insights from a number of CPAs on how they boost efficiencies in their firms.
The study revealed that there were four important steps to achieving audit efficiency.
1. Manage and train the client. CPAs can work much more efficiently when clients supply them with all the data they need. If a CPA’s staff has to spend time doing catch-up bookkeeping work or locating and copying needed files, the length of the audit probably will increase and the firm is much less likely to realize 100% of the value of its fees.
“You have to separate assistance from auditing,” says Deborah Lambert, a partner of Johnson Lambert & Co. in Bethesda, Maryland, and chairwoman of the AICPA auditing standards board. “Too often we get in there and the client has things that aren’t reconciled or account analysis that isn’t done. We end up rolling all our extra work into the audit and not getting paid for it.”
To prevent this problem, her firm has experimented with creating two separate groups: a traditional audit team and another, “swat” team that prepares clients for the audit. Introducing the swat team and a different engagement letter for its work “forces a conversation up front with the higher level people where we say, ‘Here’s what’s not ready, here’s what needs to happen, here’s how we can help and this is what it will cost.’”
At Weaver & Tidwell in Dallas, partner Gary Hoffman reviews the possible engagement efficiencies with clients at the planning conference. “We look at what added or saved time or money during the previous year’s engagement so we can reinforce the right client behavior. The clients see how they can provide us with better assistance and the financial impact that will have on engagement time.”
The survey revealed other strategies for ensuring clients are prepared for their audits:
2. Retain clients and staff. Firms agreed that a meaningful investment in an industry niche was an important contributor to efficiency. When a firm retains clients, it means that greater familiarity with the practice area and with particular clients enables practitioners to streamline their audit approaches and to make the most of the time they spend on each engagement. It also allowed them to offer clients valuable advice on best industry practices and to charge premium fees.
Lambert always looks ahead. At the end of an audit, “when you deliver the report, also deliver your next year’s engagement letter,” she advises. “It’s not at all unusual for the client to sign it and hand it right back. It’s a great way to keep the relationship going.”
Survey participants said staff retention was very important because it enhanced both their client-specific and industry experience. Firm strategies for achieving low employee turnover included
3. Plan properly. The time survey participants spent on this part of the audit process varied greatly from firm to firm, with a range of 2% to 25%.
Planning is critical to audit efficiency, many practitioners believe. “Back in the mid- to late 1980s, we changed our audit approach,” says Tony Lynn of Davis, Lynn & Moots, in Springfield, Missouri. In the past “our philosophy was to go in, audit as much as we could and when our bags were full, come home. As a staff person, I didn’t understand why we did some procedures except that they were in the workpapers from the year before.”
Today, on any audit, Lynn’s firm spends time getting to know a client and its systems in advance. “We can understand its entire operation, as opposed to understanding a bunch of procedures that we’d done previously.” Since changing the firm’s approach, “we’ve been able to reduce hours on the engagement. We’re not just in there doing procedures; we’re doing an audit.”
As part of the planning process, the firms surveyed reviewed the prior year’s workpapers to familiarize themselves with client issues and to seek out possible past inefficiencies in their own work and possible improvements.
Other steps included
However, not all successful firms have lengthy efficiency planning processes, the survey found. Some simply reviewed last year’s audit and considered what the firm could have done differently. Some created a final plan after the audit had begun, when current issues and problems were clear. These approaches generally applied in smaller firms with a high percentage of experienced staff.
4. Assess risk. Correlating audit efforts to the levels of risk and materiality has inherently a more efficient approach, the survey found.
“If you assess risk, it should affect your procedures,” says Lambert. Firms should strive actively to cut out procedures in the low-risk areas and focus instead on the problem spots.
When considering risk, Lambert recommends bringing the whole audit team together. “The senior people can talk about industry risks, while the middle-level people tend to know more about control issues and the competency of the client. The youngest people may not understand it all, but they can learn a lot. By putting the whole engagement team together, we help all of them understand the different types of risk.”
Analytical procedures (reasonable and predictive tests) were considered the most efficient by those surveyed. One firm’s audit team begins each step of the process by asking, Can we audit this analytically? Every participant is trying to use more analytical procedures and do less transaction testing because it
Areas in which predictive and reasonableness tests have replaced transaction testing and saved time include
Besides practice management and technical suggestions, firms also had a number of quick tips for enhancing efficiency. One step considered key to an efficient audit, saving as much as 20% to 30% of total time, was completing the audit in the field, including
“People are less distracted when they finish the work in the field,” Lambert says. “I know we make more money when I don’t see staff people in our office.”
One firm offered a $100 bonus to senior staff if the audit wrap-up was completed in the field. Other tips were
OPTIONS FOR EVERY FIRM
The good news is there was not any one particular route to audit efficiency. Whether the firm was traditional or casual, it was still possible to identify efficiencies that improved profitability.
Lynn, who says his firm initially shaved 30% to 50% off audit time through proper planning, urges other accounting firms to understand the point of all of their efforts. When his firm performs peer reviews, often “we see people who are overauditing and not understanding why. I usually ask, ‘What does this workpaper give you?’ They often say, ‘I don’t know; we’ve just always done it that way.’ But if you can’t say why you’re doing something, you should get rid of it.”