audit methodology

Going concern articles for auditors

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FASB has issued ASU 2014-15 which brings going concern consideration into the GAAP literature. Here are three articles that helped me and I think you can learn from as well.

Professional literature

You can find ASU 2014-15 here.

You can find SAS 126 in AU-C section 570 here.

Current going concern rules in SAS literature

4/19/14 – CPA-Scribo –  Audits: Going Concern Issues – From a year ago, here is a great summary of going concern rules in SAS 126. I recommend you check out this post as a refresher on the rules.

New going concern rules in GAAP

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Journalist falling for teen claiming $72M in stock market profits is object lesson for auditors

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How many failures in the smell test can you identify in this story, which was published by New York Magazine?

In a few years of trading*, a 17-year old* High School junior has cleared $72 million* in profits from a diverse strategy* of penny stocks*, oil futures, and mid-cap stocks. He owns a BMW and has already rented an apartment in Manhattan that his parents won’t let him live in*. He lives with his parents in the same place they’ve lived for a while*. To validate his story, a fact-checker looked at a* Chase bank statement* that shows a $72M balance*. The stock whiz now says he met with the fact-checker “for about 10 seconds” to view the one statement*.

Update, forgot this part:  After one of the interviews, he was going to an appointment with some guy who wanted to give him* a $150M investment* to start a hedge fund* the day he turns 18*.

The whole thing was a hoax.

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“The dozy watchdogs” – Deep discussion in The Economist on the state of audit profession

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Gotta’ love the drawing of a seated Doberman with a wondering look on his face as he stares at a trail of muddy feline paw prints. Staring around helpless are three other dogs. The befuddled watchdog has a tag labeled “PwC” in case you hadn’t yet caught the point.

The previous drawing was of an overfed cat in a three-piece suit helping himself to a bag of cash from a safe as four dogs snoozed in front of the safe. Said dogs have a tag identifying each as a member of the Big 4.

If you are an auditor, you really should get a fresh cup of coffee and check out The Economist’s discussion of The dozy watchdogs. Will let you see what non-accountants think of the profession (not too much) and the job the big firms are doing (not so great).

Yeah, there is a problem

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What’s the better description – “Audit” or Limited Review of Financial Statements

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A few weeks ago I had the opportunity to interview Sam Antar, previously CFO of crazy Eddie and currently convicted felon. There are several other posts from our discussion.

During our conversation he pointed out that audits are limited in terms of time and are limited in scope. An audit is not a forensic analysis.

He described our current methodology as designed to detect material unintentional errors.

(I would add to that something about looking for material intentional errors that are non collusive or are in the obvious places. Add your own paraphrase of our responsibilities to look for fraud.)

Those limits suggest to him that a better describe of what we do would be: …

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Update for accountants – posts from CPA-Scribo

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While I’ve been getting a book into print and writing some CPE classes during the last few months, Charles Hall has posted a bunch of great articles of interest to CPAs. Haven’t mentioned any of them yet. Here’s a few that I think would be most helpful for you.

Here’s some more posts that would well be worth your time.

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What is the point of accounting? Providing economic history or predicting the future?

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That is the underlying question raised by Prof. Charles M. C. Lee in a speech he gave which is summarized in an article at the Stanford graduate school of business website: Charles Lee: Why Fair-Value Accounting Isn’t Fair.

Let me help you stretch your brain. After writing this article, mine hurts. (Okay, okay, I hear you saying it doesn’t take much to strain Jim’s brain.)

The professor’s full speech is here. I read the first third of the paper, up to the point he starts talking about stock valuation theory. Good stuff.

One sentence summary from the article: …

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Irony: Charity’s anti-fraud manager pleads guilty to fraud

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BBC reports on 3/6 that Oxfam ex-fraud chief admits defrauding charity.

Oxfam, a development charity in England, has revenue of £385.5M (~$645M) in 2012.

The charity’s head of the counter-fraud department pled guilty to embezzling about £62.6K (~US$105K) and will be sentenced May 16.

(Cross-posted from my other blog, Nonprofit Update, since this is useful info for CPAs.)

His scheme?

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Growing complexity will increase. That will make auditing even more challenging.

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The overall rate of change today is increasing. This carries over to the business world. Commerce is getting more complex with every quarter that passes.

That will carry over to us as practitioners.

That’s the comment from a speaker at a recent conference.

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Some thoughts for CPAs after reading the Tampa Bay Times, CIR, and CNN reporting on GIK shipments

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The Tampa Bay Times has run the article they wrote with CNN and the Center for Investigative Research:  No accounting for $40 million in charity shipped overseas. It looks to be the same text as in the CIR report, which I mentioned here.

(cross-posted from my other blog, Nonprofit Update, because this discussion especially applies to auditors.)

I have performed lots of audits over the years but don’t have any clients with the kind of GIK programs that have been in the news lately. That does two things. First, it frees me to pontificate and speculate because the independence rules don’t limit me in discussing an actual client situation.  Second, it gives me an auditor’s knowledge, experience, and intuition to apply to the news I read.

A few thoughts for CPAs after reading the article again…

Opinion shopping.

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Why auditing isn’t like reading a history book

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Sometimes it’s weird reading a story about the Civil War. It’s the same when reading about an audit fiasco.

People do the oddest things.

As the first major battle of the war shaped up near Manassas Junction, lots of people rode out from DC in their carriages. They brought along picnic baskets so they could eat as they watched the battle. Would be a fun afternoon outing with the children.

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A Halloween costume that would make any CPA pass out from fright – an auditor performing one pension plan audit

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Photo courtesy of DollarPhotoClub.com
Photo courtesy of DollarPhotoClub.com

Amid the cute little kids in their funny costumes, this pleasant Halloween night there was a grown man in a suit at the door asking for candy. White shirt, red tie, gray pinstripe.

Not so scary, thought I.

“What are you dressed up as?”

“An auditor,” came the reply.

That’s not frightening, since I’ve been an auditor for a long time. But it did explain the standard issue uniform.

So, putting on my peer reviewer hat, I asked, “what audit work do you do?”

“Oh, only one pension plan….

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More good stuff for auditors – 9-4-13

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A few links and comments that I think would be of interest to auditors. This post: what do PCAOB deficiencies mean, their new report isn’t a big deal, sausage making at FAF, one possible surprise anti-fraud test, and the fun of investigating JPMorgan.

Going Concern – PwC and KPMG Inspection Reports Make Us Wonder: Are Shody Big 4 Audits Here to Stay? – Check out the comments for some good discussion on how important or inconsequential a PCAOB deficiency is.  I’ve long wondered …

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