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Showing posts with label importance of external audit. Show all posts
Showing posts with label importance of external audit. Show all posts

Wednesday, August 24, 2016

IRS and Small Business Owners IRS Alert

If you run a small to moderate sized company,
outsourcing options as a means to protect your
investments on the in case of IRS prompted audit.

Many small businesses suffer from the misconception that only big corporations have to worry about exhaustive IRS audits. 

Nothing can be further from the truth.

The Internal Revenue Service utilizes a different set of criteria for evaluating moderate and small businesses, so there are numerous things that can red flag your company for potential governmental scrutiny that are unique to typical mom and pop ventures.

The most common issue  that creates unwarranted suspicion is the filing of numerous tax deductions and exemptions.  Even if such deductions are legitimate, far  too many of them may  give the IRS the impression, mistaken or other wise, that you are playing fast and loose with tax loopholes, shelters and write offs.  To reduce potential risk of an IRS audit in this regard,  you may wish to mitigate the numbers of deductions you indulge, taking due care to keep all receipts  and documents on hand.  This measure may not only keep you from getting audited, but may very well assist in keeping the business in the black should you wind up  being the unwitting participant of  an IRS evaluation.

Another potential problem that may be more specific to smaller and mid sized business is the correspondence audit. 

Moderate sized companies are in greater danger.

Especially this type of review due to the fact that this type of IRS evaluations focus primarily on  red flags that are specific to more diminutive enterprises. In many cases,  this style of audit may not require a face to face meeting and can be disputed in an informal setting.

Another way to keep the tax man at bay is to outsource your major accounting work. Even if you have an in house bookkeeper or a reliable on staff finance team, it is always a good idea to have another pair of eyes evaluating your books. Not only does it guarantee your financial records will be maintained, it allows for pristine record keeping that reduces IRS related inquiry.

Outsourcing may be especially needful if you undergo a correspondence audit and decide to dispute the outcome. 

Even though these kinds of IRS audits are largely handled via snail mail, they can still be costly and problematic to a small company's bottom line when contested.   Companies that routinely outsource with reputable accounting firms will be able to utilize reliable CPA's to represent them in Tax Court. Additionally, the company will be familiar with your company's in house finance paradigm and can utilize this knowledge to assist you in the pursuit of your goals.


Call GBC Income Tax Services today at 678-366-9232 for all your tax and IRS needs!

Wednesday, August 10, 2016

What You Should Know About IRS Correspondence Audits

Many of these  types of audits occur when
mistakes in accounting happen.
Much ado has been made about the fact that IRS audits are on the  decline, however, this  does not mean the IRS can't, or won't, come knocking on your door.  This is especially true if you own a small to mid sized company, as these types of  audits are actually on the rise. 

Correspondence Audits and What They Mean for Your Business

When it comes to IRS related tax audits, large and small business can face two kinds. One is the face-to-face audit.  This particular process is largely handled in person, with the agent and business owner pouring over relevant documentation to assess how much money, if any, a business may owe in  taxes.

The type of audit small to moderate sized companies most often face however, is the called a correspondence audit. As the name implies, this type of  IRS review is generally handled via  snail mail, and can be disputed in lower tax courts. Even so, if handled incorrectly,  a correspondence audit can lead to a  closer examination  of your company's financial  records, which could lead to significant payouts.

This is something a struggling small enterprise can ill afford.

Dealing with a Correspondence  Audit

Correspondence audits usually occur after an IRS agent is alerted to potential issues on the company's tax return.  It could be something as simple as a clerical  error or  missing finance  documentation.  In such instances, an agent will send out an official letter to the business owner requesting further information for clarification.

Now, a correspondence  audit may appear innocuous enough but don't be fooled.   These types of government examinations can be a drain on time and financial resources as you try to get he matter sorted.  Making matters worse, there is usually very little recourse for businesses who receive these types of  notices in the mail, as contact information is seldom supplied.  In other words, you  receive  the notice with on o way to call  or ask questions regarding the  issue.  The only other option  a company will have at this juncture is to request an in office meeting with your local  IRS representative, but this request may or may not be honored--and that's perfectly legal.

How to Avoid a Correspondence Audit

When you receive one of these little bomb shells in the mail, you will have to respond to it by law or face heavy fines or penalties.  Many individuals try to gather the requested info and send it off hoping that will end the matter.  This may not always be the case.

As the old saying goes, an ounce of prevention is worth a pound of cure. Many of these  types of audits occur when mistakes in accounting happen.  Or worst yet, the company's finance department has lost or failed to keep up with pertinent records.

Avoiding this scenario may be as simple as hiring an outside accounting firm to handle your financial record keeping and tax filing. GBC of Atlanta is familiar with ins and out of Correspondence Auditing and related disputes and can act on your company’s behalf. Contact us today to learn more about how to protect your financial investments and remain in good standing with the IRS.

Call GBC Income Tax Services today at 678-366-9232 for all your tax and IRS needs!

Wednesday, July 27, 2016

Tax Season is Every Season : How To Avoid An IRS Audit

What Does The IRS Take Into Consideration
When Performing An Audit?
Did you know that you are more likely to face an audit when Tax Season is in full swing.  In either case, it pays to be ready, no matter what.

Although Tax Season for all officially ends and begins on a given calender day, one mustn’t make the mistake that so many businesses do, by thinking  you are safe from scrutiny  once the season comes to a close.

Remain on Guard

The Internal Revenue Service has a list of things it looks for when considering a business for potential audit. These red flags can pop up for any  reason, at any  time. As this is the case, it remains imperative to  be on the look out for potential  accounting issues, and, when and wherever possible, to outsource with a reputable accounting firm.

Indeed, the IRS can  perform an audit for any reason any day of the week, 365 days a year.


Having a second pair of professional eyes lowers your risk of IRS investigation, which  all too often approaches a corporate audit with a “guilty  until proven innocent” mindset.

What to Look Out For 

The IRS looks for a wide variety of things that  could potentially clue them in  the idea that you may not be on the up and up, at least in their eyes. When it comes  to intensive government investigations, an uncrossed “t” and undotted “i” simply means payments weren't given to Uncle Sam  in due time, and that can spell trouble for you and your business.  Even so, agents will and often do consider human errors during an audit, but they will often need detailed documentation  to make such determinations—this  is when accurate record keeping becomes crucial.

So, what are some of the things the IRS will take into consideration when performing an audit?  There are quite a few, with the most common being:

Ready and Petty Cash – Businesses that run primarily on cash transactions or  have a lot of petty cash on hand for odds and ends, may garner significant  attention. This is because cash is hard to trace and can easily be hidden or  passed under tables.  In such cases, the IRS may also evaluate your --

Lifestyle and Charity Contributions –   When cash flow is difficult to determine, the Internal Revenue Service will often assess  an individual's social status as it relates to what neighborhood they live in, car they drive, how expensive their clothing  is and even the size of charitable contributions. They weigh these things against the person's assets, inheritances and  the money reportedly take in.  Of course, someone with a sizable income will be able to amass a wealth of creature comforts. If you are pulling in less than 110k a year however, living in Beverly  Hills and buying a Bentley every year should be well out of your price range.

While the IRS uses this assessment as tool in business that deals largely in cash, they can and often employ this methodology in affirming potential tax evasive or mismanagement  for other types of payment based goods and services.

Business Expenses and Reports  – It is not unheard of for  an employee or businessman  to  expense corporate travels, and while even entertainment and meals can be  legally deducted, you have to be able to prove their relation to  company related activity. This is why it is prudent to keep all receipts and documents  on file on the in case they are needed to justify an company expenditure during an audit.

Work Form Home Write Offs  – working from home is becoming more and more common. For business owners who spend a good portion of their time at their residence, they may and can often write off things like their utilities and  internet service.  Individuals  who are tempted to do so however, may  pile on unnecessary deductions in order to receive a hefty  tax return.  Eagle eyed IRS agents  will spot such discrepancies however, and in due time, you may find yourself undergoing an intensive tax audit.

As the above list indicates it is prudent to retain receipts and  relevant forms on the in case  the IRS pays you a visit. The best course of action is to avoid an audit altogether.  One way to do this it  to   stay on top of your accounts, which  is why outsourcing to a reputable finance firm is in you and your companies best interest, all year round.

Call GBC Income Tax Services today at 678-366-9232 for all your tax and IRS needs!

Wednesday, June 22, 2016

Facing the Dreaded Audit By The IRS

The Dreaded IRS Audit - What Actions You Should Take
The IRS has targeted you and your company for a comprehensive audit. 

You've done everything  humanly possible to avoid it, but  your worst fears have been realized. Before you  fling  yourself headlong into panic mode and start checking out real estate in Tahiti, relax. An audit  isn't necessarily the end of the world, especially if you know what to do  in preparation for one.

Great – I am Being Audited – Now What?

An audit can be particularly stressful for  both employer and employees alike.  While the business  owner worries about potentially  being fined, paying exorbitant fees or worse, going to jail, dependent  workers wonder if they could lose their primary source of income should the business go under.
With so much at stake, corporation undergoing a tax audit will need to ensure they have everything on hand to make the process go as smooth as possible.

Gather all pertinent file, records  and documents –this is  the most important aspect of preparedness that cannot be stressed enough. The inability to a locate or present documents  can provide IRS agents with enough fodder to fine   you or claim criminal intent on your part.   Indeed, companies that are able to provide relevant records and books are least likely to face serious consequence after an exhaustive audit.

Do Your Home work – A little research can go a long way in not only helping you feel more secure, but in educating you on what you will need throughout the IRS auditing process. One thing that may surprise you is that the IRS aren't the big evil boogeymen they are made out to be, in fact, they   will and often do consider the fact that employees are prone to human error.  At the end of the day, only a small handful of audits result in serious  citations, fines or arrests.    With that in mind, remember that  they will and often will pursue anything they think to be grossly out to of proportion with the facts presented.

Take a Deep Breathe and – Relax! – The last thing you want to do is raise suspicions that  you have something to hide by acting overly worried. That is not to say pretend everything is A-Okay—just don't get super worked up. Stressing over the matter won't help things anyway, as the best way to ensure you  are going to “beat the system”   is to  do everything in your power  to legally increase the odds of a positive outcome. Seeking the advice of  a well respected accounting firm like GBC Tax Services of Atlanta is one way to  do this.  By outsourcing, you can  go over what needs to be done prior to the IRS agency visit. You  will also be better equipped to ferret out potential problem and solutions before the big day arrives.  In any case, it is always wise to go with  proven experts in the field of accounting  so you know you  you'll be ready when the Tax man comes a-calling.

Once you’ve decided on an expert CPA,  you can have them represent you or be a  part of the process alongside you. In either case, it makes more sense to have a proven and trusted CPA at your side who will help you protect everything you're carefully built. They can also  help you  if you don't like the IRS determination, by taking your case to  tax court on appeal.

But no matter the outcome, it literally pays to do your homework.  Avoid  common business  pitfalls that  lead to  a  negative result after Internal Revenue evaluation by being  proactive on your own behalf. It is the only way to win at life as well as beat tax audits.

READ MORE GBC Tax Services Website
For All Your Accounting Needs Call GBC 678-366-9232

Wednesday, June 15, 2016

What Home Businesses Need to Know About Auditing

Learn What You Can Do To Beat An IRS Audit

The factors that contribute to home business complications primarily concern keeping adequate, substantial records that indicate the influx of money alongside reasonable deductions that won't get you flagged for an audit.

Operating a  small business  can be  productive and exhilarating, but such proprietors  face a bevy of  issues that are unique to  “mom and pop” establishments. Add to this the fact that the company is operating from your home and things get even trickier. 

For instance, writing off  an off-site office as a business expense is a no brainer, as  one can establish the need to pay rent,  electricity, water and any other related  employee housing disbursement.  When it comes to  a home office however, you have to detail, with all due precision, the increments in which one uses things such as  supplies, water, lights,  and even the internet for business related purposes.  Some  may calculate erroneously and in  some cases fraudulently,  so more often than not, writing such things off can and/or  may  lead to an IRS audit.

How Would a Home Business Get Pinged for Audit?

The IRS considers and evaluates a home business  as it would any other,  while being aware of the limitations of such companies.  In other words, the criteria may remain the same but not the methodology  to factor in potential abuses or mistakes in reporting.

DIF Scoring  Rings Audit Bells   –  if there are enough red flags on your tax return, you could trigger what is known as a DIF  (Discriminatory Index Function) flag.  The DIF is a mathematical measurement that weighs  the possibility of audit based on certain income tax filing characteristics. In other words, if too much is out of whack on the form, it will trigger a high enough DIF to provoke an investigation.  This process is utilizes for all types of businesses, but can be problematic for home businesses, where certain nuances, like business expenses and home office space calculations, can be hard to assess properly.  With this being the case, even a mindful home business owner can  land themselves in IRS hot water.

Regular and Exclusive – Another issue, as discussed previously, is duly calculating the home office space, its requirements and  uses.  Getting this precisely right is important, as the IRS determines home office use in its tax audit assessments.  The evaluation  examines how  “regular” and “exclusive” office use is in relation to  home versus business life.  In order for a home office to  establish “office/ work viability” the IRS has to look at how regularly the room is used for business and how exclusively it is used for said business purposes.  For this reason, there are things one can indicate on  one's tax form that could give an agent the notion to investigate the in home set up. This would involve  making sure the small business owner  observed governmental and tax guidelines, like dedicating the space for work alone e.g. no watching Netflix and  having movie nights in the home office.

Examination of 1099 and W2's – a simple yet effective way that IRS agents can assess probable issues is by comparing  1099's or  w2's to the tax documents  themselves. This easy method of matching will tell an agent right away if there are any pertinent discrepancies in income reporting.

Beat the audit by looking for deductions – If you find yourself in the cross hairs of an IRS audit, it may very well pay to look for deductions wherever you can.  Many home business owners do  not now  for instance that they can write off things like utilities  and even business related phones calls.  If you have  relevant records on hand, they may be  able to be used to offset any taxes the IRS may calculate against you.

Locate  a Reputable  CPA – strong credentials  matter, so if your small home business is facing IRS scrutiny, contact a company like GBC Income Tax Service of Atlanta  and learn what you can do to beat the odds and increase your chances of a positive outcome.


Wednesday, February 24, 2016

Checklist to Prepare for an External Audit

An external audit will protect your
investment and keep your business.
Following is a step-by-step set of instructions intended to aid in the preparation for an external audit.

The guide can also be used for internal audits. Outlined are the planning stage, the entrance interview, fieldwork, the exit interview, and the final audit report phase.

Planning & Preparation:

  • Designate an audit liaison person within your organization who will act as the auditors’ main contact. This should be an experienced person with strong project management and communication skills.
  • Send a general communication to faculty and staff stating that if the auditors contact them directly, they should notify the liaison.
  • Have the liaison develop a list of contacts who must be kept informed of the audit progress.
  • Have the liaison develop a list of people who can provide support on technical issues and gathering documentation.
  • If necessary, schedule and conduct a general training session with individuals who may be asked to participate in the audit either to produce documents, be interviewed by the auditors or participate in findings discussions.
  • Contact auditors and set up entrance conference. Clarify the purpose of the audit and ask that audit requirements be in writing.
  • Alert the internal audit department of the upcoming audit.
  • Make necessary arrangements for the audit team – meeting rooms, preliminary interview schedule, entrance conference specifics including attendees.
Entrance Conference:

  • Develop a list of questions to discuss in the meeting including the purpose, objectives and scope of the audit; the awards to be included and sampling techniques; timelines including beginning and end of fieldwork and expected report date; and communication process.
  • Consider giving the auditor(s) a tour.
  • Determine staffing and space requirements, including whether the auditor will need internet access during fieldwork; arrange for auditor on site space; modify meeting room needs as necessary.
  • Obtain the list of requested records and develop an approach for pulling the information on a timely basis. Give a target date for providing records to the auditors.
  • Review the records prior to submission to the auditor. Consider if the records provide the necessary support. Anticipate what questions the records may provoke.
  • Maintain a list of all records provided to the auditor.
  • Meet with auditors at least weekly to learn of the status of the audit and potential issues that are identified.
  • Verify the facts on which issues are based; perform re-calculations and review source documents, if necessary.
  • Communicate at least weekly with those within the organization who need status updates.
  • Liaison should attend meetings between faculty/non-financial staff and external auditors unless the auditor or faculty insist otherwise.
  • Set up exit interview.
Exit Interview:
  • Ask for a copy of each finding or draft report prior to the interview.
  • Based on the nature of the issues, ask representatives from other groups to participate, e.g. general counsel, internal audit, office of sponsored programs, controllers office, etc.
  • Agree on valid findings; negotiate those findings where the facts are not representative of the control weakness.
  • Discuss with the auditor the disposition of the audit issue, i.e. verbal comment, report item, management letter.
  • Escalate any disputed issues to supervisors.
Audit Report:
  • Ask for the final draft report for review.
  • Draft management responses and circulate to management for approval.
  • Understand the follow-up process.
  • Perform a post-audit evaluation to determine weaknesses in the process and potential changes to approach in the future.

Wednesday, February 17, 2016

On the Effectiveness of the External Audit Process

Make the most of your annual audit.
It is important that the audit committee has an independent point of view on audit quality; assessing the effectiveness is a natural extension of the audit committee's activities.

That said, what is an effective audit?

Whilst the auditor is in large part responsible for the effectiveness of the audit process, management and the audit committee have an important influence. Their contributions should also be considered in the overall assessment of effectiveness. An effective audit truly challenges and tests the contents of the financial statements in order to form an opinion on whether they present a true and fair view. An audit must, of course, comply with all relevant auditing and ethical standards. Fundamentally, an effective audit must deliver the right audit opinion, in which shareholders have confidence. Other characteristics of an effective audit include:

  • Communications and reports to those charged with governance that reflect the audit team’s thought processes and rationale for conclusions. These should discuss management’s approach, alternatives considered, relevant comparators and a clear articulation of the final conclusion. 
  • Effective interaction with management and the audit committee throughout its performance — everyone must understand what the ‘audit issues’ are, why they are ‘issues’ and how they will be resolved.
Assessing the effectiveness of the audit process is broader than assessing the auditor. Management have a role too and their contribution should also be included in the overall assessment. With this in mind, let us explore ways to assess the effectiveness of the external audit:

*On TEAM-STRUCTURE AND LEADERSHIP demonstrated by external auditor:
  • Does the partner demonstrate leadership of the team and provide effective ownership and oversight of the audit? 
  • Do the partner(s) and manager(s) commit an appropriate amount of time to undertake the audit, to supervise staff and to meet directly with management and the audit committee? 
  • Do you agree with the audit team’s assessment of significant risk areas? 
  • Are appropriate specialists (e.g., tax, pensions, valuations etc.) involved in the audit commensurate with the complexity of issues?
*Possible sources of evidence; Indicators:
  • Feedback from management on whether the partner and key team members are available and responsive, based on interactions throughout the audit. 
  • Feedback from members of executive management most involved in the audit process, on whether the lead audit partner is actively engaged in the audit process and audit decisions and is not over-reliant on his/her team. 
  • Evidence that changes are made to the audit team in response to changing business needs as well as performance issues e.g., team strengthened to deal with a major corporate transaction. 
  • Direct experience of the audit committee and the board based on interactions with the auditor. 
  • Information from the auditor on the proportion of senior to junior time and the absolute amount of hours budgeted to be spent on the audit by senior team members. 
  • Information from the auditor on the proportion of audit effort spent addressing risk areas. 
  • Feedback and insights received by the audit committee and executive management from the involvement of specialists.
  • Is the audit team’s understanding of the business and its structure, the sector and the regulatory environment appropriately reflected in the audit approach? 
  • Is the audit approach responsive to changes in the business over time? 
  • Has the approach been challenged in the current year and if so, what has changed? 
  • Have business risks been properly considered when assessing audit risks?
*Possible sources of evidence; Indicators:
  • Evidence that senior audit team members demonstrate a good understanding of the group’s business and industry sector (e.g., from their discussions with executive and non-executive management). 
  • Communication of planning matters by the auditor to the audit committee shows scope changes that are responsive to changes in the size, risk and nature of the business. 
  • Communication of planning matters by the auditor to the audit committee shows clear understanding of the business and the risks that matter most. 
  • Audit committee’s consideration as to whether the external audit scope makes sense in the context of the areas of the business that it is concerned about. 
  • Audit approach is clearly modified year on year as appropriate. 
  • Commerciality, flexibility and innovation are apparent from the discussions with the audit team.
*On PROFESSIONAL SKEPTICISM in execution of external audit:
  • To what extent does the team demonstrate professional integrity and objectivity? Would the audit partner say ‘no’ when needed and stand by their view? 
  • Is there an appropriate degree of challenge throughout the audit? 
  • In areas of significant accounting and audit judgement, does the audit team demonstrate the robustness of their approach including the evidence considered and the rationale for the conclusions reached?
*Possible sources of evidence; Indicators:
  • Feedback from management and the audit committee on whether senior audit team members were robust when dealing with key judgments, errors, etc., whether they had conviction, were able to clearly articulate the rationale behind their position and did not unduly rely on management representations. 
  • The auditor’s communications about their independence clearly articulate the safeguards considered and applied to maintain independence and objectivity. 
  • Results of external quality reviews. 
  • Evidence from audit committee and other meetings that the audit partner challenges executive management’s view and does not just accept explanations received without corroboration. 
  • Quality and clarity of the articulation of the key audit and accounting issues. The basis for the auditor’s view is clearly explained and the audit committee understands the auditor’s thinking.
*On TECHNICAL EXCELLENCE in execution of external audit:
  • Is technical excellence visible within the team and is this appropriately demonstrated alongside commercial application? 
  • Are management and the audit committee provided with accounting, corporate governance and other technical and regulatory insights to allow them to operate effectively in a changing environment? 
  • Do the partner(s) take ownership of technical judgments and are they able to clearly articulate their point of view and reasoning behind them? 
  • To what extent are specialist technical resources used and effectively deployed in order to address difficult or unusual technical issues?
*Possible sources of evidence; Indicators:
  • Quality of analysis in communication and reports from the auditor. 
  • Feedback from members of executive management who are best placed to assess technical competence. 
  • Experience from audit committee briefings and formal meetings. 
  • Results of external quality reviews. 
  • No late surprises coming through communications. 
  • Feedback and insights received from the specialists where involved. 
  • Number of restatements and prior year adjustments.
*On COMMUNICATION AND REPORTING by the external auditor:
  • Are communications from the auditor clear and concise and does the auditor communicate a point of view where relevant? 
  • Are the communications and reports from the auditor timely so as to allow appropriate action to be taken to prevent as well as detect material misstatements in financial reporting? 
  • Are communications from the auditor specific and relevant to your company and its circumstances?
*Possible sources of evidence; Indicators:
  • Clarity and timing of reports to management and the audit committee and whether they provide insight into broader governance matters, the company’s financial reporting process and control environment rather than just accounting technical matters. 
  • Use of interim and ‘early warning’ reports in addition to communication of planning matters and findings from the audit. Feedback from management regarding communications throughout the year. 
  • No late surprises coming through communications.
*On THE ROLE OF MANAGEMENT in the external audit process:
  • Are key personnel available and accessible to the auditor when needed? 
  • Is information requested by the auditor prepared on a timely basis, complete and accurate? 
  • Are management’s papers to the auditor and audit committee on key judgments, estimates and uncertainties well researched and written i.e., articulate the issue, approach used by management and rationale, alternatives considered and a clear final conclusion and recommendation? 
  • Where possible, is management proactive in seeking early input from the auditor e.g., on complex, unusual or sensitive transactions? 
  • Does the audit timetable allow sufficient time for robust quality control and review processes to be applied by both management and the auditor? 
  • Do management act on feedback provided by the auditor on financial reporting processes, and controls?
*Possible sources of evidence; Indicators:
  • Delays in the audit process beyond the control of the auditor. 
  • Feedback from the auditor on availability and flexibility of key management personnel and timeliness and quality of information received. 
  • Feedback from the auditor and audit committee on quality of management’s papers on judgments, estimates and uncertainties and timeliness of involving the auditor. 
  • Number of audit adjustments as a result of errors in information provided. 
  • Auditor’s feedback on whether management implemented agreed upon actions from prior year management letters, assessments of the audit process or post audit debrief meetings.
Call GBC Income Tax Services today at 678-366-9232 for all your tax and IRS needs!

Wednesday, February 3, 2016

Sample Questions for Evaluating an External Auditor

Maximize the effectiveness of your
annual external audit by interaction.
Each year, audit committees should evaluate the external auditor in fulfilling their duty to make an informed recommendation to the Board whether to retain the auditor.

The evaluation should encompass an assessment of the qualifications and performance of the auditor; the quality and candor of the auditor’s communications with the audit committee and the company; and the auditor’s independence, objectivity and professional skepticism.


Did the lead engagement partner and audit team have the necessary knowledge and skills (company-specific, industry, accounting, auditing) to meet the company’s audit requirements? Were the right resources dedicated to the audit? Did the auditor seek feedback on the quality of the services provided? How did the auditor respond to feedback? Was the lead engagement partner accessible to the audit committee and company management? Did he/she devote sufficient attention and leadership to the audit?

Did the lead engagement partner discuss the audit plan and how it addressed company/industry-specific areas of accounting and audit risk (including fraud risk) with the audit committee? Did the lead engagement partner identify the appropriate risks in planning the audit? Did the lead engagement partner discuss any risks of fraud in the financial statement that were factored into the audit plan?

If portions of the audit were performed by other teams in various domestic locations, or abroad by the firm’s global network or other audit firms, did the lead engagement partner provide information about the technical skills, experience and professional objectivity of those auditors? Did the lead engagement partner explain how he/she exercises quality control over those auditors?

During the audit, did the auditor meet the agreed upon performance criteria, such as the engagement letter and audit scope? Did the auditor adjust the audit plan to respond to changing risks and circumstances? Did the audit committee understand the changes and agree that they were appropriate?

Did the lead engagement partner advise the audit committee of the results of consultations with the firm’s national professional practice office or other technical resources on accounting or auditing matters? Were such consultations executed in a timely and transparent manner?

If the company’s audit was subject to inspection by the PCAOB or other regulators, did the auditor advise the audit committee of the selection of the audit, findings, and the impact, if any, on the audit results in a timely manner? Did the auditor communicate the results of the firm’s inspection more generally, such as findings regarding companies in similar industries with similar accounting/audit issues that may be pertinent to the company? Did the auditor explain how the firm planned to respond to the inspection findings and to internal findings regarding its quality control program?

Was the cost of the audit reasonable and sufficient for the size, complexity and risks of the company? Were the reasons for any changes to cost (e.g., change in scope of work) communicated to the audit committee? Did the audit committee agree with the reasons?

Does the audit firm have the necessary industry experience, specialized expertise in the company’s critical accounting policies, and geographical reach required to continue to serve the company?

Did the audit engagement team have sufficient access to specialized expertise during the audit? Were additional resources dedicated to the audit as necessary to complete work in a timely manner?

Did the audit engagement partner maintain a professional and open dialogue with the audit committee and audit committee chair? Were discussions frank and complete? Was the audit engagement partner able to explain accounting and auditing issues in an understandable manner?

Did the auditor adequately discuss the quality of the company’s financial reporting, including the reasonableness of accounting estimates and judgments? Did the auditor discuss how the company’s accounting policies compare with industry trends and leading practices?

In executive sessions, did the auditor discuss sensitive issues candidly and professionally (e.g., his/her views on, including any concerns about, management’s reporting processes; internal control over financial reporting (e.g., internal whistle blower policy); the quality of the company’s financial management team)? Did the audit engagement partner promptly alert the audit committee if he/she did not receive sufficient cooperation?

Did the auditor ensure that the audit committee was informed of current developments in accounting principles and auditing standards relevant to the company’s financial statements and the potential impact on the audit?

Did the audit firm report to the audit committee all matters that might reasonably be thought to bear on the firm’s independence, including exceptions to its compliance with independence requirements? Did the audit firm discuss safeguards in place to detect independence issues?

Were there any significant differences in views between management and the auditor? If so, did the auditor present a clear point of view on accounting issues where management's initial perspective differed? Was the process of reconciling views achieved in a timely and professional manner?

If the auditor is placing reliance on management and internal audit testing, did the audit committee agree with the extent of such reliance? Were there any significant differences in views between the internal auditors and the auditor? If so, were they resolved in a professional manner?

In obtaining pre-approval from the audit committee for all non-audit services, did the lead engagement partner discuss safeguards in place to protect the independence, objectivity and professional skepticism of the auditor?

Furthermore, another good way to get well-rounded feedback is to provide a simple questionnaire to the rest of the company staff in order for them to rate their experience. 

Here therefore, is a guide, divided into sections, to help:



  • Meets commitments e.g., by meeting agreed upon performance delivery dates, being available and accessible to management and the audit committee.
  • Is responsive and communicative e.g., by soliciting input relative to business risks or issues that might impact the audit plan, identifying and resolving issues in a timely fashion, and adapting to changing risks quickly.
  • Proactively identifies opportunities and risks e.g., by anticipating and providing insights and approaches for potential business issues, bringing appropriate expertise to bear, and by identifying meaningful alternatives and discussing their impacts.
  • Delivers value for money e.g., by charging fees that fairly reflect the cost of the services provided, and being thoughtful about ways to achieve a cost-effective quality audit.


  • Is technically competent and able to translate knowledge into practice e.g., by delivering quality services within the scope of the engagement, using technical knowledge and independent judgment to provide realistic analysis of issues, and providing appropriate levels of competence across the team.
  • Understands our business and our industry e.g., by demonstrating an understanding of our specific business risks, processes, systems and operations, by sharing relevant industry experience, and by providing access to firm experts on industry and technical matters.
  • Assigned sufficient resources to complete work in a timely manner e.g., by providing access to specialized expertise during the audit and assigning additional resources to the audit as necessary to complete work in a timely manner.


  • Communicates effectively e.g., by maintaining appropriate levels of contact/dialogue throughout the year, effectively communicating verbally and in writing, being constructive and respectful in all interactions, and providing timely and informative communications about accounting and other relevant developments.
  • Communicates about matters affecting the firm or its reputation e.g., by advising us on significant matters pertaining to the firm while respecting the confidentiality of other clients’ information, and complying with professional standards and legal requirements, including informing us when the company’s audit is subject to inspection by the PCAOB or other regulatory review and sharing the results of the review that are pertinent to the company’s accounting or auditing issues.


  • Demonstrates integrity and objectivity e.g., by maintaining a respectful but questioning approach throughout the audit, proactively raising important issues to appropriate levels of the organization until resolution is reached, and articulating a point of view on issues.
  • Demonstrates independence e.g., by proactively discussing independence matters and reporting exceptions to its compliance with independence requirements.
  • Is forthright in dealing with difficult situations e.g., by proactively identifying, communicating and resolving technical issues, raising important issues to appropriate levels in the organization, and by handling sensitive issues constructively.

Wednesday, January 27, 2016

Help the Success of the External Audit by Educating Your Professional Team on the Characteristics of Skepticism.

Expect your external auditors to
embrace a professional level of
skepticism in order to succeed.
Skepticism is integral to the conduct of external auditors. But the exercise of skepticism should not be limited to external auditors. Even if not codified in law or regulation, deterrence and detection of financial reporting fraud requires all participants in the financial reporting supply chain to exercise skepticism.

Skepticism is a questioning mindset, and it requires an understanding that even the best organizations can be susceptible to fraud. Management, audit committees, and internal auditors, at a minimum, should take a “trust but verify” approach with systems, methods, and communications rather than accept critical information at face value.

Skepticism is not an end in itself and is not meant to encourage a hostile atmosphere or micromanagement. The word skepticism, in fact, comes from the Greek word skeptikos, which means “inquiring” or “reflective.”

Is skepticism a set of personality traits, or is it a learned skill? The short answer is both. We will consider skepticism as an individual characteristic, albeit with multiple dimensions, listed as follows:

  • Questioning mind—A disposition to inquiry, with some sense of doubt
  • Suspension of judgment—Withholding judgment until appropriate evidence is obtained
  • Search for knowledge—A desire to investigate beyond the obvious, with a desire to corroborate
  • Interpersonal understanding— Recognition that people’s motivations and perceptions can lead them to provide biased or misleading information
  • Autonomy—The self-direction, moral independence, and conviction to decide for oneself, rather than accepting the claims of others
  • Self-esteem—The self-confidence to resist persuasion and to challenge assumptions or conclusions
READ MORE>> The Fraud-Resistant Organization


Wednesday, January 20, 2016

Creating a Fraud-Resistant Culture in Your Business; the Importance of Skepticism

Skepticism is discouraged in some
cultures around the globe,
 particularly when it means
 challenging superiors within an
 organization. When dealing
internationally, training and
education can lessen the
gravity of this reluctance.
In an age of complex accounting in an increasingly global economy, the entire financial reporting supply chain must participate in deterring and detecting financial reporting fraud.

The effort begins with a tone at the top that promotes an ethical culture, a tone set by the CEO and management, reinforced by boards, audit committees, and internal auditors, and enhanced with the knowledge and presence of external auditors

The effort requires the exercise of healthy skepticism up and down the financial reporting supply chain. Ultimately, it is the responsibility of all the players in an organization to know their roles in delivering high-quality financial reporting, to be part of the financial reporting supply chain’s “deep defense” in deterring and detecting financial reporting fraud, and to perform those roles to the best of their abilities.

To effectively conduct an audit of an organization’s financial statements, an external auditor should have a thorough understanding of an organization and its industry to evaluate whether the results suggest that a fraud risk exists. The external auditor should know how to assess fraud risk, including the risk of management override of controls, and how to respond to identified risks. In accounts or assertions with lower risk of material misstatement, less evidence and documentation may be required, while accounts or assertions where higher risk factors are present demand more rigorous examination of evidence.

What is most helpful to aid the external audit is to train staff to use characteristics of skepticism. While some individuals are more naturally disposed toward skepticism, research shows that individuals can be trained to employ professional skepticism.

What is skepticism?

Throughout the audit process, auditing standards call for external auditors to exercise professional skepticism, defined by the auditing standards as “an attitude that includes a questioning mind and a critical assessment of audit evidence.” External auditors are required by professional standards to be alert for information that suggests material errors in the financial misstatements, and must exercise skepticism when considering the possibility that there may be a material misstatement of the financials due to fraud. External auditors must also apply professional skepticism when they consider the risk that management may override internal controls, and take that risk into account when formulating judgments about the nature and extent of audit testing.

PCAOB’s Practice Alert No. 10 Maintaining and Applying Professional Skepticism in Audits, reminds auditors of their obligation to exercise professional skepticism throughout the audit, and suggests skepticism is “particularly important” in the following circumstances:

  • Significant management judgments 
  • Transactions outside the normal course of business, such as nonrecurring reserves, financing transactions, and related-party transactions that might be motivated solely, or in large measure, by an expected or desired accounting outcome 
  • The auditor’s consideration of fraud 

To properly exercise skepticism, in addition to diligently pursuing sufficient appropriate audit evidence, an external auditor can employ effective interview and inquiry techniques, including how to evaluate nonverbal communications. 

External auditors also should be familiar with judgment biases and other threats to skepticism. 

Cognitive biases have their place. Without them, decisions can fall victim to the inefficiency of “analysis paralysis.” However, when not kept in check, judgment biases can lead to bad decisions and to overlooking possible indications of fraud. A delicate balance is required. The first step in striking that balance is awareness.

What are some common threats to skepticism?

There is research that identifies threats to professional skepticism and ways in which such threats can be mitigated. One threat is a lack of vigilance about possible sources of bias in judgment. While everyone uses shortcuts to facilitate forming judgments or making decisions, it is important to be aware of the potential for cognitive shortcuts that can lead to poor decisions. When an individual fails to notice financial reporting irregularities, it could be because he or she fell into one of the several common judgment trapsFollowing is a list of 4 most common judgment tendencies with strategies suggested to help avoid these and mitigate bias:

  1. Confirmation: The tendency to put more weight on information that is consistent with initial beliefs or preferences.
    Solution: *Make the opposing case and consider alternative explanations. *Consider potentially disconfirming or conflicting information.
  2. Overconfidence: The tendency to overestimate one’s own ability to perform tasks or to make accurate assessments of risks or other judgments and decisions.
    Solution: *Challenge opinions and experts. *Challenge underlying assumptions.
  3. Anchoring: The tendency to make assessments by starting from an initial value and then adjusting insufficiently away from that initial value.
    Solution: *Solicit input from others. *Consider management bias, including the potential for fraud or material misstatements.
  4. Availability: The tendency to consider information that is easily retrievable or what’s easily accessible as being more likely or more relevant.
    Solution: *Consider why something comes to mind. *Obtain and consider objective data. *Consult with others and make the opposing case. 
Judgment biases are not the only threat to the exercise of skepticism. Threats exist at every level of the financial reporting supply chain. For example, the individual might face deadline pressure, pressure to please one’s boss or client, or lack of experience in significant accounting estimates. These threats can be mitigated, but the first step is clear-eyed acknowledgment that the threats exist. Understanding the importance of skepticism is a vital part of ensure the success of both the internal and external audits.

The role and responsibility of the external auditor defined:

The primary responsibility of the independent external auditor is to provide an opinion on an organization’s annual financial statements. The opinion is intended to provide reasonable assurance that the financial statements are presented fairly in all material respects. Most large companies (i.e., those with over $75 million in public float), are also required to have their external auditor report on the effectiveness of the company’s internal control over financial reporting. External auditors are engaged by, and report directly to, the audit committee, but they often have contact across many parts of an organization’s operations, and can garner valuable insights not only about controls, but also about an organization’s culture. In addition, their work across multiple companies endows external auditors with useful perspectives.

Professional standards require the external auditor in a financial statement audit to understand the company’s system of internal control as part of the audit planning process. This understanding includes consideration of the tone at the top and overall corporate culture, and incentives or pressures that may impel fraudulent financial reporting. The auditor considers factors such as management’s philosophy and operating style (including the integrity and ethical values practiced by management), the company’s commitment to competence, the effectiveness of the board and audit committee’s oversight, and the company’s human resource policies and practices (including compensation arrangements). All of these factors contribute to the auditor’s risk assessment of the company.


The more an external auditor engages, and engages effectively, with various members of management throughout an organization, the better the audit design and results. In obtaining information, face-to-face meetings encourage open discussion and the opportunity to assess nonverbal communications. Early in the engagement, auditing standards require the external auditor to brainstorm about possible fraud risks. Topics for brainstorming include:
  • How and where the engagement team believes a company’s financial statements could be susceptible to material misstatement due to fraud
  • How management could perpetrate and conceal fraudulent financial reporting
  • How assets of the company could be misappropriated
  • The importance of maintaining the proper state of mind throughout the audit regarding the potential for material misstatement due to fraud
Other factors that the external auditor may consider as part of its risk assessment include the following:
  • Communications and training programs, including the tools that help each level of management reinforce the desired messages with its direct reports
  • Incentives or pressures that may exist for management to engage in fraudulent financial reporting
  • Management’s fraud risk assessment and results of testing of internal controls
The board and audit committee can leverage the external auditor’s fraud risk assessment to ask questions of management.

Transparent, open, two-way communications between the external auditor and the audit committee are vital, and is it is necessary for all parties involved to employ an attitude of skepticism.

READ MORE>> The Fraud-Resistant Organization

Call GBC Income Tax Services today at 678-366-9232 for all your tax and IRS needs!


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