Audit Techniques, Audit Preparation and Audit Efficiencies for Small and

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1 Audit Techniques, Audit Preparation and Audit Efficiencies for Small and M di Medium E Enterprises t i (SME (SMEs)) March 26 26, 2014

Although the presentation and related materials have been carefully prepared, neither the presentation authors, firm, nor any persons involved in

2 Although the presentation and related materials have been carefully prepared, neither the presentation authors, firm, nor any persons involved in the preparation and/or instruction of the materials accepts any legal responsibility for its contents or for any consequences arising from its use.

3 Public Accounting Firms- audit pricing, audit teams and audit timing Audit techniques for SME Audit schedules and working paper preparation Tax update

4 Audit Pricing, Audit Teams and Audit Timing

5 Audit quotes and invoices are typically based on the # of hrs x charge out rate The more prepared you are for your audit engagement g the less time it should take for the audit to be completed and overall less costs for you the client

6 Engagement partner person in charge of audit Engagement manager typically does the detail review of the audit, will be on site periodically Audit staff members will vary depending on size but can consist of junior to senior staff members

7 Tax Partner complete the tax review of your T2, Registered Charity Return, Not-For-Profit Information Return, etc. Other members a second partner to review the Financial Statements and Financial Statement disclosures a second partner to review the high risk parts of the file advisory partner

and tests File clean up and completion at Public Accounting Firm s

8 Audit planning - completed prior to start of audit Fieldwork the time the audit team is at the client s premises conducting audit procedures and tests File clean up and completion at Public Accounting Firm s office Various reviews of the audit Quality Control Process Control Process

10 What is Materiality? Term used to reflect a dollar amount, which would influence the economic decisions i of users of the financial statements Types of materiality: Overall materiality Performance materiality Specific materiality

12 Determined in the planning stage but must be monitored to determine if it is still relevant throughout the audit process. Based on professional judgement A percentage is often applied to choose a benchmark.

13 General benchmarks: Profit-oriented 5% of Income before tax from continuing operations ½ to 2% of gross revenues Not-for-profit ½t to 2% of ftotal t revenue or expenses

14 Risk of Material Misstatement (RMM) The risk that the financial statements are materially misstated prior to the start of any audit work. Two components of RMM (1) Inherent Risk (2) Control Risk

15 Auditor is not looking for fraud, but must maintain professional skepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist. The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.

16 The way to discover fraudulent activity is to identify warning signs (such as patterns, oddities and exceptions) and then follow the trail. An immaterial amount (such as an inflated expense claim) should not be ignored. It may well be indicative of a larger issue.

18 There are two main types of audit procedures: Substantive procedure (i) Tests of details (of classes of transactions, account balances, and disclosures); and (ii) Substantive analytical procedures. Test of controls An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.

The application of audit procedures to less

provide the auditor with a reasonable basis

19 The application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population.

20 The reliability of audit evidence is influenced by its source, its nature and the individual circumstances cu ces under which it is obtained. Obtaining a written confirmation directly from an independent source can often be more reliable than evidence generated internally by the entity.

21 Common uses of confirmations: Accounts receivable balances. Bank balances or debt. Loans and advances receivable. Inventory held by third parties. Interest rates. Estimates (litigation settlements, etc.). Terms of agreements, contracts.

22 Things to consider and do

23 Communicate with your auditors contact them if they have not contacted you Before the start of the audit communicate any changes or significant events during the year Request a list of schedules that you can prepare to assist with the audit Ask for the materiality level that the auditors are using

24 If the auditors will be using sampling ask for the list in advance of the audit so you can prepare information Trial balance - a final trial balance should be provided to your auditor; If this is not possible and you discover adjustments needed afterwards post entries and provide to your auditor.

25 Auditor s responsibility Obtain an understanding of internal controls Components of internal controls Control environment Risk assessment Information systems Control activities Monitoring

26 What you can do to help... Prepare/update p systems/process documentation How auditors use the documentation Identify controls Evaluate design Evidence implementation

27 Types of controls Preventive (stronger) Detective (weaker)

28 Bank/Cash Bank reconciliations Agree to the G.L. Review old/unusual items and adjust if necessary Cut off Transactions recorded in the correct period Provide subsequent G.L. detail

29 Accounts Receivable Confirmations Not necessary but is strong evidence Types of confirmations Positive Negative Other A/R working papers Aged summary agreed to the G.L. Allowance for doubtful accounts support Analytical (ratios) Translation of foreign balances

30 Accounts Payable Confirmations Again, not necessary but strong evidence Other A/P working papers Other A/P working papers Aged summary agreed to the G.L. Segregate related party balances Analytical (ratios) Translation of foreign balances

31 Government payables Sales tax reasonability Agree G.L. balance to subsequent payment/receipt

32 Inventory Summary of composition i of inventory Memo outlining inventory count procedures, count date, costing methods Obsolete/slow moving inventory Inventory in transit/consignment

33 Capital assets Capitalization policy Continuity schedule and amortization calculation Additions of fixed assets with backup Amortization rates are in accordance with FS Review of R&M and office accounts Indicate if there were fixed assets disposed, idle, held for resale or in progress

34 Income Tax Copies of all notice of assessments/reassessments Instalment t l t summary Detailed general ledger printouts Identify y Schedule 1 add-backs Meals & entertainment 50% deductible Life insurance Non-deductible interest Non-deductible club dues and fees Car leases ($800+HST)

35 Long-term debt Consider financing vs. capital vs. operating leases Provide a loan amortization table Agree to the trial balance accounts (closing principal, interest expense) Long-term t vs. current portion correctly classified Provide a copy of the loan document Terms agree to the loan amortization table Covenants and loan security is disclosed are you offside? Auditor may request a bank/creditor confirmation

36 Related party balances and transactions Reconciliations of related entity accounts Calculations supporting amounts of related party transactions Support for inter-fund charges/allocations Signed confirmation letters from the related party

37 Marketable securities Accounting policy Schedules agreed to the trial balance Long-term vs. current classification Segregated income by type Eligible dividends vs. interest Realized vs. unrealized gains Cut-off accrued interest and dividends

38 Retained earnings / Net assets Does the Opening R.E./N.A. Agree to last year s issued financial statements? If not: Have all of auditor s entries been posted? Does the Trial Balance provided to the auditor last year agree to the pre-adjustment Trial Balance per system? Were any adjustments posted directly to R.E. or fund balances?

39 Revenue Analytics Why is revenue what it is compared to the prior year? How does it compare to the budget Were management s / Directors expectations met What are main reasons for the increase/decrease? Market / industry trends Geographic Seasonal / cyclical New or lost customers / clients New lines of business / government programs ForEx affect Auditors may need to discuss details with V.P. Sales/E.D./Program Manager

40 Revenue cont.. Analytics cont... What is the Gross Margin as compared to the prior year and why? GM% by product line GM% by geographic location ForEx fluctuations Capacity constraints / utilization Industry statistics / averages Auditors may need to discuss details with V.P. Sales/E.D./Program Manager

41 Revenue cont.. Existence Is the revenue recognition policy applied consistently? Are unusual sales terms handled correctly: Consignment inventory Layaway sales Is ForEx recorded at the date of transaction correctly? Completeness When are invoices generated for shipped goods? Access to first and last invoices / shipping documents around the year-end Consider open contracts o/s at year-end any revenue to recognize? Listing of contracts active at year-end Access to subsequent bank statements

42 Revenue cont.. Valuation Are estimates reasonable? Percentage of completion contracts Milestone-based contracts Significant returns Avoid being overly conservative GAAP requires most reasonable estimate, not most conservative Disclosure Revenue recognition policy Foreign exchange translation policy Economic dependence Government e e t assistance sta (for-profit po tentities) ttes)

43 Expenses other than COGS Salary and benefits Calendar year end T4 reconciliation (T4 Summary to G.L. accounts) Non-Calendar year-end prepare p a T4 reconciliation adjusting for timing differences Agree G.L. accounts to payroll provider reports. A list of hires and terminations in the year and material changes in salaries given to staff Benefits as a % of salary, trend analysis

44 Expenses other than COGS Legal Vouch and examine 100% of legal invoices Discuss nature of invoices i Prepare and send legal letter describing any outstanding claims to corporate lawyers

45 Expenses other than COGS Repairs, maintenance, office, computer Review G.L. details for large amounts that should potentially be capitalized Discuss any large amounts with you Agree to supporting invoices

46 All Other Expenses Review for major, unexpected fluctuations and variations comparing the past 3 to 5 years (i.e trend analysis) Compare actual expenses to budget (if one is prepared) Relate expenses to other sections of the audit for example insurance with prepaids, interest expenses with debt, etc. Review contracts and agreements such as premise lease contract and agree to G.L., etc

47 File clean-up Expect follow-up questions Subsequent events discussion Track any events which is unusual, large or relevant to the current year-end Litigationi i Large contracts New commitments Loss of business New competitors Natural disasters

50 Date ABC Limited 200 Nowhere Street Toronto, ON M1T 3F6 Attention: Mr. Smith Dear Mr. Smith: Re: ABC Limited Year Ended December 31, 2013 Please find listed below schedules and/or work that we require for our year-end 2013 audit fieldwork. Electronic copies of the schedules in Excel or PDF format are preferable. Please contact us to clarify any items or if you require any additional support. Balance Sheet Cash - Bank reconciliations (all accounts); including detail of outstanding cheques and deposits at December 31, 2013, with bank statements for December 2013; - Listing of any cheques issued at year-end but not released until January 2014; - Listing of all disbursements (cheques and wire transfers) for the month of January 2014; - Listing of new bank accounts; - Copies of new, amended or updated credit facility agreements, including calculation of any financial covenants as of December 31, Accounts Receivable - Accounts receivable (A/R) listing as at December 31, 2013 reconciled to Trial Balance accounts. Please forward A/R listing to Adams & Miles as soon as possible for us to make an A/R confirmation sample. - Listing of doubtful accounts (not yet written off) reconciled to the allowance for doubtful accounts amount recorded as of December 31, 2013 and explanations of their statuses; - Listing of the last? shipments of goods to customer in 2013 and the first? shipments in 2014, including invoice number, date, amount and shipping date; - Summary of outstanding HST balances payable/receivable reconciled to the balance in account # HST as of December 31, 2013; - Listing of all receipts (deposited cheques and wire transfers) for the month of January and February Inventory - Detailed and summary listings of inventory on-hand, stored off-site, and in-transit at December 31, 2013, including descriptions, quantities and costs; - A report reconciling for any activity (production, sales, purchases) between the completion of the physical count on December 30, 2013 and December 31, 2013; /2 adamsmiles.com For Illustrative Purposes Only

51 - 2 - Inventory (cont d) - Inventory summary at December 31, 2013; - Finished goods costing details for a sample of F.G. parts; - Official price listings as of December 31, 2013 for the F.G. parts selected above; - WIP costing details for a sample of WIP parts; - Summary of any inventory held on-site at December 31, 2013 which was not owned by ABC Limited; - A listing of inventory on consignment at customer s premises at December 31, 2013, ensuring it is carried at cost; - List of the? last purchase orders in December 2013 and the first? in January 2014, including photocopies of shipping documents and/or invoice showing shipment terms and delivery dates; Prepaids - Summary of balances included in prepaid expenses as of December 31, 2013 with supporting documentation. Capital Assets - Capital assets continuity for each capital asset account, showing additions, dispositions and calculation of amortization expenses, with a reconciliation of amortization expense calculated to the amount recorded in Trial Balance as of December 31, 2013; - List of capital assets under construction or not in use as of December 31, 2013; - Documentation on any new lease agreements entered during the year, with supporting documentation on operating vs. capital accounting treatment decision; - G.L. details for maintenance, office and computer expense for 2013 with descriptions of any items over $XX noting whether such items are expenses vs. capital in nature. Accounts Payable - Aged account payable (A/P) listings by vendor at December 31, 2013, reconciled to Trial Balance accounts. Please forward A/P listing to Adams & Miles as soon as possible for us to make an A/P confirmation sample; - Support for foreign exchange on Accounts Payable balance recorded as of December 31, 2013; - Copies of government filings - employer remittances, HST and QST reconciled to the general ledger balances; - December 2013 HST filing including a calculation of Restricted ITC s; - Breakdown of other accrued expenses accounts, including supporting calculations: - Accrued vacation pay (including salaried and hourly employees); - Accrued payroll liability / payroll clearing / source deductions payable; - Accrued other. Taxes - General Ledger details for income tax expense and liabilities accounts for the year; - Total meals and entertainment expense for the year; - Summary of interest and penalties on government remittances, if applicable. /3 adamsmiles.com For Illustrative Purposes Only

52 - 3 - Long-term Debt - Copies of all new debt agreements entered into during the year and schedules of repayments; - Amortization schedule for Equipment loan reconciled to the loan balance recorded in Trial Balance as at December 31, Related Party Accounts - Detailed schedules of the outstanding balances due to/from related parties reconciled to the G.L. account balances as at December 31, Summary of all transactions with related parties in the year (revenue and expenses). - Indicate if any of the activity with related parties in the year relate to capital assets items. Income Statement - Listing of sales by customer (in $ terms) for 2013; - Access to copies of all major sales contracts (if any) entered into by ABC Limited in 2013; - Reconciliation of calculated commission expense for 2013 to the amount recorded in the Trial Balance; - Description of any purchase commitments entered into by ABC Limited in 2013; - A schedule reconciling the 2013 T4 Summary gross earnings to the account(s) in the Trial Balance; - Listing of 2013 hires and terminations (excluding temporary employees), including month of hire/termination; - Summary of professional fees and legal fee expense account by vendor; - A brief explanation/analysis of changes over $XX from prior year in individual expense accounts (excluding Cost of Sales and Salary/benefits accounts). - Other - A copy of the trial balance dated December 31, ed to Adams & Miles by?; - General Ledger detail for year ended December 31, 2013 in Excel format, if available; - Ensure that all monetary assets and liabilities (cash, bank indebtedness, A/R, A/P, related party balances and loans, etc.) held in foreign currencies are translated into Canadian dollars at Bank of Canada closing rates for December 31, 2013; - Copies of all resolutions and minutes of shareholder meetings in the year and listing of all Directors meetings held during the year; - Listing of lawyers used in the year and description of claims, if any, against ABC Limited. Your assistance in the preparation of the above-mentioned schedules will greatly assist us in completing all work within the time and budget agreed upon. If you have any questions, please do not hesitate to contact our office. Yours truly, Adams & Miles LLP adamsmiles.com For Illustrative Purposes Only

53 ABC Manufacturing Limited Capital assets continuity For Year Ended December 31, 2013 COST ACCUMULATED AMORTIZATION NET BOOK VALUE OPENING ENDING OPENING ENDING DESCRIPTION BALANCE ADDITIONS ADJ'MTS DISPOSALS BALANCE RATE BALANCE ADJ'MTS AMORT BALANCE Land 198, , , , Building 1,573, ,573, % 228, , , ,331, ,344, Renovations Internal 112, , , % 13, , , , , Funders % , , , , , , , , Computers Internal , , yrs 23, , , , , , yrs 28, , , , , Funders , , yrs 38, , , , , yrs 3, , , , , , , yrs 4, , , , , , , yrs - 7, , , , , , , , , , , Furniture and Fixtures 49, , , % 29, , , , , Leasehold Improvements Internal , , yrs 5, , , , , Funded , , yrs 143, , , , , , , yrs 23, , , , , , , yrs 4, , , , , , , , , , , Software Licence 25, , , , ,554, , ,743, , , , ,036, ,008, adamsmiles.com For Illustrative Purposes Only

54 ABC Manufacturing Limited Bank Loan Payable Schedule For Year Ended December 31, 2013 Monthly Payment 18, Number Monthly Payments 84 Annual Interest Rate 3.250% Monthly interest rate 0.271% PAYMENT Remaining Date Amount Interest Principal Balance 84 1,364, /09/12 18, , ,345, /09/12 18, , , ,331, /09/12 18, , , ,316, /10/12 18, , , ,302, /10/12 18, , , ,287, /11/12 18, , , ,273, Current portion 108, , , /11/13 18, , , ,258, /11/13 18, , , ,243, /14/13 18, , , ,228, /14/13 18, , , ,214, /15/13 18, , , ,199, /15/13 18, , , ,184, /16/13 18, , , ,169, /16/13 18, , , ,154, /16/13 18, , , ,139, /17/13 18, , , ,124, /17/13 18, , , ,109, /09/13 18, , , ,094, TOTAL , , $ 178, Account /09/14 18, , , ,079, /09/14 18, , , ,063, /12/14 18, , , ,048, /12/14 18, , , ,033, /13/14 18, , , ,018, /13/14 18, , , ,002, /14/14 18, , , , /14/14 18, , , , /14/14 18, , , , /15/14 18, , , , /09/14 18, , , , /09/15 18, , , , TOTAL , $ 184, /09/15 18, , , , /12/15 18, , , , /12/15 18, , , , /13/15 18, , , , /13/15 18, , , , /14/15 18, , , , /14/15 18, , , , /14/15 18, , , , /15/15 18, , , , /15/15 18, , , , /16/15 18, , , , /09/16 18, , , , TOTAL , $ 190, Total loan oustanding 2 1,094, Account 2950 As at December 31, 2013 Less: Current portion 3 $ 184, Account 2960 Total Loan Payble $ 909, Amount per GL $ 909, $ (0.53) adamsmiles.com For Illustrative Purposes Only

55 ABC Manufacturing Limited Due from ABC Wholesale Reconciliation For Year Ended December 31, 2013 Account 3450 Due from ABC Wholesale Limited Dec.31/ , Reconciliation - activities Dec.31-Mar : Overhead charge-back to ABC Wholesale 15, Sales to ABC Wholesale 25, Payments received from ABC Wholesale - 35, Calculated balance as of Mar , Per ABC's books Mar , diff 3, Credit memo dated Mar. 15, not yet approved by management of ABC Manufacturing as of Mar.26/2014. adamsmiles.com For Illustrative Purposes Only

56 ABC Manufacturing Limited T4 Reconciliation For the Year Ended December 31, 2013 Y-E Accruals/ Payroll Paid Reversals not Date Description G.L. a/c # Thru Ceridian in Ceridian Total per GL Difference 12/31/13 Salaries (incl. Bonus paid during year) 6650 $325, , $337, $ /31/13 Year-end Bonus 6651 $24, $24, $ /31/13 Vacation Pay 6652 $11, $11, $0.00 Balance per Ceridian T4 Recap $337, /31/13 Employer CPP 6653 $10, $10, $0.00 Employee CPP $10, N/A 12/31/13 Employer E.I $6, $6, $0.00 Employee EI $4, N/A Income tax deducted 103, N/A Balance per CRA Statement of Account $134, adamsmiles.com For Illustrative Purposes Only

Piotr Pyziak, Consultant, CFRR

Piotr Pyziak, Consultant, CFRR 16 March 2017, Vienna Audit Training of Trainers Road to Europe: Program of Accounting Reform and Institutional Strengthening EU-REPARIS is funded by the European Union and