Organizations that understand how auditors verify account balances and transactions can minimize disruptions during audit fieldwork and maximize the effectiveness of financial statement audits. Here’s a summary of the types of “substantive evidence” auditors gather to help them form opinions regarding your financial statements.

Original source documents

Auditors can verify an account balance or record by vouching (or comparing) it to third-party documentation. For example, an auditor might verify the existence of a machine on your company’s fixed asset register by reviewing the invoice from the seller. Vouching enables an auditor to evaluate the accuracy of the amount recorded and whether the transaction was entered correctly in the accounting system.

Physical observations

Seeing is believing. Auditors sometimes verify the existence of assets through physical observations and inspections. For example, inventory audit procedures typically include observing or conducting a physical inventory count, inspecting the process to record incoming and outgoing inventory, and analyzing the inventory obsolescence process.

Confirmation letters

Auditors send letters to third parties — such as customers, banks or vendors — asking them to verify amounts recorded in a company’s books. There are two types of confirmations: A positive confirmation requests that the recipient complete a form confirming account balances (for example, how much a customer owes the company). A negative confirmation requests that the recipient respond only if the balance is inaccurate.

Comparisons to external market data

For assets actively traded on the open market, auditors may research pricing data to confirm the amounts claimed on the company’s financial statements. For example, if a company invests in marketable securities that it plans to sell within the year, the auditor could analyze the prevailing market prices to confirm their book value. Likewise, a random sample of parts inventory could be compared to online pricing sheets to confirm that items are reported at the lower of cost or market value.

Independent calculations

Auditors may verify internally prepared schedules and reports by re-creating them. If the auditor’s work matches the client’s version, it confirms that the underlying accounts appear reasonable. Auditors often rely on this procedure for such items as bank reconciliations and schedules of payroll-related expenses (for example, overtime, benefits and tax payments).

Collaboration is critical

An effective audit requires coordination between the audit team and the client. As we wrap up the audit of your 2022 financials, let’s work together to review the types of substantive evidence that were used for each major financial statement category. Contact us here. This process can identify potential bottlenecks in the auditing process and help you anticipate document requests and inquiries, making your next audit more efficient.

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QuickBooks® provides an all-in-one solution that helps some small and medium-sized businesses manage their finances. While QuickBooks provides the accounting backbone for many companies, it has advanced features that go beyond basic bookkeeping tasks.

For example, the time-tracking functionality in QuickBooks captures the hours spent on a specific project and makes it easier to bill clients in real-time. Additionally, third-party data feeds and integrations can reduce your administrative burden.

Here’s an overview of the platform’s lesser-known capabilities:

Mobile app. You can download an app for smartphones and tablets to access your financial data anywhere, anytime. This feature allows you to track your business finances in real-time and quickly pivot as needed.

Reminders and alerts. You can set up automatic reminders for recurring bills and alerts that tell you when cash balances fall below a specific threshold or inventory levels are nearing the reorder point.

Profitability reporting. The software can help you determine profitability by tracking project-related time, expenses and revenue. This makes it easier to bill customers quickly and accurately.

Customer and vendor tracking. You can store customer and vendor information, including contact information, transaction and payment history, and notes.
Customized invoicing. Custom invoices can be created with your logo. The software can also facilitate customer payments with credit cards, the Automated Clearing House (ACH) and online payment platforms, such as PayPal or Venmo.

Purchase and sales order management. Built-in purchase and sales order management systems allow you to track incoming orders and outgoing shipments more effectively.

Bank and credit card data feeds. You can import transactions from bank accounts and credit cards, then classify each transaction within your accounting records. Additionally, you can enable system-generated classifications for recurring transactions or create rules manually.

Payroll administration. Users can administer payroll data within QuickBooks, making it easier to manage payroll processes on one platform and comply with tax laws.
Third-party integrations. Many third-party applications — including payment processors, payroll systems and e-commerce platforms, such as Amazon Business, PayPal, Square, and Shopify — work with QuickBooks.

We can help

If you understand QuickBooks’ full functionality, it can streamline your accounting processes, improve the accuracy and timeliness of your reporting, and make it easier to do business with your company. It can also facilitate communications between in-house and external accountants. In addition to providing your CPA with direct online access to your organization’s books, QuickBooks allows your accountant to send requests for information and documents through the platform. Contact us with any additional questions you have about QuickBooks and other accounting software solutions.

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Are you looking for someone to manage the books and records for your small business? Whether you’re operating a startup or an established business that recently lost its bookkeeper, hiring the right person for these tasks can be challenging.

Selecting a candidate in today’s job market requires a rigorous process. It’s important not to be hasty or wing it during the interview. Give your job posting adequate time to attract a healthy sample of qualified candidates. Write up a detailed job description with the help of your management team. Then brainstorm a comprehensive list of questions.

Here are 10 questions to consider in the brainstorming process.

1. How many years of bookkeeping experience do you have, and are you familiar with U.S. Generally Accepted Accounting Principles (GAAP)?
2. Do you possess any accounting-related qualifications, such as a certified public accountant (CPA) license or an undergraduate or graduate degree in accounting?
3. What accounting software programs are you proficient in? (Alternatively, if your company has an existing software system, ask if the candidate is proficient in that program — or if he or she recommends a different one.)
4. Do you have experience filing income, payroll and sales tax returns? If so, which tax software have you used?
5. Can you provide additional services — for example, can you create budgets, forecasts, valuations or business plans — that might benefit our business long-term?
6. Do you have experience streamlining existing accounting and reporting processes?
7. How long after the close of each month does it take you to generate monthly financials, and can you provide interim reports, such as daily cash statements or weekly flash reports?
8. Are there any areas of accounting where you need more experience or training? Are there any aspects of tax and accounting that you’d rather avoid?
9. Have you ever dealt with any discrepancies or audit issues before? If so, how did you address them?
10. Do you have experience working with an outside CPA firm? If so, explain the types of services the firm provided.

By asking these questions, you’ll gain a detailed understanding of each candidate’s capabilities. The questions will likely open an extemporaneous dialog about the candidates’ qualifications and your expectations.

Remember, there’s more to finding the right fit than just accounting know-how. It’s also important to consider the soft skills you’d like the bookkeeper to possess, such as trustworthiness, approachability and communication. Ask yourself: Will this candidate mesh well with the other personalities on my management team? And will this candidate bring fresh ideas and advanced skills to the table? Taking the time to choose wisely could save headaches and money later.

We can be a valuable resource during the hiring process. In addition to helping brainstorm interview questions, we can refer qualified candidates with experience in your industry who are looking for a new position. Or we can temporarily handle your bookkeeping tasks during the hiring process. Contact us to discuss the possibilities.

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Accounting is a critical element when launching a successful business venture. Unfortunately, it’s also an area where startups tend to make mistakes. Here are some common (and avoidable) errors that entrepreneurs should watch out for.

Failing to track expenses

Starting a new business is exciting — and it’s natural to focus on generating revenue and building business relationships. But it’s essential to keep detailed records of expenses, including receipts and invoices. This will help you properly allocate costs, price products and services, assess and improve financial performance, and claim tax deductions.

Forgetting to reconcile accounts

Reconciling accounts involves comparing your records to your bank and credit card statements to identify and correct any discrepancies. Account reconciliation ensures that your business pays close attention to its expenses and available cash. It can also help to prevent and detect fraud by third parties and employees.
Commingling personal and business expenses

When you own a business, you need to keep personal and business matters separate for financial reporting, tax and legal purposes. In addition to maintaining a distinct workspace for your business, you should have different bank and credit card accounts. This will avoid confusion and make it easier to track business expenses. It also will facilitate budgeting and forecasting.

Incorrectly classifying workers

How much control do you exercise over the people who work for your business? Are your workers an integral part of your operations? Misclassifying employees as independent contractors can have serious legal and financial consequences. Make sure you understand the differences between employees vs. contractors and categorize them appropriately. If you don’t follow the rules, the IRS, the U.S. Department of Labor and a state tax agency might challenge the status of your workers.

Not budgeting for taxes

Since many startups run at a loss, at least initially, some owners forget to set aside money for taxes. This can lead to cash shortages and other financial difficulties when tax time rolls around. Failure to make timely federal and state tax payments can result in penalty and interest charges. And don’t forget about payroll, sales and property tax obligations, too.

Failing to set up a formal accounting system

Entrepreneurs must select and consistently follow an accounting method based on their business needs. Many fledgling businesses start off using cash- or tax-basis accounting, then graduate to accrual-basis reporting as they mature. But lenders, franchisors and investors sometimes require accrual-basis financial reporting from the get-go.

It also pays to invest upfront in simple internal controls — such as locks on file cabinets, regular software updates, network backups and antivirus programs — to help prevent theft and fraud. Startups with valuable intellectual property, such as patents, secret recipes and proprietary software, should consider protecting these assets by requiring employees and contractors to sign noncompete agreements, implementing network security policies and filing appropriate legal protections. Additional internal control measures can be implemented as your business matures.

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When companies report financial results, they often rely on estimates made by management. Examples include the allowance for doubtful accounts, warranty obligations, costs of pending litigation, goodwill impairment and the fair values of acquired intangible assets. How do auditors evaluate whether amounts reported on the financial statements for these items seem reasonable?

Inquiry and testing

Accounting estimates may be based on subjective or objective information (or both) and involve a level of measurement uncertainty. External auditors evaluate accounting estimates as part of their standard audit procedures.

For instance, they may inquire about the underlying assumptions (or inputs) that were used to make estimates to determine whether the inputs seem complete, accurate and relevant. Estimates based on objective inputs, such as published interest rates or percentages observed in previous reporting periods, are generally less susceptible to bias than those based on speculative, unobservable inputs. This is especially true if management lacks experience making similar estimates in the past.

Whenever possible, auditors try to recreate management’s estimate using the same assumptions (or their own). If an auditor’s estimate differs substantially from what’s reported on the financial statements, the auditor will ask management to explain the discrepancy. In some cases, an independent specialist, such an appraiser or engineer, may be called in to estimate complex items.

Auditors also may compare past estimates to what happened after the financial statement date. The outcome of an estimate is often different from management’s preliminary estimate. Possible explanations include errors, unforeseeable subsequent events and management bias. If management’s estimates are consistently similar to what happened later, it adds credibility to management’s prior estimates. But if significant differences are found, the auditor may be more skeptical of management’s current estimates, necessitating the use of additional audit procedures.

Gray area in accounting

Accounting estimates and fair value measurements involve a high degree of subjectivity and judgment and may be susceptible to misstatement. In today’s uncertain market conditions, predicting metrics that underlie accounting estimates can be particularly challenging. Therefore, they require more auditor focus today than in more-stable prior accounting periods. Be prepared to provide comprehensive documentation to support your estimates during the upcoming audit season.

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