Dave Cain: Welcome to unsuitable on Rea Radio. The award winning financial services and business advisory podcast that challenges your old school business practices and the traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie while offering you meaningful modern solutions to help enhance your company’s growth. I’m your host, Dave Cain.
Are you afraid of your auditor? Is your auditor simply a jerk? I’ve had the pleasure to work with more than a few auditors over the course of my career. I’m happy to report that most of them really aren’t as bad as they’re made out to be. Believe it or not, auditors are normal people or semi-normal people in some cases. They have a job to do and we want to make sure they get that done. Our guest today is James Moore, a supervisor on Rea’s audit team, located in Dublin Ohio. Even though James is located in Dublin Ohio, he travels across the state of Ohio. He’s quite a famous person in the area of audit service. On this episode of Unsuitable on Rea Radio, James is going to treat us to some behind the scene tips that will help make your next audit stress free.
Welcome to unsuitable, James.
James Moore: Hey, Dave. Thanks for having me on.
Dave: Good. Most of our guests, a lots of our guest do bring gifts. Earlier today we had some donuts that stopped by, we have other trinkets. Looks like you’ve brought a rather unusual gift. Looks like you have a guitar in your hand.
James: Yeah, that’s correct Dave. Brought in my, it’s called a Partscaster, it’s one of these Frankenstein companies out on the west coast. They’ll sell you a neck and a body and you gotta do it yourself and buy all the guts, the electronics and the parts and all that and put it together yourself. At the end of the day if you do it right, you can have a pretty nice guitar on your hands for a fraction of what you might pay one of these big boutique manufacturers for. Coming up on 10 years with this thing and yeah, I wouldn’t trade it for the world.
Dave: Good. That guitar have a name?
James: It doesn’t actually.
Dave: It doesn’t.
James: Yeah, surprisingly enough. Maybe give it a couple more years, I’ll give it a name.
Dave: Before we talk about how to prepare for a financial statement audit, do you mind playing us a song?
James: Yeah, I can do that.
Dave: What do you got for us?
James: Maybe jazz it up a little bit. You guys like Over the Rainbow?
Dave: Let’s do it.
James: So hopefully this doesn’t put everybody to sleep. Got a little ballad in E flat here. Hope you enjoy.
Dave: All right, yeah. That song stands the test of time. When was that song written?
James: That’s a really good question. Definitely would have been before …
Dave: Before you were born. Before I was born.
James: Long before both of us were born.
Dave: Might have been ’30s or ’40s.
James: Yep, probably so.
Dave: Could be. Hey, you ready to talk about how to prepare for financial statement audit?
James: Yeah, would love to.
Dave: Good. Our clients will be treated, you come out for an audit, you might take a break and bring the guitar, play a little tune.
James: It’s entirely possible. Any clients out there listening, just let me know.
Dave: Good, good. Anyway, what we want to do is talk about preparing for a financial statement audit as the year’s upon us just about. One of the things that we talk about is are the financial statements ready to be audited. That’s one of the areas that you guys, your department looks at very closely. How do you make that determination, whether the financial statements are ready to be audited?
James: Some big indications there are what work is going to be need to be done to the trial balance after it’s provided to us. Is the client still making entries? Are there entries that we’re expected to make? How much of a final product is that trial balance that the client gives us? It might be that they’ve got 12/31 year end and it takes them, or maybe they claim it takes them 15 days to get the books closed down. So we come out, the end of January. Well, they’re still booking entries. Maybe it’s 80%. That’s probably the biggest indication of what’s going to need to be done to that trial balance in order to where it’s full on gap rule basis and it’s something that we can, it’s a finished product that the audit team can test and put an opinion on.
Dave: One of the things that makes the auditor a jerk is when your team shows up and the financial statements aren’t ready to be audited. The books aren’t closed based on what you said that’s a number one problem you run into.
James: Yeah. Yeah, I would say so.
Dave: What would be your suggestion in that regard to help a client get closed? What’s that mean? Lot of clients may not know what that actually means.
James: I would say that probably the biggest thing is the financial personnel at the client whether it be the CFO, the controller, accounting manager, whoever, that they’re having those conversations with the engagement team saying, “Here’s where we’re at. I know we had you scheduled to come out first week of January. We’re just running behind. We had this that and the other happen.” Hey, that stuff happens. If we could come out two weeks later and we had a finished product that was looking good, we could power through that. The biggest thing is probably it’s a two way conversation. It’s a two way street between the client and the engagement team and we’ve got this shared goal of getting the audit report out and we want to make it as painless as possible for ourselves and for the client.
Dave: One of things as you were talking about that, it occurred to me that if a client’s books aren’t closed and the audit team is spending more time than usual, that usually drive the audit fee price up.
James: Absolutely Dave. That’s, no client is going to sign on for that I wouldn’t think. Doesn’t make sense to me.
Dave: You have spent a lot of time in your career coaching a client or the accounting staff to get closed. So that they’re closed at the end of the year ready for the auditors.
James: Yeah. Yeah, I would say so.
Dave: Let me give you a couple examples and see if you can respond to that. I’m not very good at reconciling my bank account. I get it close enough. It’s close enough. Will you accept that as an auditor?
James: The concept of materiality comes into play here. In audit we’re engaged to offer up an opinion on whether the financial statements are free of material misstatements. It depend the R threshold and the client’s threshold. Some clients will be out there chasing a dollar. In reality for an audit, cash doesn’t necessarily need to tie by that much. If it’s pretty reasonable, it’s not necessarily anything that’s going to keep the auditors up. If we’re talking thousands and thousands of dollars and we have a pretty low materiality, yeah, it’s a bigger deal. But we’d really need to get a sense for the magnitude of the error.
Dave: What would you say would be the number one issue? Maybe there’s two issues when you step into the audit environment, what do you need right out of the gate? What gets me ready? I’m ready, go. Let’s get my statements done. My banker wants to knock out loan covenants. I need that thing by the end of April. Let’s go.
James: Step one’s going to be the trial balance. This is the chart of accounts. This is your year end balances. Your balance sheet accounts. It’s all the activity going through the income statement. This is the information that rolls up into the balance sheet and the income statement as of and for the year ended, the audit period. That’s step one. That’s the first thing we ask for. Lot of times we’ll do interim planning, maybe we’ll come out in the fourth quarter of the year and we’ll look at through September 30. That allows us to get a sense for how your year’s been going even at that interim date. We at the audit team can get a comfort level and get a sense for was it a good year based on that information.
A trial balance can be exported as of a specific day and time. We want it as of the date of the close. 12/31 in calendar year instances. That’s the starting point. The activity, the roll forward of all those accounts and the detail of all those income statements, accounts, that’s your general ledger detail. We can glean a lot of information from those two specific reports. That the starting point.
Dave: A key area there is if I have a December year end, I ought to be looking to you to come out in October, November and get started. That may help the process.
James: In a lot of cases it’s all client specific. It’s based on the level of complexity, how similar, dissimilar from year to year those client’s operations are. But yeah, it may make sense to come out in October, November, December to do a little bit of, and a lot of times we can do audit testing at that point. The data’s only as good as the month it’s through. We can take credit for those samples and for those testing for our year end audit. It lessens the amount of time we have to come out there in January, February, March, whenever we would normally be scheduled to come out.
Dave: As the auditor you’ve set very high expectations for me as the client to be ready for you guys, if I hire Rea to audit my financial statements, what are my or what should my expectations be of you as my auditor?
James: Great communication to keep the client accountable to meet the deadlines that we’ve set together. That’s a two way street. Are you going to be ready for us? Is your financial statement information going to be ready for us? Are all the documents and underlying support going to ready for us as of this? If we’ve given you a date and you’ve met that deadline well we need to meet our deadline. We’re going down this road together. That’s what you can expect of us.
Dave: It’s a two-way street. It’s a partnership. We’re working together to get this document out.
James: I believe that.
Dave: What happens if I again, if I am not ready for you, I can expect one of two things. One, an increased fee or I’m going to be pushed back in the schedule.
James: That’s entirely possible. This is it’s a relationship. It’s a partnership. We try to work with our clients as best as possible and so a lot of times it’s easily accommodable. We can move something in a week if we really feel like we’re backed up into a corner. Maybe it’s a little longer than that. These relationships with our clients have been here longer than I have in many cases so it’s all about maintaining those.
Dave: As auditors you guys have your own special language. It’s almost like a foreign language. It’s gap, it’s trial balance, it’s current ratio, it’s inventory turns, net assets, I’m confused. Can you sit down, will your team sit down with me and explain all of that?
James: Yeah, absolutely. Our team has the knowledge, skills and expertise to have that conversation with the controller, with the CFO, with the AP clerk, with whoever. We can, we like to think we’re a big advocate for our clients.
Dave: You’re not the jerk. We got the common goal.
James: I don’t think I am.
Dave: No, you’re pretty …
James: Have you heard otherwise?
Dave: Well, no. Not recently.
James: Not recently.
Dave: No. You are actually very famous for meeting the deadlines for financial statement audits. Talk to me about audit difficulties. What areas to you find that are the most difficult to audit? Are they line items? Are they specific areas? Revenue items? Balance sheet items?
James: I would say revenue, there’s a lot that falls under that umbrella. Some entities are a lot more simple than others. Some have very complex contracts with multiple deliverables and it’s not just necessarily $500,000 the day you sign the contract. Maybe that’s being recognized over the life of this contract and falls over multiple periods. That becomes incredibly important because it’s not just about one period. It’s about multiple periods of time being stated correctly and multiple income statements and multiple balance sheets. There’s a lot of effect there. There’s some pretty large new accounting standards coming down the road in relation to deliverable based contracts and that’s there’s some teams at Rea that are getting up to speed on that so that they can get our clients up to speed. Hopefully in the interim as this stuff’s getting put into place, our clients can be ahead of the curve there.
Dave: The audit environment is ever-changing, more so than it ever has because of all the technology and electronic transfers etc. Are you seeing that in the field?
James: Yeah. We’re seeing that. We’re seeing that IT piece of this and our teams, we’re trying to get ourselves up to speed as much as possible but we need to call specialists in. We’ve got some great specialists here at Rea. We got those folks on speed dial for matters that just above our level and knowledge, skills and expertise.
Dave: As my auditor, you gonna find some fraud? Are you going to audit for fraud?
James: We are not specifically going to audit for fraud. We have to address fraud but it doesn’t, fraud may exist in your entity and we may not catch it. That all goes back to we give an opinion on whether the financial statements are free of material misstatement whether due to error or fraud. We are focused on the misstatement. If we think there are inherently risky areas for fraud at your organization through just knowledge of the client, walk-throughs, inquiries, it’s small shop, there’s a husband and wife running this thing. If there’s opportunities, we have to design custom procedures so that we feel comfortable with giving an opinion on the financial statements. There are engagements out there that will perform more of the forensic stuff. More fraud specific. That’s not something I do specifically.
Dave: Sounds like though potentially your team will look for problem areas that may cause fraud or misstatement just by errors. Just by your general testing. You may not specific but you may say, “Hey the climate is right. It could happen.”
James: Yeah, that’s exactly right Dave.
Dave: Do have time for another song?
James: I think I could make that happen.
Dave: Let me check with our production crew. See if we have time. Hey, Jerry, we got time for another song?
James: We got time.
Dave: We got time.
James: Okay.
Dave: What do you got for us?
James: You folks like a little Bossanova? Some Antonio Carlos Jobim?
Dave: Sure, you got it.
James: Okay. Key of D, pretty happy key.
Dave: Okay.
James: I like D. Okay.
Dave: K.
James: Sounds good.
Dave: Hey, we’ve been jamming with James Moore, a supervisor at Rea and Associates and special famous person in audit of financial statements. Thanks for the entertainment.
James: Hey, thanks for having me on Dave.
Dave: As we bring this episode back to the final leg, just want to conclude with some of the things we talked about. Number one is united by common goal, both the auditor and the client and certainly are the financial statements ready to be audited. That’s critical in this space. We want clients out there to hold the auditors accountable.
James: I agree with that. Absolutely. If we give you a deadline, it’s a two-way street. Please hold us to that. If you’ve kept up your end of the bargain and we’re not meeting your expectations, does not look good for the Rea family over here.
Dave: It’s a deal. You gotta deal buddy.
James: Thank you.
Dave: Thanks for joining. If clients want to set up a jam session with you, do they just call the office, shoot you an email, invite you over to look at the financial statements? All of the above?
James: All of the above.
Dave: Thanks again for joining us on unsuitable today James. We’ve all gained some valuable insight into the audit process. Listeners if you have any questions about what you should be doing to prepare for your audit, feel free to reach out to myself or James directly. Or you can send a general message to podcast@reacpa.com. If you haven’t already, I would encourage to take a look at Rea’s YouTube channel to watch videos of our weekly podcast. And don’t forget to subscribe to unsuitable on iTunes. Until next time , I’m Dave Cain encouraging you to loosen up your tie and think outside the box.
Disclaimer: The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views for Rea and Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.