Audit effectiveness vs efficiency
In the first audit class of my undergraduate program, my professor taught a seemingly elementary principle—Audit efficiency and audit effectiveness have a natural trade off. Pretty simple, right?
The more samples selected and procedures performed, the more likely an auditor is to uncover any errors (intentional or not) in the financial statements. Sure, an auditor could comb through every single transaction recorded in a fiscal year, but that would require an unrealistic amount of time and resources.
The key is to find that sweet spot where enough procedures are performed to gain reasonable assurance over the information presented without completely throwing efficiency out the window.
This week we continue our ASC 842 for Auditors series by looking more closely at efficiency.
We have the tools to audit smarter
Technology advancements have paved the way for increased efficiency in audits. Believe it or not, in the past, auditors went onsite to audit clients who operated cattle ranches. There, they would do an actual count of the cattle as they passed through a narrow entryway somewhere on the ranch. This arduous (and very smelly) process has been replaced by simply flying a drone over cattle pastures to take a picture. The auditors can now count cattle from the comfort of their desks. This is just one example of improved audit techniques because of modern technology.
In that same vein, when I was an intern with one of the Big-four accounting firms, I heard stories about performing audit procedures on graph paper. Can you imagine the relief auditors had when excel was introduced? Dragging formulas down a column to eliminate hours of filling in those tiny little squares was a huge boost to the efficiency of an audit.
Here’s the thing: Excel was launched almost 40 years ago! While Excel is still a viable solution for a host of accounting and auditing procedures, it’s time for an update.
The new ASC 842 requirements can get very complex very quickly. Imagine putting together a spreadsheet for dozens of leases when auditing a client. Each one could have unique contract lengths, interest rates, classifications, and payment schedules. Sprinkle in a few modifications in the middle of a lease and you are dealing with a “graph paper” situation. Suddenly a huge amount of budgeted time has been consumed by just one area of the audit. Fortunately, there is a better way. Software tools can help return the balance of audit efficiency and effectiveness.
Scalability when using innovative tools
Schedules and disclosures
Software solutions like this can make an auditor’s job much less painful. Instead of spending ages building schedules in a spreadsheet, simply identify the inputs of the lease and enter them into the user interface. As mentioned earlier, these inputs consist of lease classification, payment amount and timing, lease incentives, prepaid amounts, interest rates, and even those pesky mid-lease modifications.
Using a powerful software solution like NetLease for Auditors, if you get the inputs right, you can sit back and watch the entire lease schedule populate instantly. This includes lease expense, interest, liability accretion, and ROU asset amortization for each period of the lease.
In addition to the lease schedule, required disclosures and journal entries are also available at the click of a few buttons. Instead of building yet another spreadsheet with manual calculations, NetLease for Auditors shows weighted average interest rates, weighted average remaining term, and a host of other disclosures for all leases entered into the system. In addition, the dynamic reporting feature of NetLease for Auditors displays journal entries for every single month of each lease contained in the database.
Auditors can improve their efficiency by simply scrutinizing the inputs instead of building manual schedules in spreadsheets for each lease.
Shared database
NetLease for Auditors further increases audit efficiency when clients adopt the software to use internally. Clients can give access to their auditors and allow them to view all lease details, down to the inputs. Now instead of entering lease criteria, the auditor can quickly review these values and trust that the calculations have been done correctly.
Getting a client on NetLease for their lease accounting is one of those classic win-win situations that every auditor loves. The result is easier lease accounting management for the client and a smoother, simpler workflow for the audit firm.
Fixed cost
Do you know how many leases each of your clients has? How about embedded leases? For that matter, does your client know?
The quantity of leases can vary a lot between audit clients. Some may have a single leased office space while others may have hundreds of vehicles and equipment on lease.
That’s why we decided on a fixed cost pricing model with NetLease for Auditors. Software often has a fee associated with each use. Consider the alternative example of sending a confirmation to a bank through a software solution. When the number of required confirmations suddenly changes, the overall cost could be, well, surprising. With NetLease for Auditors, audit teams can input as many leases for as many clients as their hearts desire. No need to worry about excess costs eating into margins on an engagement when your tool has a predictable price.
Bottom line:
The tools used for an audit can be the biggest factor in its efficiency. Just like the transition from graph paper to Excel, the opportunity to further innovate is available. NetLease for Auditors can turn a manual, error-prone process into a streamlined and scalable effort within an audit. Why do long division when the calculator has already been invented?
