Want to see how we work? Read exemplary audit management letter by GP !

by | Jan 21, 2019 | Blog, Guides | 0 comments

We recently had an engagement that required GP CMP to gather data from several different softwares and create enough of a documentation trail to support an audit. The results of our work was reported to management in a letter of recommendation, which we feel would be a great guide for other companies considering the same path.

To the Management of Company X,

After working with the different systems that support Company X’s , sales, and billing functions, GP would like to bring to management’s attention several issues that may affect the timing and scope of the intended financial statement audit. A company of Company X’s size does not have a large transaction pool from which to pull individual transactions for testing, which lends an outsized weight to each transaction contained in the financials. Anything other than a positive audit report would be considered unacceptable, so please consider the issues below in that light and the suggestions that follow as options available to mitigate them.

1. Revenue recognition – Due to the continued use of Online for invoicing, and the significant parallel use of to create and track sales, there are several revenue deposits that are unable to be coordinated with invoiced amounts. Ordinarily, this would not be an issue for a company making direct sales of a product; however, Company X also offers a monthly subscription that could be prepaid, as well as a 30-day return policy. As the “non-invoiced” amounts do not total to more than XX% of total recorded sales it may not be an issue, although it may warrant additional transactional testing by the auditors.

         Recommendation – If possible, a comprehensive review should be taken of the “non-invoiced” revenue deposits in a final attempt to match them with invoices sent. In lieu of a comprehensive review, management could document their transition from QBO to and provide emails and statements that corroborate research done on the transactions. Being well prepared to answer any questions about these transactions will also likely help keep the audit on track.

2. Multiple methods of payment collection – This issue ties in with revenue recognition and differences between invoiced amounts and collection methods, although they may not be an issue by themselves. However, the inability to trace transactions from origination through collection may warrant additional audit testing and increase the cost of the audit.

         Recommendation – Download or preserve documentation related to management’s quest to lower their transaction costs by using different payment methods to achieve that objective.  Documentation by the management of the reasons why payment system Y and Z were used for certain transactions and QBO/Intuit was used for others. 

3. Accounts Payable aging – At the end of 20xx, there were a significant amount of accrued expenses that could be directly linked to the decline in the company’s financial position. We were not able to easily correlate vendor payments with accrued expenses and payments stretched out well beyond standard terms. As the auditors will seek to confirm balances due to Company X’s significant vendors, it may create an issue if this is not done by Company X prior to an audit. There is not a substantial number of overall transactions from which the auditors can choose to test, which makes the consequences of a vendor balance mismatch a more difficult obstacle to overcome.

         Recommendation – If Company X is able to, having major vendors confirm the balances as of specific dates would likely help the audit process. Since there were large accrued balances at a prior year end that have been paid intermittently throughout the year, account statements from the vendors might also be of assistance to the auditors. It may also help for management to address the length of time associated with payables to vendors through meeting minutes or other documentation.

4. Liabilities – Company X has consistently used short term lending to maintain operational cash flow. While not uncommon, Company X also does not have a very strong liquidity position, nor many tangible/convertible assets. The combination of relatively high debt and a lack of liquidity creates unfavorable ratios that will be part of the audit analysis of a “Going Concern,” which is not a desirable outcome for the company.

         Recommendation – Company X may benefit from consolidating existing debt with one creditor and have a more formal, long term arrangement put in place to demonstrate stability and a long term outlook.

5. Inventory – The company’s inventory is likely to be adjusted by the auditors based on the lack of a concrete opening balance and a mechanism for tracing inventory related transactions. It may not be possible to determine what each MINOR SUPPLIER purchase was for or have full details on each of the overseas supplier’s orders; although gathering all the information that is readily available would certainly help. Please note that the inventory value/amount carried from 2016 to 2017 included no adjustments. We are unable to predict the significance of this on an audit at this time.

         Recommendation – If management is able to do so, a physical inventory count should be performed as soon as possible to provide an accurate inventory count and valuation. Also, source documents related to purchasing MINOR SUPPLIER and other vendors should be organized in preparation for the audit.

6. Sales – Company X’s main product offering [product X] could be considered “tangible personal property” and subject to “retail sale definitions” as taxable sales in most states.

Recommendation – If Company X has noted significant sales in one particular jurisdiction, it would be prudent to review the relevant sales tax laws there and seek professional guidance as the taxable nature of those sales. Company X may also want to review their domestic materials purchased for use tax implications in .

GP

Audit Management Letter

MORE ARTICLES FROM OUR BLOG

2019 Payroll w/Gusto

Payroll is often a source of pain for owners. S-Corp owners know that they have to have it, although most still find it a bit…mysterious. The big payroll companies offer ready-built platforms that offer a ton of features, although they are often difficult to...

March 2019 Tax Update. Home-office deduction and QBI

When possible, you want to claim that your office in your home qualifies as a principal place of because of this classification gives you the home-office deduction, andeliminates commuting from your home to your regular office.

Want to see how we work? Read exemplary audit management letter by GP CPA!

We recently had an engagement that required GP CMP to gather data from several different softwares and create enough of a documentation trail to support an audit. The results of our work was reported to management in a letter of recommendation, which we...

Extension season is coming… are you ready?

Many Most Nearly all of GP CPA’s clients typically do not require an extension in order to timely file their personal and corporate tax returns. This is partly due to our regular contact with our clients and the proactive approach that helps us get ahead of any issues...

A recipe for taxes…

has not memorized the tax code like we have the Joy of Cooking, but we reference both a lot. If your current accountant is not the advisor you hoped them to be, or you want more dark chocolate M&Ms in your life, would love to talk to you about your . We may even bring cookies!

Tina Simmons
Tina Simmons
13:38 17 May 19
This team is dedicated to their clients and committed to understanding your business and sharing their knowledge to help you succeed. I love working with these folks, they take the worry and uncertainty out of accounting and !read more
Bravo4 Autowerks
Bravo4 Autowerks
12:55 08 May 19
Gary and his team have been fantastic for me and my business. They respond well to all my questions, are very helpful and of course keep my financials in order. Highly recommended.read more
Queen City Newborn Care
Queen City Newborn Care
15:57 02 Apr 19
I was drowning before I met Justin. He totally transformed how I run my small business and has gotten me organized in ways I didn't even know were possible. I am so grateful for his advice and suggestions! This company is worth every penny.read more
Dennis Bloomberg
Dennis Bloomberg
16:01 26 Mar 19
Unfortunately, I found GMP when my mother passed. She had a trust set up and I had no experience with one. I received excellent advice prior to filing , that allow for the transfer of assets with little tax implication. The tax process was simple for me, Justin took over once he had details and cleared up all question from filing our . Thank you for a job well done!read more
Natalie Knight
Natalie Knight
15:35 21 Nov 18
is up to date on technology. They handcraft a platform that works best for your company's accounting services. We really appreciate how hands on and quick their team is when replaying to any type of correspondence. Simply put, they care and want your company to succeed.read more
Ashlyn Lelej
Ashlyn Lelej
14:39 21 Nov 18
I highly recommend Justin at Prusiensky, CPA for all of your accounting and tax needs. I've been a client for over two years, and have been consistently impressed with their dedication to helping my business grow and be financially successful. His advice is invaluable. Thank you!read more
Bobby Nguyen
Bobby Nguyen
22:23 20 Nov 18
My partner and I started our very first small business last year. Justin has been a blessing to us. Being new at all of this, we didn’t understand much of how business taxes work. Justin explained and answer all of questions that we have. He took care of everything for us throughout the year and have made life so much easier for us. I couldn’t have asked for a better CPA. Highly recommended!read more
Next Reviews

CATEGORIES

Why your kids are model employee’s?
2019 Payroll w/Gusto