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We recently had an engagement that required GP CPA to gather data from several different accounting 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 accounting, sales, and billing functions, GP CPA 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 QuickBooks Online for invoicing, and the significant parallel use of Xero 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 Xero 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.
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.
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 taxes
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 NC.
GP CPA offers a wide range of business advisory services that are tailored to the needs of business owners. For those small businesses who need someone to keep the books, we can do that.
GP CPA has relied on cloud-based accounting technology for many years now and devotes a significant amount of time toward testing and learning the latest and greatest systems out there.
Since we now have less than 90 days left in the year, kindly keep me apprised of when you expect the major revenue collections to be during the next few weeks and we can adjust accordingly.
As many area businesses know Charlotte Sales Tax rate is either 2%, 7.25%, or 8.25% and what rate belongs to your business is based on what the business is selling.