BACKGROUND: Like many cyclical businesses, auditors (and clients) have periods o

Question

BACKGROUND: Like many cyclical businesses, auditors (and clients) have periods of each year with peak demand on their time. In order to remain efficient, effective, and deliver high-quality client service, many auditors have shifted some of the work to other, less demanding times of the year. Property and its related accounts is a good example of work that can easily be shifted. Clients may make acquisitions at varying times through the year, allowing the auditor to test activity to date as of an interim date. At year-end, procedures can be performed to roll forward from the interim date to the period being opined on.

Very Best CPA is conducting a second year audit on its client, Advanced Manufacturing, Inc. The client's lender, State Bank, has asked for the financial statements 30 days earlier than prior periods in order to meet internal compliance deadlines. As a result, Very Best is concerned about its ability to finish the audit in a timely manner. One Very Best partner suggested that the audit team could audit property and its related accounts as of 09/30/XX, 3 months earlier than the year end of 12/31/XX. Very Best had never taken this approach previously, so this idea was listed as an item to be discussed in the auditor-client planning meeting to be held.

1. What is the advantage of testing property and its related accounts as of an interim date?

2. If property is audited at an interim date, what procedures will need to be done at year-end?

3. What difference would it make if Advanced Manufacturing, Inc. was a first year audit instead of a second year audit?

Explanation / Answer

1. Testing property and its related accounts as of an interim date reduces pressure of peak periods both on auditor as well as auditee. Auditor has many clients to serve and hence he can spread out his work using this technique. Client has his own pressure of closing annual financials and hence the burden is reduced if part audit is done prior to period close

2. All the changes taken place with respect to property from interim date to year end have to be subsquently tested, giving more focus on areas which had raised questions at the time of review on interim date

3. Had Advanced manufacturing Inc was a first year audit, interim date audit is not an advisable way of doing the audit, as the auditor is clueless on clients culture and style of accounting and maintaining financials and the client is not aware of audit requiremments and hence chances of mispresentation is also high

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