News & Tech Tips

4 ways to prepare for next year’s audit

Every fall, CPAs are busy preparing for audit season, which generally runs from January to April each year. This includes meeting with clients, assigning staff and scheduling fieldwork.

Likewise, organizations with calendar year ends should prepare for audit fieldwork. A little prep work this fall can help facilitate the process, minimize adjustments and surprises, and add more value to the audit process. Here are four ways to gear up for your audit.

1. Disclose operational changes

Internal and external changes may bring opportunities and risks that could affect your auditor’s procedures. So it’s important to identify all recent developments of importance and discuss them with your auditor before fieldwork begins.

Examples of noteworthy internal events or transactions include:

  • Major asset acquisitions or divestitures,
  • New or expanded product lines,
  • Relocation or a new lease for commercial space,
  • Application for new debt (or refinanced debt),
  • Addition (or retirement) of owners and other key employees,
  • Losses and business interruptions from natural disasters, fraud, or cyberattacks,
  • Acquisition (or loss) of a key customer or supplier, and
  • A change in accounting software.

Your auditor will also want to hear about external changes, such as pending lawsuits and tax audits, new sources of competition, and new regulations. When in doubt, tell your auditor.

2. Ask questions about gray areas

All transactions for the year should be entered into your accounting system before the start of fieldwork. But your accounting personnel might not know exactly how to report certain items. There have been several major changes to the federal tax code and U.S. Generally Accepted Accounting Principles (GAAP) in recent years.

If your staff is uncertain how to account for a particular transaction or when a new rule goes into effect, it’s a good idea to ask for help before closing the books at year-end. Doing so will help minimize inquiries and the need to make adjusting journal entries during fieldwork.

3. Review last year’s audit

Start by looking at last year’s adjusting journal entries and management points. You should have taken steps to correct whatever problems were found last year. For example, if your controller forgot to record accrued payroll and vacation last year, double-check that accruals have been done for 2023. Likewise, if your auditor suggested that you needed stronger internal controls over purchasing, you could make last-minute changes before year end, such as segregating ordering and vendor payment duties between two employees or cross-checking vendor vs. employee addresses.

You should also anticipate requests for documentation and inquiries from auditors. Chances are you’ll create many of these schedules — such as accounts receivable aging reports and fixed asset listings — when you reconcile your general ledger. Consider compiling an audit binder before the start of fieldwork to expedite the process. It also helps to designate an internal liaison to field the audit team’s inquiries. Often, this is the company’s CFO or controller, but it can be anyone who’s knowledgeable about the company’s operations and accounting systems.

In addition, each account balance should have a schedule that supports its year-end balance. Amounts reported on these schedules should match the financial statements. Be ready to explain and defend any estimates that underlie account balances, such as allowances for uncollectible accounts, warranty reserves or percentage of completion.

4. Adopt a positive frame of mind

Some in-house accounting personnel see audit fieldwork as a painstaking disruption to their daily operations. They may begrudge having to explain their business operations and accounting procedures to outsiders who will highlight mistakes and weaknesses in financial reporting.

Although no one likes to be questioned or critiqued, audits shouldn’t be adversarial. Your external auditor is a resource that can provide assurance about your financial reporting to lenders and investors, offer fresh insights and accounting expertise, and recommend ways to strengthen internal controls and minimize risks. Financial statement audits should be seen as a learning opportunity and an investment in your organization’s future.

Preparing for your auditor’s arrival not only facilitates the process and promotes timeliness, but also engenders a partnership between in-house and external accounting resources.


Interested in learning more? Contact us to talk to one of our Audit professionals.

© 2023

Navigating the percentage-of-completion method

Does your business work on projects that take longer than a year to complete? Recognizing revenue from long-term projects usually requires use of the “percentage-of-completion” method. Here’s an overview of when it’s required and how it works.

Completed contract vs. percentage-of-completion

Homebuilders, developers, creative agencies, engineering firms, and others who perform work on long-term contracts typically report financial performance using two methods:

  1. Completed contract. Under this method, revenue and expenses are recorded upon completion of the contract terms.
  2. Percentage-of-completion. This method ties revenue recognition to the incurrence of job costs.

If “sufficiently dependable” estimates can be made, companies must use the latter, more-complicated method, under U.S. Generally Accepted Accounting Principles (GAAP). And, if your business uses the percentage-of-completion method for financial reporting purposes, you’ll usually need to follow suit for tax purposes.

The federal tax code provides an exception to using the percentage-of-completion method for certain small contractors with average gross receipts of $25 million or less over the last three years. This amount is adjusted annually for inflation. For 2023, the inflation-adjusted figure is $29 million.

Percentage-of-completion estimates

In general, companies that use the percentage-of-completion method report income earlier than those that use the completed contract method. To estimate the percentage complete, companies typically compare the actual costs incurred to expected total costs. Alternatively, some may opt to estimate the percentage complete with an annual completion factor.

The IRS requires detailed documentation to support estimates used in the percentage-of-completion method. In addition, the application of the percentage-of-completion method may be complicated by job cost allocation policies, change orders, and changes in estimates.

Balance sheet effects

The percentage-of-completion method can also affect your balance sheet. If you underbill customers based on the percentage of costs incurred, you’ll report an asset for costs in excess of billings. Conversely, if you overbill based on the costs incurred, you’ll report a liability for billings in excess of costs.

For example, suppose you’re working on a $1 million, two-year project. You incur half of the expected costs in Year 1 ($400,000) and bill the customer $450,000. From a cash perspective, it seems like you’re $50,000 ahead because you’ve collected more than the costs you’ve incurred. But you’ve actually underbilled based on the percentage of costs incurred.

So, at the end of Year 1, you’d report $500,000 in revenue, $400,000 in costs, and an asset for costs in excess of billings of $50,000. If you had billed the customer $550,000, however, you’d report a $50,000 liability for billings in excess of costs.

Getting assistance

Although the percentage-of-completion method is complicated, if your estimates are reliable, it can provide more current insight into financial performance on long-term contracts. Contact us to help train your staff on how this method works — or we can perform the analysis for you.

© 2023

Consider stress testing to lower risks

The pandemic and the ensuing economic turmoil have put tremendous stress on businesses. Many companies that appeared healthy on the surface, on their financial statements, quickly realized that they weren’t prepared for the unexpected. A so-called “stress test” of your company’s financial position and its ability to withstand a crisis can help prevent this situation from recurring in the future.

In general, stress tests evaluate a company’s ability to handle an economic crisis. A stress test includes the following three steps:

1. Determine the types of risks the business faces

Identify the operational, financial, compliance, reputational and strategic risks your company might face. For example, operational risks cover the inner workings of the company and can include dealing with the impact of a natural disaster. Financial risks involve how the company manages its finances, including the threat of fraud. Compliance risks relate to issues that might attract the attention of government regulators. Strategic risk refers to the company’s market focus and its ability to respond to changes in consumer preferences.

2. Develop a risk-management plan

Once you’ve identified these risks, it’s time to meet with your management team to improve your collective understanding of the threats facing the business, including their financial impact and the ability of your business to absorb that impact. In addition to asking for feedback about the risks you identified, encourage them to share any additional risks and projections regarding the potential financial impact.

From there, your management team can develop a game plan to mitigate risk. For example, if your company operates in an area prone to natural disasters, such as earthquakes or wildfires, you should have a disaster recovery plan in place. If your company relies heavily on a key person, you should develop a viable succession plan and consider purchasing insurance in case that person unexpectedly dies or becomes disabled.

3. Review the plan

Risk management is a continuous improvement process. New risks may emerge, old risks may fade away and the best-laid plans may become outdated over time. Meet with your management team at least annually to review copies of your current plan and consider updating it. If the risk management plan has been recently activated, ask for an assessment of its effectiveness and the changes that may need to be adopted in the aftermath.

We can help

A stress test can reveal blind spots that can affect your company’s future financial performance. This exercise is increasingly important in today’s unpredictable marketplace. While risk is part of operating any business, some companies are more prepared to handle the unexpected than others. Contact us for help conducting a stress test to assess your business’s risk preparedness and to identify and reinforce any vulnerabilities.

© 2022

Educate yourself about the revised tax benefits for higher education

Attending college is one of the biggest investments that parents and students ever make. If you or your child (or grandchild) attends (or plans to attend) an institution of higher learning, you may be eligible for tax breaks to help foot the bill.

The Consolidated Appropriations Act, which was enacted recently, made some changes to the tax breaks. Here’s a rundown of what has changed.

Deductions vs. credits

Before the new law, there were tax breaks available for qualified education expenses including the Tuition and Fees Deduction, the Lifetime Learning Credit and the American Opportunity Tax Credit.

Tax credits are generally better than tax deductions. The difference? A tax deduction reduces your taxable income while a tax credit reduces the amount of taxes you owe on a dollar-for-dollar basis.

First, let’s look at the deduction

For 2020, the Tuition and Fees Deduction could be up to $4,000 at lower income levels or up to $2,000 at middle income levels. If your 2020 modified adjusted gross income (MAGI) allows you to be eligible, you can claim the deduction whether you itemize or not. Here are the income thresholds:

  • For 2020, a taxpayer with a MAGI of up to $65,000 ($130,000 for married filing jointly) could deduct qualified expenses up to $4,000.
  • For 2020, a taxpayer with a MAGI between $65,001 and $80,000 ($130,001 and $160,000 for married filing jointly) could deduct up to $2,000.
  • For 2020, the allowable 2020 deduction was phased out and was zero if your MAGI was more than $80,000 ($160,000 for married filing jointly).

As you’ll see below, the Tuition and Fees Deduction is not available after the 2020 tax year.

Two credits aligned

Before the new law, an unfavorable income phase-out rule applied to the Lifetime Learning Credit, which can be worth up to $2,000 per tax return annually. For 2021 and beyond, the new law aligns the phase-out rule for the Lifetime Learning Credit with the more favorable phase-out rule for the American Opportunity Tax Credit, which can be worth up to $2,500 per student each year. The CAA also repeals the Tuition and Fees Deduction for 2021 and later years. Basically, the law trades the old-law write-off for the more favorable new-law Lifetime Learning Credit phase-out rule.

Under the CAA, both the Lifetime Learning Credit and the American Opportunity Tax Credit are phased out for 2021 and beyond between a MAGI of $80,001 and $90,000 for unmarried individuals ($160,001 and $180,000 for married couples filing jointly). Before the new law, the Lifetime Learning Credit was phased out for 2020 between a MAGI of $59,001 and $69,000 for unmarried individuals ($118,001 and $138,000 married couples filing jointly).

Best for you

Talk with us about which of the two remaining education tax credits is the most beneficial in your situation. Each of them has its own requirements. There are also other education tax opportunities you may be able to take advantage of, including a Section 529 tuition plan and a Coverdell Education Savings Account.

Greatness is a Choice

courtesy of

At a recent Women Presidents’ Organization (WPO) conference in Atlanta I had the opportunity to attend a seminar led by Jim Collins, titled “Great by Choice.”  The information I left with would be valuable to any and all business owners.  Below is an outline of what I learned, including links to even more in-depth information.

Greatness is a choice.  You can choose to be good, or just good enough, or truly great.  Truly great leaders have drive and confidence, but also the humility to put the needs of the company, clients and employees ahead of their own.

So what distinguishes the greatest leaders from the rest?

It’s all about having fanatic discipline – sticking to your goals no matter what.  Discipline is not a natural trait that some people are born with and others are not.  Rather, discipline is an art form to be learned.  It takes practice and dedication to be disciplined.

Another trait is what Collins referred to as empirical creativity.  This involves taking our natural creativity and adding discipline to it for maximum effectiveness.  By empirically testing our creative ideas first, before throwing a lot of time and resources at them, we are able to find out what works and move ahead in the right direction.  We test our ideas by trying them out on a small scale and verifying their effectiveness before drastically moving forward.

And finally, great leaders employ productive paranoia – being prepared for the situations that could put your company’s future at risk.  One key is having the cash reserves and buffers to protect your business from any economic catastrophe.  It is important to understand what would be disastrous to your company, and then prepare for it.  The second key is not putting your business in jeopardy by taking big risks.

Luck happens to everyone, both good and bad.  What separates the great leaders from the rest is the ability to maximize the return on luck.  Start thinking of luck as an event, rather than just some indefinable aura that follows some people around and not others.  Then, when luck happens, make the most of it.  Back it with your drive and discipline to get the highest return on your luck possible.  And remember that a single good luck event will not make your business, but one catastrophic bad luck event could break it – so always be prepared and have your business protected.