[IMGCAP(1)]One time I was asked to audit a hotel in Florida that was going to be foreclosed on by the mortgagor and for which I was paid in advance. The audit was planned and scheduled, and it looked like we had everything under control from our end as much as we could.
I received a call on a Friday morning that the foreclosure was going to take place sooner than expected, and I had to either do my work Monday through Wednesday or return the retainer since the foreclosure was going to take place on Thursday. I took a Sunday evening flight with a senior accountant. When I walked into the hotel, I got real nervous. This was not a small motel, but a big Hilton hotel; not what I anticipated.
The next morning we met the controller and accounting staff. I told my assistant that we would start with the balance sheet. I would do the cash and he would do everything else. He was elated that he wasn’t “stuck” with the cash and that he would work on the “important” accounts.
I have two simple rules in starting a job. Start at the top. Cash is the first item at the top. The top relieves any decisions about where to start and reduces anxiety about choosing. Actually sometimes it might make sense to start with the most important account, but occasionally in an audit what looks like the easy pickings isn’t and what looks difficult might not be important. Start at the top—eventually you’ll cover everything. A proper audit or work program will eliminate unimportant efforts.
The second rule to consider is to start with cash. Usually that is the top item in a chart of accounts. The cash accounts show the ins and outs of cash. Isn’t that what business is about? If the cash is right, then the confidence level for the audit rises.
I always preferred to do the cash. There is a lot you can learn about a business and its operations. Knowledge is power—really! The problem with many accounting firms’ procedures is that they assign the cash to the lowest-level staff person, immediately signaling that it is not important, that it is a chore and is something to wiz through.
Well, none of that is true—it is the most or second most important part of an audit. Depending upon the business, something else might be more important, but that needs some thinking about—while cash is always at or near the top.
We worked late that first night, had a quick dinner and went to sleep. The controller joined us at breakfast in the morning and we started talking about the hotel operations, the room rates, the vacancy percentages, seasonality of business, the corporate customers and major suppliers.
Afterwards, when we started work, my assistant asked me when I had time to find out all that information. I replied that was the byproduct of auditing the cash accounts. I then explained the importance of working on the cash. It is sort of like “youth is wasted on the young.”
When starting an audit, or investigation, start with the most important—start with the cash.
Edward Mendlowitz, CPA, is a partner in WithumSmith+Brown, PC, CPAs. He has authored 20 books and has written hundreds of articles for business and professional journals and newsletters plus a Tax Loophole article for every issue of TaxHotline for 27 years. Ed also writes a blog twice a week that addresses issues his clients have at www.partners-network.com. He is the winner of the Lawler Award for the best article published during 2001 in the Journal of Accountancy. He has also taught in the MBA graduate program at Fairleigh Dickinson University, and is admitted to practice before the U.S. Tax Court. Ed welcomes practice management questions and he can be reached at WithumSmith+Brown, One Spring Street, New Brunswick, NJ 08901, (732) 964-9329, email@example.com.