Note to Editors: This article is available for IFAC member organizations to publish in their journals and/or websites. Email permissions@ifac.org for access and copyright information. 

An ­­­audit is probably the most common form of assurance worldwide but it’s not the only one, and in some cases, it might not be the right one. Small- and medium-sized entities (SMEs) are often not required by legislation to have an audit. Lacking the complexity of their larger counterparts, an audit doesn’t necessarily make sense for an SME, and the costs may outweigh the value added for these small operations. There are other forms of assurance that may be more cost-effective and better suited to meet their needs. SMEs can look to their accountants and their statement users to help them determine what level of assurance on their financial statements is most appropriate.

A review engagement, for example, is another form of assurance that can meet the needs of some SMEs without putting an undue strain on time and other resources.

What is a Review Engagement?

A review is a limited assurance engagement. It provides less assurance than an audit but more than a compilation engagement, which offers no assurance. The International Auditing and Assurance Standards Board (IAASB) revised International Standard on Review Engagements (ISRE) 2400, Engagements to Review Historical Financial Statements, in 2012. ISRE 2400 (Revised) is designed not only to provide an effective and consistent level of limited assurance on financial statements but also to allow for efficient delivery of the service proportionate to the complexity of the statements reviewed. The revised standard includes strengthened requirements and additional guidance to promote a clearer understanding of the nature of a review engagement.

Merits of a Review Engagement

SMEs that are not required by law to have an audit may still want some level of independent assurance to increase the credibility of their financial statements, for example, when seeking a loan from a bank. In these cases, a review can be an ideal solution. Additionally, since the work effort involved in performing a review engagement is generally less than that in conducting an audit, a review should be a more cost-effective option while still involving the financial reporting expertise of an independent professional accountant.

When to Conduct a Review Engagement

Under ISRE 2400 (Revised), a review engagement may only be performed when it both serves a rational purpose and is appropriate under the circumstances. An engagement without a rational purpose, for example, is one in which management unreasonably restricts the practitioner’s inquiries to specific individuals. A review may not be appropriate, for example, for complex entities, such as banks or insurance companies, for which inquiry and analytical procedures alone may not reduce engagement risk sufficiently. In these cases, an audit or a compilation engagement may be more appropriate.

Where Can I Learn More?

The IFAC Small and Medium Practices (SMP) Committee has developed a comprehensive guide to help IFAC member organizations and their members in practice, especially SMPs, understand and implement ISRE 2400 (Revised). The Guide to Review Engagements is planned for release in December 2013, which is also when the updated standard goes into effect (effective for periods ending on or after December 31, 2013).

Practitioners can use the guide to develop a deeper understanding of a review engagement conducted in compliance with ISRE 2400 (Revised) through explanation and illustrative examples. The guide also includes a number of appendices with key checklists and forms that practitioners can adapt to meet the requirements and circumstances in their particular jurisdiction.

Note to Editors: This article is available for IFAC member organizations to publish in their journals and/or websites. Email permissions@ifac.org for access and copyright information. 

The acquisition of new clients continues to be a dominant driver of profitability for small- and medium-sized practices (SMPs). Indeed, in the latest edition of the IFAC SMP Quick Poll, the largest portion of respondents identified acquisition of new clients as the main driver of practice profitability—by a wide margin (see chart below).

While SMPs understand the importance of improving operational leverage (doing more with less), improving productivity (e.g., changing work practices or introducing technology), reducing overheads, and better utilization of assets, these are not the main drivers of profitability for most SMPs. This is not surprising given the fact that practice overheads are relatively fixed.

The poll results seem to question the wisdom of many practice management “gurus” who say that the cost of acquiring a new client is far higher than the cost of retaining, or selling more services to, an existing client. What those “gurus” may be failing to recognize is the full potential and cost effectiveness of a marketing campaign that includes low-cost social media.

This article looks at promotion and marketing and, in particular, the role of social media in acquiring new clients and driving practice profitability. 

Branding

The first step of a marketing strategy is to identify your target customers and what they need. You then have to determine how you can satisfy those needs at a profit and, at the same time, differentiate yourself from your competitors. This becomes your brand. The aim of your marketing strategy is to have people associate your brand with their needs and desires, choose you over the competition, and, if you do it right, pay a premium for your services.

Promotion and Marketing

An organic growth strategy involves leveraging promotion and marketing activities to build brand and attract new clients or sell additional services to existing clients. Remember that most businesses in the market are likely to already have an accountant. In the majority of cases, that means for you to grow your practice you will need to win clients from rival practices. And, in order to do that, you must offer a compelling reason for them to switch. This makes promotion and marketing more important than ever—and demands that practices build the capability to proficiently promote and market their brand and service offerings. You will likely be faced with the classic “make-or-buy” dilemma, that of using (and training as needed) existing staff to do promotion and marketing, or else recruiting or outsourcing for the requisite skills.

Promotion and marketing efforts are most effective when a number of activities and channels are used simultaneously: this harnesses the momentum of such efforts and is likely to be more impactful. There are many “tried and true” strategies for marketing but the newest one, social media, has already broken the mold. Social media marketing has rapidly grown in prominence and gone from marginal to mainstream in the marketing space. Social media is a low-cost channel with a very wide reach into your target market.

Social Media Marketing

Social media essentially has taken traditional word-of-mouth marketing (historically the norm for accountants) and moved it to a digital space, exponentially increasing opportunities to influence. It is one of the most powerful tools to engage customers and drive revenue growth. But according to Steven D. Strauss, small business expert and author of The Small Business Bible, while small business owners recognize how important social media is to their success, they’re not taking advantage of social media’s full potential.¹ And, chances are, the same applies to SMPs: after all, SMPs are effectively small businesses in the accountancy sector.

Getting started in social media marketing and deciding whether it can benefit your practice can be quite overwhelming—even scary, at first. Here are some steps to take when building a social media presence:

1. Set aside preconceived notions—social media carries risks but the rewards are greater: it will take time and expense to plan and execute but there are many tools, resources, and articles to help.
2. Learn about the what, why, and how—take the time to read and educate yourself about social media, including Twitter (see Twitter’s Small Business Guide), LinkedIn, Facebook, and blogging, and see what your peers are doing.
3. Check out the tools and resources available to help—there is a growing suite of tools, resources, and guidance available, for example, the AICPA PCPS has developed a number of resources, many of which are available for free, including a social media toolkit and articles.
4. Create a strategy and action plan—define goals, decide how you will measure success and allocate responsibility, then start out small by, for example, pilot testing one of the tools. See “10 Questions to Ask When Creating a Social Media Marketing Plan.”
5. Implement the plan—aim to provide content that creates conversation rather than advertises and involve staff from the millennial generation as they often have the most experience.
6. Periodically evaluate, analyze, and update the plan—track your efforts and monitor the return on investment using common metrics including likes, shares, followers, traffic, and conversions.
7. Consider the need for a policy—this can help manage the risks and reap the rewards.

Resources

IFAC’s website hosts a range of resources and tools to help SMPs grow their practices, especially the Guide to Practice Management for Small- and Medium-Sized Practices).

IFAC SMP Committee Chair Giancarlo Attolini spoke at CReCER 2013 on the following:

• Importance of SMEs and SMPs
• IFAC SMP Quick Poll
• Role of IFAC SMP Committee
• Implementation Guides

Introduction

The International Auditing and Assurance Standards Board (IAASB) has released proposals that could fundamentally transform the auditor's report, greatly enhancing its communicative value. The Exposure Draft (ED) proposes a new standard, International Standard on Auditing (ISA) 701, Communicating Key Audit Matters in the Independent Auditor’s Report, and a number of revisions to existing standards, including ISA 700, Forming an Opinion and Reporting on Financial Statements (see IAASB press release). While the proposals stand to significantly change the shape of auditor reporting for listed entities, the impact on unlisted entities is likely to be much smaller. Nevertheless, there are proposed requirements that apply to all audits. These are intended to help demonstrate the value of the audit and, furthermore, may improve service and promote engagement efficiency.

This article summarizes this impact and suggests how small- and medium-sized practices (SMPs) and small- and medium-sized entities (SMEs) can get involved to help ensure the best possible outcome.

Proposals

The proposed new and revised standards deal mainly with reporting considerations, which typically involve decisions by the auditor toward the end of the audit process. There are, however, aspects that may have implications for what the auditor does at or near the beginning of the audit, such as agreeing the terms of and planning the engagement, as well as communicating with those charged with governance. The most significant implications for the audits of unlisted entities are described below.

Content of the Auditor’s Report

The centerpiece of the proposals is proposed ISA 701. This completely new standard establishes requirements and guidance for the auditor’s determination and communication of key audit matters in the auditor’s report. Key audit matters, which are selected from matters communicated with those charged with governance, are required to be communicated in the auditor’s report for listed entities. Auditors of financial statements of unlisted entities may also be required, or may decide, to communicate key audit matters in the auditor’s report.

For example, law, regulation, or national auditing standards may require auditors of unlisted entities in a particular jurisdiction to communicate key audit matters. Moreover, the auditors of other unlisted entities may wish to use the new mechanism of key audit matters on a voluntary basis. Where key audit matters are communicated for audits of financial statements of unlisted entities (either voluntarily or when required by law or regulation) then such matters should be determined and communicated in the same manner as for listed entities (see paragraph 4 of proposed ISA 701 and paragraphs 30 and A30–A31 of proposed ISA 700 [Revised]).

ISA 700 has been revised to establish new required reporting elements, including a requirement for the auditor to include an explicit statement of auditor independence and disclose the source(s) of relevant ethics requirements, for all audits including those of unlisted entities. Similarly, ISA 570, Going Concern, has been amended to establish auditor reporting requirements applicable to all audits. The IAASB believes it is in the public interest for this to have universal application.

Agreeing the Terms of the Engagement

In light of the possibility of auditors of unlisted entities communicating key audit matters in the auditor’s report, or being requested by management or those charged with governance to do so, the IAASB has proposed limited amendments to other ISAs, including ISA 210, Agreeing the Terms of Audit Engagements. Specifically, if the auditor is not required to communicate key audit matters but intends to do so, a new requirement has been established for the auditor to include a statement in the audit engagement letter regarding such intent. This will provide an additional opportunity for the auditor to communicate with management and those charged with governance to ensure there’s a clear understanding as to the nature of the key audit matters to be disclosed.

Communicating with Those Charged with Governance

In light of proposed ISA 701, amendments are proposed to the required auditor communications with those charged with governance for all audits. The most significant proposed change to ISA 260 relates to the existing requirement for the auditor to communicate an overview of the planned scope and timing of the audit with those charged with governance. Proposed ISA 260 (Revised), Communication with Those Charged with Governance, expands this requirement to include communicating about the significant risks identified by the auditor (see paragraph 15 of proposed ISA 260 [Revised]).

Communication with those charged with governance about significant risks is likely already occurring in many audits, including those of SMEs, as ISAs demand a risk-based approach to the audit. But the IAASB believes audit quality could benefit from explicitly requiring such communication in every audit. The proposed requirement would provide those charged with governance with insight into those areas for which the auditor determined special audit consideration was necessary and, in so doing, help those charged with governance to fulfill their responsibility to oversee the financial reporting process. This will also provide the auditor with an opportunity to garner additional insights into significant risks from those charged with governance and, thereby, help ensure the audit program is appropriately focused.

The IAASB believes it is in the public interest to establish this requirement for audits of financial statements of all entities, not only for listed entities. Communicating with those charged with governance about significant risks is not expected to result in a significant burden on auditors who are not required to communicate key audit matters in the auditor’s report (e.g., auditors of unlisted entities), as proposed ISA 260 (Revised) remains flexible for such communication to be made orally. In addition, the IAASB proposes requiring the auditor to communicate, as part of communicating the significant findings from the audit, circumstances that require significant modification of the auditor’s planned approach to the audit, to align with the factors the auditor considers in determining key audit matters (see paragraph 16(c) of proposed ISA 260 [Revised]). This will provide further opportunity for dialogue with those charged with governance to help ensure all responsible parties have a full understanding of areas of significant auditor attention.

Feedback

The IAASB believes that the proposed ISAs can be implemented in a manner proportionate to the size and complexity of an entity and welcomes the views of both preparers and auditors of financial statements of unlisted entities, including SMEs, in this regard. The IAASB also invites respondents to comment on areas where additional guidance may be helpful to illustrate how the proposed ISAs can be implemented in a proportionate manner. The IFAC SMP Committee has been providing regular and robust input to the IAASB throughout the ED's development, starting with a response letter to the Invitation to Comment. Please tell us and the IAASB (click on Submit Comment) what you think about the ED and consider field testing ISA 701 on unlisted entities.

Globalization is not a new phenomenon but what is new is both its velocity and how it affects small- and medium-sized entities (SMEs). The impact on SMEs has significant implications for the accounting practices, in particular small- and medium-sized practices (SMPs), that typically serve SMEs. According to the Edinburgh Group (EG)’s recently published report, Growing the Global Economy through SMEs, SMPs may need to carefully critique the services they provide to SMEs seeking to internationalize. As a starting point, the report suggests specific actions for SMPs that include developing more understanding and expertise internally, strengthening relationships with funding institutions, and building international networks of trusted professional and business contacts. SMPs have the potential to become a key agent for the internationalization of small business if they are able to provide SMEs with the advice they need.

Globalization of SMEs

SMEs are a vital and integral part of the global economy. According to the OECD, they account for the majority of private sector employment and GDP as well as a disproportionately large share of new jobs; they are a major source of entrepreneurship and innovation. These SMEs are increasingly becoming part of the global business community. Dramatic changes in communications, transportation, and information technology have accelerated the pace of globalization. SMEs now regularly manufacture products and provide services in many countries and sell to customers and clients around the world—just as large multinational companies have been doing for many years.

The EG report reveals a significant amount of international activity among the SME sector. Almost 75% of the SMPs it surveyed have clients that have some sort of international aspect to their business, even if it is simply buying goods or services from abroad.

Role of SMPs

While globalization presents great opportunities for SMEs—not least new markets for their goods and services—it also poses great challenges. Perhaps the greatest challenge SMEs face is the lack of human capital, including managerial expertise, and financial resources to take advantage of these opportunities. IFAC research indicates that SMEs will likely look to SMPs, their trusted business advisors, to fill the resource gap. The EG report, however, suggests that SMPs themselves must ready themselves to capitalize on the opportunities created by the internationalization of small business. 

Recommendations for SMPs from the EG Report            

The EG report (page 5) makes the following recommendations for SMPs:

1. Provide more proactive support to SMEs in their planning for internationalization, including support in identifying the most attractive, fast-growing international markets.
2. Develop knowledge and information resources to guide SMEs through the red tape challenge associated with international activity, and to help them access all appropriate sources of funding.
3. Build relationships with banks and other key financiers of international investment and trade, to facilitate introductions between these funding sources and SME clients.
4. Identify where SMEs are dealing in foreign currency and seek opportunities to provide value-adding advice in areas such as managing foreign exchange risks and forecasting currency needs.
5. Consider whether additional networking opportunities exist to build relationships with other professionals or to help connect SME clients with each other to create mutually supportive environments and information channels.
6. Assess how the proactive delivery of services targeted at SMEs with international ambitions could help to grow practice income, as well as strengthening client relationships and the firm’s wider reputation.
7. Consider whether developing the international resources available to the practice—for example, by participating in an international network of accountancy firms or building more direct close relationships with firms in other countries—could benefit the firm itself, and its SME clients.

SMEs are increasingly being integrated into the global business community. However, in order for SMEs to maximize the opportunities from internationalizing their business, they need timely advice. SMPs are well placed to provide this counsel.

Resources

IFAC’s website hosts a range of resources and tools to help SMPs implement these recommendations. These resources and tools help SMPs enhance their practice management and build their capacity to offer business advisory services.

The latest IFAC SMP Quick Poll showed that the vast majority (73%) of the nearly 4,000 small- and medium-sized accounting practices (SMPs) surveyed are either currently providing or have plans to provide sustainability services to their clients, suggesting that there’s a sizeable market for these services among the small businesses that SMPs typically serve.

Of those who offer sustainability services, many offer more than one service; the most common service provided, indicated by over 75% of respondents, is advisory services. Reporting and assurance are the next most commonly provided services with about 50% and 40%, respectively.

“The widespread provision of sustainability services suggests that small businesses are increasingly recognizing the tangible benefits of operating more sustainably. This, in turn, seems to be fueling a desire to seek advice from their professional accountants,” commented SMP Committee Chair Giancarlo Attolini. “SMPs can help their SME clients in many ways, for example, advising on the costs and benefits of behavioral changes aimed at reducing waste, appraising potential investments in alternate sources of energy, and assisting with the implementation of an environmental management system (EMS). This is a large and growing area of demand that SMPs need to be prepared to meet.”

Results varied somewhat by size of practice and region. The larger the size of the SMP, the more likely it was to be offering sustainability services. More than half of the practices with 21 or more professional accountants currently offer these types of services, compared to 37% of sole practitioners. By region, Asia and Africa/Middle East were most likely to offer sustainability services, while Central/South America and Australasia/Oceania were the least likely.

The report also includes results on the biggest challenges facing SMPs and their clients, among other topics. As in previous polls, burden of regulation and economic pressures ranked highest. However, tensions around rising costs, competitive stresses, and keeping up with technology gained in importance. This changing mix suggests that SMPs are enjoying a more favorable economic climate and planning for growth.

See the full report in the SMP Committee area of the IFAC site: www.ifac.org/SMP. Due to different response rates in different geographic areas, results may not be statistically representative of global or regional populations of SMPs.

The mid-year 2013 poll received 3,678 responses and was conducted in 16 languages from May 29 to July 8. The poll, conducted twice annually, is intended to take a snapshot of key challenges and trends influencing SMPs globally. IFAC wishes to thank the many member and regional organizations that helped with translation and distribution of the poll.

About the SMP Committee
The SMP Committee of the International Federation of Accountants (IFAC) represents the interests of professional accountants operating in small- and medium-sized practices (SMPs). The committee develops guidance and tools and works to ensure the needs of the SMPs are considered by standard setters, regulators, and policy makers. The committee also speaks out on behalf of SMPs to raise awareness of their role and value, especially in supporting SMEs, and the importance of the small business sector overall.

About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

This report summarizes the results of the IFAC SMP Quick Poll, conducted May 29-July 8, 2013. This edition of the poll received 3,686 responses and was conducted in 16 languages.

Co-hosted with the Institute of Certified Public Accountants of Uganda
and the Pan African Federation of Accountants 

The SMP Committee submitted this comment letter to the International Auditing and Assurance Standards Board (IAASB)'s Consultation Paper, A Framework for Audit Quality. 

The pace of change and increased complexity in audit and financial reporting standards over the past few years has been dramatic and may weigh disproportionately on smaller accounting practices who typically audit smaller entities. This burden is being exacerbated by the difficult economic environment, which is prompting clients to put pressure on their accountants to lower fees. As a result, it is getting harder for practices to maintain sufficient profitability from audit work.

The good news is that automation, made possible by recent developments in technology and by process improvements, can help practices simultaneously boost the quality and efficiency of their audit work—in turn, lowering costs and ensuring its profitability. 

Increasing Audit Quality          

Automating your micro-entity audit practice provides an opportunity to improve audit quality at both firm-wide and individual engagement levels. At the firm level, setting up standardized templates helps ensure that all phases have been completed in every audit. Customized checklists can be updated as needed and incorporated into individual engagement files at the beginning of every engagement.

File automation can significantly increase quality at the engagement level as well. If you import data from one application program to another, data conversion errors should be eliminated and grouping and arithmetical errors can be minimized.

A word of caution: as every audit is unique, make sure you customize each and every file. The generic firm template is a great place to start but it is only a start. Customization for things such as industry characteristics and internal controls are as essential as fully automating the underlying file structure.

Boosting Engagement Efficiency

Much of the tangible output of auditing is very similar from file to file: individual practitioners typically use common file structures and similar checklists and forms. In addition, commercial audit file, spreadsheet, word processing, and database platforms often allow for seamless and rapid data sharing between applications and client files. None of these features are new, but are you using them to maximum advantage? There are many easy-to-implement ways to increase the efficiency of every micro-entity audit. The trick is to be creative and use your imagination. Here are a few suggestions.

Pre-Engagement Phase

When using commercially available software for micro-entity audit engagements, you can:

• Roll forward last year’s electronic file almost instantly;
• Call the client, or send an email, to discuss timing, and ask if there were significant events/changes over the past year; and
• Assuming not, email an engagement letter, an audit strategy letter, and a list of the materials you will need when you visit the client to begin the audit. All of these documents should have been already prepared as part of the file update.

Engagement Processing and Assembly

Following the pre-engagement phase, ask your client to email you a trial balance in a format you can import into the audit file.

Fieldwork Phase

An efficient automated audit of a micro-entity might progress as follows:

Arrive at the client’s office with the rolled-forward audit file. After an initial discussion with the client, update your rolled-forward schedules, documenting your knowledge of the client’s business for any industry, environment, and entity control changes since last year.

Program the engagement and performance materiality calculations and sample size calculations, based on the imported trial balance.

Review the multi-year account analyses (e.g., key ratio analysis such as gross profit percentage), all of which can be pre-programmed.

Print confirmations required and have them signed at your client’s office.

Review for relevance and complete the rolled-forward engagement checklists. (Again, a word of caution: avoid falling into the trap of simply repeating last year’s procedures without having first used your professional judgment).

Draft key points for communication to management and those charged with governance as required by International Standard on Auditing (ISA) 260, Communication with Those Charged with Governance, and ISA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management, at the client’s office as they arise and review them with the client to ensure you have your facts right.

Forming an Opinion Phase

Review the post-fieldwork analytical review automatically updated for your audit adjustment.

Email the adjusted trial balance and proposed audit adjustments to your client.

Email the client the letter of representation and an updated ISA 260 audit summary document.

Email/mail a copy of the signed auditor’s report and an invoice once appropriate personnel have accepted responsibility for the statements.

The above assumes you have taken time to standardize data fields across all your client files. Client names and address fields, year-end and other dates, and other standard documentation can all be programmed into a master file containing individual templates for correspondence, planning lists, etc. Firm-wide standardization is essential if you want to maximize efficiency with automation.

Be Smart About the Automation Process

There are a number of cautions to heed before embarking on even a modest automation project.

1) Be realistic. The initial automation process will likely take longer than you think.

2) Spend time up-front to get it right. If you have an error in your template, you will have to fix it each time you use it. That significantly increases the cost of automation.

3) Aim for consistency across clients. Using standardized templates for analytical schedules, financial statements, statement coding, and file indexing avoids having to reinvent the wheel on every micro-entity audit engagement.

Summary

Automation of your practice is an exacting process requiring project management skills and a significant time commitment from senior members of the firm. If you have the discipline to make it happen, automation will pay off over the long term many times over.

IFAC Resources

IFAC hosts a range of resources and tools, including guides and articles, to help implement audit and quality control standards: See Resources and Tools at www.ifac.org/SMP.