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Audit Reporting: Yellow Book Style By Leita Hart-‐Fanta, CPA, CGFM, CGAP

CHAPTER 4—EXPECTATIONS

AUDIT REPORTING: YELLOW BOOK STYLE 4

Table of Contents Section 1: Whas’ up with Your Team’s Writing? ........................... 1

Chapter 1: Business Writing ................................................................................. 1 1-1-1 What’s Your Problem?: The Root of Writing Problems ....... 1 1-1-2 Four Criteria for Good Business Writing .................................... 2 1-1-2A Principle #1: A Good Audit Report Engages the Reader’s Attention ........................................................................................................................... 2

1-1-2B Principle #2: A Good Audit Report Persuades the Reader that Change Should Occur ................................................................................... 3

1-1-2C Principle #3: A Good Audit Report is Mercifully Brief .. 3 1-1-2D Principle #4: A Good Audit Report is Clear and Well Organized .......................................................................................................................... 3

1-1-3 How this Text is Organized ...................................................................... 4 Study Questions for Chapter 1 ........................................................................... 6 Answers to the Study Questions for Chapter 1 ...................................... 7 Chapter 2: Does Your Audit Process Lead to a Good Audit Report? ................................................................................................................................ 9

1-2-1 The Report Can Only Be as Good as the Audit Itself ........... 9 1-2-1A The Worst Audit Ever! ............................................................................ 10 1-2-2 Establish Expectations for your Team .......................................... 12 1-2-2A Design a Sound Audit Process: Begin with the Objective, Scope and Methodology ......................................................................................... 12

1-2-2A-1 What Makes a Good Audit Objective? ....................................... 12 1-2-2A-2 How Do You Define the Audit’s Scope? ................................... 13 1-2-2A-3 How Do You Define the Audit’s Methodology? .................. 14 1-2-2B Possible Elements of an Audit Report ....................................... 14 Study Questions for Chapter 2 ......................................................................... 16 Answers to the Study Questions for Chapter 2 .................................... 17 Chapter 3: Audience, Tone, and Length ........................................................ 20 1-3-1 Who is the Audience? .................................................................................. 20 1-3-1A Who is the Main Audience for Your Report? .......................... 21 1-3-1B How Do You Find out What the Client Cares About? ....... 22 1-3-1C Create a Report with Layers .............................................................. 22 1-3-1D Are You Setting up Hurdles for the Reader? ........................ 23

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1-3-1D-1 Hurdle #1: Your Job Title ............................................................... 24 1-3-1D-2 Hurdle #2: How You Have Treated Your Reader in the Past ...................................................................................................................................... 24

1-3-1D-3 Hurdle #3: The Format ....................................................................... 25 1-3-1D-4 Hurdle #4: The Weight ....................................................................... 26 1-3-1D-5 Hurdle #5: The Title ........................................................................... 26 1-3-1D-6 Hurdle #6: The First Paragraph ................................................. 26 1-3-1D-7 Hurdle #7: The Logic/Organization .......................................... 27 1-3-2 Tone is a Tricky Thing ................................................................................ 27 1-3-2A Word Choice ................................................................................................... 27 1-3-2B The Rug Lifters: An Analogy ............................................................. 30 1-3-2B-1 What is the Auditor Going to Do about the Dirt? .......... 30 1-3-2B-2 Which Approach is Best? ................................................................... 31 1-3-2B-3 Where Do You Draw the Line? ....................................................... 31 1-3-2B-4 The “At Your Service!” Approach ............................................... 32 1-3-2C Examples ........................................................................................................... 32 1-3-2D Our Tricky Little Minds: Cognitive Distortions that Affect Tone .................................................................................................................... 33

1-3-3 How Long is Too Long? ............................................................................... 36 1-3-3A How Long Should Your Report Be? ................................................ 36 1-3-3B What to Communicate via Email or Memo ................................... 37 1-3-3C Working Papers vs. Audit Reports ................................................. 37 1-3-3D You Don’t Have to Please Your English Teacher Anymore! ........................................................................................................................... 38

1-3-3E Good Business Writing is Like a Good Experience with Getting Your Blood Drawn .................................................................................. 38

Study Questions for Chapter 3 ......................................................................... 40 Answers to the Study Questions for Chapter 3 .................................... 43

Section 2: The Standards: Yellow Book, AICPA, and IIA ............ 49

Chapter 4: Overview of the Auditing Standards ................................... 49 2-4-1 Audits, Standards-Setters, and Auditors, Oh My .................. 49 2-4-1A Types of Audits ............................................................................................ 49 2-4-1B Who Are These People: Standards-Setting Bodies ............. 50 2-4-1C Alternative Titles for Those Not Following Auditing Standards ........................................................................................................................ 51

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2-4-1D Audits vs. Investigations ...................................................................... 52 2-4-2 The Relationship of GAO Standards (GAGAS) to Other Standards ........................................................................................................................ 52

2-4-3 Comparing the Standards: The GAO Cares About the Quality of the Report ............................................................................................ 53

Study Questions for Chapter 4 ......................................................................... 57 Answers to the Study Questions for Chapter 4 .................................... 58 Chapter 5: Reporting Standards for Financial Audits .................... 60 2-5-1 GAGAS Compliance Statement ............................................................... 61 2-5-2 Reporting on Internal Control and on Compliance with Laws, Regulations, and Provisions of Contracts or Grant Agreements ..................................................................................................................... 62

2-5-2A Example Letter ............................................................................................. 64 2-5-3 Reporting Deficiencies in Internal Control, Fraud, Illegal Acts, Violations of Provisions of Contracts or Grant Agreements, and Abuse .......................................................................................... 65

2-5-3A Presenting Findings ................................................................................. 67 2-5-3A-1 Quantification .......................................................................................... 67 2-5-3A-2 The Elements of a Finding ............................................................... 70 2-5-3B Direct Reporting of Fraud, Illegal Acts, Violations of Provisions of Contracts or Grant Agreements, and Abuse ........ 71

2-5-4 Reporting Views of Responsible Officials ................................. 73 2-5-5 Reporting Privileged and Confidential Information .......... 76 2-5-6 Report Issuance and Distribution ..................................................... 77 Study Questions for Chapter 5 ......................................................................... 79 Answers to the Study Questions for Chapter 5 .................................... 81 Chapter 6: Reporting Standards for Performance Audits ............ 85 2-6-1 Organizaiton of the performance Audit Reporting Chapter ............................................................................................................................. 86

2-6-1A Report Form .................................................................................................... 86 2-6-1B Report Contents ......................................................................................... 87 2-6-1B-1 Objectives, Scope, and Methodology ....................................... 87 2-6-1B-2 Report Findings ...................................................................................... 92 2-6-1B-3 Conclusions ............................................................................................... 98 2-6-1B-4 Recommendations .................................................................................... 99 2-6-1B-5 Reporting compliance with GAGAS .......................................... 100

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2-6-1B-6 Reporting Views of Responsible Officials ....................... 100 2-6-1B-7 Reporting Privileged and Confidential Information 102 2-6-1C Report Issuance and Distribution ............................................... 102 2-6-2 Chapter Summary ......................................................................................... 103 Study Questions for Chapter 6 ....................................................................... 105 Answers to the Study Questions for Chapter 6 .................................. 106 Chapter 7: IIA Standards and AICPA Standards ................................... 108 2-7-1 The Institute of Internal Auditor’s International Professional Practices Framework ............................................................ 108

2-7-1A The CAE is Responsible for Communications ....................... 110 2-7-1B Monitoring Results ................................................................................ 110 2-7-2 AICPA Reporting Standards ................................................................. 111 Study Questions for Chapter 7 ....................................................................... 113 Answers to the Study Questions for Chapter 7 .................................. 114

Section 3: The Writing Process ............................................. 116

Chapter 8: Overview of the Writing Process ........................................ 116 3-8-1 Streamline Your Writing Using the Nine-Step Process .... 117 3-8-2 Tips for Using the Nine-Step Process .......................................... 119 3-8-2A Make it Easy on Yourself: Do Each Step Individually ... 119 3-8-2B Delay Creating Full Sentences for as Long as Possible............................................................................................................................................... 120

3-8-2C Get Buy-in Along the Way .................................................................. 120 3-8-2D Share with Others ................................................................................... 121 3-8-2E Create the Executive Summary First .......................................... 121 Study Questions for Chapter 8 ....................................................................... 122 Answers to the Study Questions for Chapter 8 .................................. 123 Chapter 9: Planning ................................................................................................. 125 3-9-1 Step #1: Outline the Objective, Scope, and Methodology............................................................................................................................................... 127

3-9-2 Step #2: Outline the Detail Section .............................................. 129 3-9-2A Step #2A: Get Your Thoughts on Paper .................................... 129 3-9-2A-1 Mind-Mapping ........................................................................................... 129 3-9-2A-2 Brainstorming ........................................................................................ 133 3-9-2A-3 Fishbone ...................................................................................................... 134

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3-9-2A-4 Some Things Need to Be Thrown out! .................................... 135 3-9-2B Step #2B: Fill out the Finding Form .......................................... 135 3-9-2B-1 The Finding Form: The Key to Happiness ............................. 136 3-9-2B-2 A Few Rules about Using the Elements ................................. 136 3-9-2B-3 What Do You Want the Reader to Do? ..................................... 139 3-9-2B-4 Address the Root Cause ................................................................... 143 3-9-2C Step #2C: Evaluate and Reorganize ............................................ 145 3-9-2C-1 Remove Extraneous Information ............................................... 145 3-9-2C-2 Step Away for a While ...................................................................... 146 3-9-2C-3 Keep Several Pots Going on the Stove ................................. 146 3-9-2D Step #2D: Evaluate Evidence Gathered .................................... 146 3-9-3 Step #3: Outline an Executive Summary ...................................... 146 3-9-3A What is an Executive Summary? ...................................................... 146 3-9-3B What Does an Executive Summary Contain? ........................... 147 Study Questions for Chapter 9 ....................................................................... 148 Answers to the Study Questions for Chapter 9 .................................. 149 Chapter 10: Drafting ............................................................................................... 151 3-10-1 Step #4: Draft the Objective, Scope, Methodology, Detail, and Executive Summary ...................................................................... 151

3-10-1A Drafting the Objective, Scope, and Methodology ........... 151 3-10-1B Drafting Detail ........................................................................................ 152 3-10-1C Drafting the Executive Summary ................................................ 153 3-10-2 Step #5: Draft the Remaining Pieces of the Report ........ 155 3-10-2A Create the Standard Letters ........................................................ 155 3-10-2B Develop the Background Info if Necessary ....................... 157 Study Questions for Chapter 10 .................................................................... 158 Answers to the Study Questions for Chapter 10 ............................... 159 Chapter 11: Editing and Formatting ............................................................. 160 3-11-1 Editing .............................................................................................................. 160 3-11-1A Step #6: Edit the Entire Report for Organization ....... 160 3-11-1A-1 Organize ................................................................................................... 160 3-11-1A-2 Read This Finding .............................................................................. 162 3-11-1A-3 Now Evaluate This Finding ......................................................... 164 3-11-1B Step #7: Edit the Entire Report for Readability ........... 166

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3-11-1B-1 Criteria for a Readable Report ............................................... 166 3-11-1B-2 A Word or Two on Redundancy ................................................ 168 3-11-1C Step #8: Edit for mechanical Correctness ......................... 169 3-11-1C-1 Find the Talent ................................................................................... 169 3-11-1C-2 Steps to Take Before You Issue Your Report ............... 169 3-11-1C-3 Just for Fun ......................................................................................... 170 3-11-2 Step 9: Formatting: Make it Pretty, Please .......................... 170 3-11-2A Make it Appealing ................................................................................... 170 3-11-2B Develop a Style Guide ........................................................................ 171 Study Questions for Chapter 11 .................................................................... 172 Answers to the Study Questions for Chapter 11 ............................... 175

Section 4: Coaching .............................................................. 178

Chapter 12: How to Talk to Folks about Their Writing ................. 178 4-12-1 Coaching is Really All About the Questions ...................... 178 4-12-2 Coaching Tips ............................................................................................... 179 4-12-2A Resist Handing over a Marked-up Report ............................. 179 4-12-2B Meet in Person ......................................................................................... 180 4-12-2C Apply Agreed-Upon Guidelines ..................................................... 180 4-12-2D Do Not Concern Yourself with Their Style ....................... 180 4-12-2E Never Rewrite Their Work .............................................................. 181 4-12-3 How to Talk to the Writer ................................................................. 181 4-12-3A Ask, Don’t Tell ........................................................................................ 182 4-12-3B Respect Their Knowledge ................................................................ 182 4-12-3C Say, “I Don’t Understand” ............................................................... 182 4-12-3D Avoid Using the Word You ............................................................... 182 4-12-3E Bring the Focus Back to the Objective Criteria for Good Writing ............................................................................................................... 182

4-12-3F Restate What They Have Written or Said ............................. 183 4-12-3G Ask Questions to Redirect the Report Meeting ............... 183 4-12-4 If the Product is Poor, It’s Probably Your Fault ............ 183 Study Questions for Chapter 12 .................................................................... 184 Answers to the Study Questions for Chapter 12 ............................... 185

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Appendix A: External Internal Control and Compliance Letters .............................................................................................. 187

Appendix B: Executive Summaries ............................................ 188

Example 1 .......................................................................................................................... 188 Example 2 .......................................................................................................................... 189 Example 3 .......................................................................................................................... 191 Example 4 .......................................................................................................................... 193 Example 5 .......................................................................................................................... 198 Example 6 .......................................................................................................................... 202 Example 7 .......................................................................................................................... 203

Appendix C: Whole Reports .................................................... 204

Example 1 .......................................................................................................................... 204 Example 2 .......................................................................................................................... 209

Glossary ................................................................................ 217

Author Biography: Leita Hart-Fanta, CPA, CGAP, CGFM .......... 221

Index ..................................................................................... 223

Final Exam ............................................................................. 225

CHAPTER 1—BUSINESS WRITING


Section 1: Whas’ up with Your Team’s Writing? Chapter 1: Business Writing Objective:

• Identify what is causing your team’s problems with report writing

1-1-1 What’s Your Problem?: The Root of Writing Problems “What kind of writing issues does your staff have?” When a potential client calls to ask me to conduct a writing seminar, this is one of my first questions. It was my first question when I was asked to be an editor and writing coach at the Texas State Auditor’s Office. Invariably, the project manager, manager, or director with whom I am chatting says, “My staff just doesn’t know how to write! They need help!” So I dig a little deeper. “Are they unable to write clear sentences?” The response is usually, “No, they can write sentences. I end up having to fix a lot of their sentences, but they can write sentences.” “Is the problem grammar or spelling?” I ask. “No, not really. That is easily fixed.” “Is it that the concepts are unclear or disjointed? Do the reports make any sense?”


2 AUDIT REPORTING: YELLOW BOOK STYLE

“I think that is the real problem. The staff doesn’t seem to be able to focus on what is important about an issue, and we go round and round and round trying to distill what the main issue is. It takes us way too long. Sometimes it takes us over a month to get a report out.” Are you laughing to yourself right now? You may be thinking:

1. A month! I wish we could get our reports out that fast! 2. A month! What are those people thinking? We take a week at the most.

OR, 3. Yes, a month is how long it takes us, and that is ridiculous.

Would you believe that some audit teams only take a few days to issue a report? Would you believe that some audit teams take six or more months? Yep, it’s true. I have been in the profession for over 20 years and have worked with a variety of audit shops and firms, and I have seen the gamut. And what I found, both as a writing coach and as a writing instructor, is that all of the problems with writing usually stem from a few simple problems:

• On the front end, the powers that be are not clear about what they expect the audit report to look like.

• The reporting process is broken. • The powers that be are control freaks who won’t allow the staff to have their own voices.

Did you notice whom I was holding accountable for problems in those bullets? The directors, managers, and project supervisors call to ask me to fix their staff, when it is really the director, manager, or project supervisor that is causing the problem. Not convinced? Hang in with me as I use the guidance of the Yellow Book (Government Auditing Standards) to help us out of this quagmire!

1-1-2 Four Criteria for Good Business Writing Many moons ago, I read a great book titled The Basics of Business Writing by Marty Stuckey. She really hit the nail on the head when she listed four criteria for good business writing. I adapted them to make them sound more audit-‐‑y. Here goes: 1-1-2A Principle #1: A Good Audit Report Engages the Reader’s Attention



Let’s face it: we have a challenge before us. Audit reports aren’t well known for being engaging or entertaining. To make our reports appealing, we have to create user-‐‑friendly formats, meaningful titles, and enticing content. Yes, enticing content! 1-1-2B Principle #2: A Good Audit Report Persuades the Reader that Change Should Occur All statements lead to the recommendation! Your recommendation is the core of the report. It is the reason clients pay you. They want to know what they need to do better. And you’d better tell them clearly and convincingly. Later in this text, we are going to talk about the elements of a persuasive argument, also known in the Yellow Book as the elements of a finding. Each element is designed to support the recommendation. Some folks think that the purpose of an audit report is to inform. I disagree. Information without action is boring and unhelpful. As a professional, take the additional step and advise the client what should be done to mitigate the risks you uncover. Persuasive audit reports have a clear purpose: to elicit change. Only audit reports with clear, feasible recommendations have the potential to elicit change. Otherwise, everyone is too confused to act! Also, to persuade a reader to change, the recommendation must be supported by good, logically organized evidence. 1-1-2C Principle #3: A Good Audit Report is Mercifully Brief Because audit reports are not an enjoyable mystery novel or a juicy magazine, the best way to make them tolerable is to cut their length. Good business writing makes its point and leaves the reader alone to take care of other business. We will discuss the length of audit reports in Chapter 3. 1-1-2D Principle #4: A Good Audit Report is Clear and Well Organized The best audit reports have a clear, logical structure. One of the best ways to ensure good organization is to use a structure.



Reporters answer the questions: Who, What? Why? Where? And How? And auditors usually spell out the condition, effect, cause, criteria and recommendation—all elements of a good persuasive argument. Writing without a structure is messy and will cause you to ramble on and on in a disjointed fashion.

1-1-3 How this Text is Organized No doubt about it, the clearer you are about what you want, the more likely you are to get it! As my mama always said, “You can’t get what you want until you know what you want!” This book is divided into four sections. This first section focuses on general business writing and issues that need to be addressed before we begin the writing process. Next, in Section 2, we review the standards for writing audit reports. In the third section, we discuss the nine-‐‑step writing process, and the final section covers how to coach writers to improve their writing. In order for your report to have any impact at all, it has to be written so that your intended audience can digest it. And to do this, you have to follow some basic rules of writing etiquette. In the first chapter of Section 1, we looked at some basics of good business writing. Chapter 2 clarifies the importance of the audit process in writing the report and discusses ways to improve the audit process. And, in Chapter 3, we help you determine whom your audience is and how to remove those hurdles that you set up for your reader. We also discuss different tones you can use in your reports and the effects they have on the audience, and how long your reports should be. Next, in Section 2, we look at what the audit standards say we have to do. First, we review the basics of audits and the standard-‐‑setting bodies, discuss how the standards work together, and contrast the Yellow Book standards and AICPA standards (Chapter 4). Then, our focus is on the various reporting standards for financial audits in Chapter 5 and turns to the reporting standards for performance audits in Chapter 6. The last chapter in this section discusses the IIA standards and the AICPA standards for audit reports. At this point, we have a much clearer idea of what we want. The next question is, “How do we get it?” So that is the topic of section 3. Here we cover a step-‐‑by-‐‑step process for creating the audit report of your dreams … OK … That is taking things a little too far. We learn how to create an audit report that someone is compelled to read. This section is divided into four chapters that correspond with the major aspects of the nine-‐‑step process: planning, drafting, editing, and formatting. Then, our last section discusses coaching techniques and tips to help you help your team improve their audit reports. In general, writers are very self-‐‑conscious about and protective of their writing. Men and women who normally exude self-‐‑confidence turn into nervous



schoolchildren when they have to talk about their writing. And Chapter 12 provides guidance for coaching to make these experiences less painful—for you AND the writer!



Study Questions for Chapter 1 OBJECTIVE: Identify what is causing your team’s problems with business writing 1. You lead a team of 25 auditors. For the past few years, your report writing process has been so painful that several of your promising new hires named the report writing process as the main reason they resigned from your shop. You are a very busy chief audit executive so you delegate the responsibility for designing and managing the process to your managers. But you always want to see and put your personal touch on every report before it goes to executives. Several times this past year you have questioned the auditing abilities of your staff, as the reports seem to be unfocused. One team had to scrap their entire project because their results were not what you expected. What could be the root cause of your report writing process problems?

• Your managers’ inability to set audit objectives. • Your team’s inability to write. • Your team’s inability to stay focused. • Your need to have so much control.

2. You finished your financial audit of the Housing Authority, and now you have to begin writing your audit report. What is the main purpose of writing the report?

• To bring forth change within the Housing Authority. • To let the accounting department know which policies they need to follow. • To let the director of the Housing Authority know about any internal problems. • To make the public aware of any abuse, noncompliance, illegal acts, or internal control

weakness.



Answers to the Study Questions for Chapter 1 OBJECTIVE: Identify what is causing your team’s problems with business writing 1. You lead a team of 25 auditors. For the past few years, your report writing process has been so painful that several of your promising new hires named the report writing process as the main reason they resigned from your shop. You are a very busy chief audit executive so you delegate the responsibility for designing and managing the process to your managers. But you always want to see and put your personal touch on every report before it goes to executives. Several times this past year you have questioned the auditing abilities of your staff, as the reports seem to be unfocused. One team had to scrap their entire project because their results were not what you expected. What could be the root cause of your report writing process problems?

• Your managers’ inability to set audit objectives. Incorrect. Nothing in this scenario points to the managers’ inability to set objectives. A clear objective is very important to keeping a project on track and critical to a good audit report. Without a clear objective, the team flounders and gathers a variety of disconnected facts that cannot be woven together into a coherent whole document.

• Your team’s inability to write. Incorrect. Although it is easy throw the blanket statement, “Joe can’t write!” it is a vague and inaccurate statement. Exactly what you are complaining about as qualities of their writing! Is it their grammar, sentence structure, verbosity, or logic? To be helpful to your staff, you must clearly name the problem.

• Your team’s inability to stay focused. Incorrect. Although it does sound like the team is wasting some time and effort on their audits, their lack of direction is not necessarily rooted in their own personal behavior.

• Your need to have so much control. Correct. You are the main cause of your team’s writing process misery. If you would let go a little, you might find that the team can do a fine job. If not, there might be additional problems to be resolved.



2. You finished your financial audit of the Housing Authority, and now you have to begin writing your audit report. What is the main purpose of writing the report?

• To bring forth change within the Housing Authority. Correct. The main reason for writing the audit report is to bring forth change! Information without action is pointless!

• To let the accounting department know which policies they need to follow. Incorrect. The accounting department should be aware of the policies with which they must comply. But the report should not be the main source of this education. The powers that be should educate the department about these policies through training, conferences, or simple memos.

• To let the director of the Housing Authority know about any internal problems. Incorrect. While it is important for the director to be informed of any internal problems at the Housing Authority, this is not the main reason for you to write the report. You need to ask why the director needs to be informed of such problems.

• To make the public aware of any abuse, noncompliance, illegal acts, or internal control weakness. Incorrect. Even though the public wants to know about any and all of these problems, your main audience is not the public. What would the audience do with the information in your report?

CHAPTER 2—DOES YOUR AUDIT PROCESS LEAD TO A GOOD AUDIT REPORT?


Chapter 2: Does Your Audit Process Lead to a Good Audit Report? Objective:

• Define the possible contents of an audit report

This is the hard part! You need to discuss with your team whether your audits are designed to allow you to crank out a good report. For us auditors, our audit exposes the information we are going to put in the report. This information-‐‑gathering phase is also called the “soak it up” phase. Here we are soaking up all this great information like a huge sponge. The problem is that we can’t share everything we know with our readers. We have to be very selective about what we share because we don’t want to overwhelm and confuse them.

1-2-1 The Report Can Only Be as Good as the Audit Itself One of the most common reasons that an audit report is so painful to create is that the audit failed. Yes, I am using very strong, emotional language—failure.

One of my favorite postcards is of the Leaning Tower of Pisa. And the caption reads, “Nice façade, bad infrastructure.” You must have both substance and style to pull off a good audit report. And the substance comes directly from the planning and fieldwork of an audit. A director of a large university audit shop called me a few years ago to ask me to teach his staff how to write. I started inquiring about what was going on. He told me, “Over and over again, we get to the end of the audit, and my team turns in their reports, and I have to direct them to start all over again. They completely miss the boat. They have no idea how to write, and we spend months

cleaning up the mess.”



I then asked him how involved he was in the auditing process. He said that he was very busy meeting with the executive board and running the department, so he didn’t get involved in the audit process until the working papers were finished and the report was finished. My little light bulb went FLASH! I asked him whether he would be open to expanding the length of the training and really fix the problem. He said he would be. And then I asked him if he would sit in on the training. I was very thankful that he said yes. It was one of my most effective gigs ever! We went all the way back to the beginning of the process: to defining the audit objective. Without a good objective, how in the heck can you conclude? The conclusion is the answer to the objective. For instance, your objective might be to determine if university faculty is using purchasing/credit cards to pay for allowable items. Your conclusion might be, “Yes, the majority of faculty are using their purchasing/credit cards for allowable items.” And the exceptions you find would possibly show up as findings with resulting recommendations. But let’s say instead that your objective is a little looser than that. Your objective is to determine if the program is effective. AARGH. No wonder your report stinks. How are you going to conclude on that? 1-2-1A The Worst Audit Ever! While I was working for a state legislative auditor, the GAO came out with its new standards on performance auditing. Up to this point, the auditor had been conducting only financial and compliance audits. Management was intrigued with the idea of a performance audit and decided to try one. I volunteered to be one of the first to leave the comfort of financial opinion audits and give one of the performance audits a shot. One of our first opportunities to try a performance audit cropped up at the Department of Criminal Justice, our prison and parole system. The department had decided to parole a few guys who had been sitting on death row. (?!WHAT?!?) The legislature called us and asked us to go find out what was happening. A group of us got in our little cars and headed out to audit! At the entrance, the executive director kept asking us, “Now what are you doing here?” And we said, “A management control audit.” To which he asked, “What is a management control audit?” And we said, “It examines the five aspects of management control, including



safeguarding of assets, information and communication, …” Blah, blah, blah. And he gave us a quizzical look, which we purposely ignored. Then after a few more minutes of chatting, he asked us again, and we gave him the same lame response. After the third try, he finally gave up—thank goodness! We didn’t know what the heck we were doing and didn’t want to admit it! Our audit objective was basically, “What’s up?” We left the entrance conference congratulating each other on a job well done. Because we had no real focus, each of us decided to tackle a different area at the department, which by the way was HUGE! I decided, being a CPA and having a financial background that it must be about the money. So I started looking at the budget process. Genius. Another guy decided to look at health care for the inmates. Huh? Another guy decided to look at the little businesses the department created to employ the inmates. Only one gal actually looked at the right thing. She examined the parole process to find out why dangerous criminals had been released. After spending all summer and part of the fall in Huntsville, we came back to the office in Austin to compile the report. And how do you think that went? We finally published the report around Valentine’s Day of the following year. Jacque was a very talented report writer, and she was assigned to help us with this project. She had the unenviable task of taking all of the disjointed results we had come up with and tying them up with a neat bow. Our project manager kept telling her, “Come on, Jacque . . . can’t you come up with a thesis or a conclusion or something?” It wasn’t Jacque’s job to do that! Right after the report was issued, she quit, saying something about us auditors driving her completely insane. Most of the guys who were released were back behind bars after murdering a few more folks. “What’s up?” is a very wide-‐‑open audit objective. How do you tie together all of the disparate results in a cohesive audit conclusion and report? You can’t. No way. Having been through this experience, I was so happy that the audit director at the university was willing to expand the scope of the training. Because everyone on the staff realized that they were planning the audit at the end of the audit and that their audit objectives were so vague that the team was spinning its wheels most of the time. When it came time to conclude, they swam around some more and planned some more. And often found that they had to go back and do more fieldwork. What a mess! The state auditor’s office learned how to do it by first experiencing how NOT to do it! Why suffer? Instead, learn from their hard-‐‑earned wisdom.



1-2-2 Establish Expectations for your Team 1-2-2A Design a Sound Audit Process: Begin with the Objective, Scope and Methodology The audit objective, scope, and methodology build a fence around what you can say in your report. Post the audit objective and scope in a spot where you will see it every day. Use it to stay focused! 1-2-2A-1 What Makes a Good Audit Objective?

The audit objective is the question you are trying to answer for the reader. If you don’t know your audit objective, don’t even begin to write your report; it will be guaranteed to ramble on in a pointless and confusing manner. Harsh statement? Yes, but a very true statement! The audit objective establishes boundaries for the audit by clearly stating what the audit is to accomplish. It identifies the subject of the audit and the performance goal. Example of a clear objective:

Is the program complying with federal grant requirements? Ideally, you would answer this question in the first paragraph of your audit report. A good audit objective:

• is stated as a question • identifies the subject of the audit • is very specific

Example of a vague audit objective:

Audit the department’s child welfare program. Example of a better audit objective:

Is the Child Welfare Division ensuring the safety of children in foster homes in the state? Of course, what does safety mean? To answer the question, you will probably want to define important terms. Additional Examples:

VAGUE: Is the department working efficiently? BETTER: How promptly does the clerk’s office respond to research inquiries? VAGUE: Audit the hospital’s controls for safeguarding assets.



BETTER: Is the hospital’s medical equipment protected from theft? The more specific you are, the easier the audit is and the easier the audit report is to write. A bad audit objective guarantees a bad audit report. A firm, specific audit objective—don’t leave home without one! The Elements of a Finding Depend on the Objectives of the Audit When you come up with an overarching audit objectives, you can develop the elements of a finding—condition, effect, cause, criteria, and recommendation. What Questions Do the Elements Answer for the Reader? This list describes the questions that each element should answer for the reader:

• Condition: What is the problem/issue? What is happening? • Effect: Why should the reader care about this condition? What is the impact? • Cause: Why did the condition happen? • Criteria: How do auditors know this is a problem? What should be considered a

problem? • Recommendation: How do you solve the condition? The cause?

These elements are an important part of the audit process, since you will use them to formulate your report. We will cover various aspects of the elements in later chapters. 1-2-2A-2 How Do You Define the Audit’s Scope?

The audit scope defines the depth and coverage of audit work and any scope limitations. An audit scope should, as applicable:

• explain the relationship between the universe and what was audited • identify organizations • identify geographic locations • identify the period covered • report the kinds and sources of evidence • explain any quality or other problems with the evidence • report significant constraints imposed on the audit approach by data limitations or

scope impairments Example of an audit scope:

The scope of our review included all Oregon trial courts—that is, state circuit courts, local justice courts, and municipal courts. Our test period covered January 1, 2000, to April 30, 2000, and included the most recent data available at the time our audit fieldwork was conducted.



1-2-2A-3 How Do You Define the Audit’s Methodology?

The audit methodology explains the techniques used when performing the audit. The audit methodology lists what the audit team did to answer the audit objective. The auditor should describe the type and source of evidence gathered. The type of evidence could be:

• physical evidence, such as an item of inventory • documentary evidence, such as an invoice or purchase order • testimonial evidence, such as interview responses from the auditee

The methodology should:

• identify any significant assumptions made in conducting the audit • describe any comparative techniques applied • describe the criteria used • describe the sample design and state why it was chosen when sampling significantly

supports auditor’s findings Example of a methodology section:

In performing this audit, we reviewed applicable statutes, interviewed court officials, analyzed court documents, tested court filings for compliance with statutes and grant requirements, and tested court records for reliability and completeness.

If you are following Yellow Book auditing standards, you are required to put the objective, scope, and methodology in your report and in your working papers. You will find detailed coverage of the Yellow Book standards relating to this subject in Chapters 5 and 6. 1-2-2B Possible Elements of an Audit Report What are the components of your audit report? Here is a long list of possible components. Your report may contain all or some of these elements:

• transmittal letter • cover • key points • table of contents • standard letters (opinions, internal control, and compliance letters) • executive summary • financial statements • detailed issues and recommendations • follow-‐‑up on prior audit issues



• management’s responses • auditor follow-‐‑up comments • objective, scope, and methodology • background information • appendices

What does your team include in their report? Many of the components are pretty easy to develop. You may be able to customize canned, or form, versions of the:

• transmittal letter • cover • table of contents • standard letters (opinions, internal control, and compliance letters)

See Appendix C for examples of entire audit reports containing these components. The hardest components to develop are in boldface type above. They are the:

• objective, scope, and methodology • detailed issues and recommendations • executive summary

Later, we will discuss more about writing the detailed issues and recommendations and the executive summary of the report.



Study Questions for Chapter 2 OBJECTIVE: Define the possible contents of an audit report 1. Which of the following represents a statement of an audit scope?

• We visited 17 of the 39 field offices of the Department of Transportation. • We interviewed the board of directors and the executive team, tested for compliance

with contract provisions, and confirmed contract terms with vendors. • Our audit is conducted in accordance with Government Auditing Standards issued by

the Government Accountability Office. • We endeavored to determine whether the Department complied, in all material respects,

with contract provisions with its vendors. 2. Which of the following represents a focused objective that will result in a relatively easy reporting process?

• Determine whether the entity is efficiently using resources to provide services to the public.

• Determine whether the facility improvement program complies with provisions of the Davis Bacon Act.

• Conduct a management control audit of the State of Mississippi. • Does the entity comply with state regulations regarding payments to vendors?

3. Which of the following statements is true about the relationship between the audit process and the reporting process?

• An unfocused audit with a vague objective can be remedied in the report-‐‑writing phase. • A specific audit objective and focused audit process will ease the report-‐‑writing phase. • The report should be outlined at the end of audit fieldwork. • The executive summary cannot be envisioned until the detailed audit report is

completed.



Answers to the Study Questions for Chapter 2 OBJECTIVE: Define the possible contents of an audit report 1. Which of the following represents a statement of an audit scope?

• We visited 17 of the 39 field offices of the Department of Transportation. Correct. This gives readers an idea of how much coverage you had of the audit subject. The purpose of the scope statement is to explain the relationship between the universe and what you actually audited.

• We interviewed the board of directors and the executive team, tested for compliance with contract provisions, and confirmed contract terms with vendors. Incorrect. This is a methodology statement that explains the work you did to support your audit conclusion.

• Our audit is conducted in accordance with Government Auditing Standards issued by the Government Accountability Office. Incorrect. This is a statement regarding the standards that the auditor followed in conducting their work. The scope endeavors to explain the relationship between what could have been audited and what was audited.

• We endeavored to determine whether the Department complied, in all material respects, with contract provisions with its vendors. Incorrect. This is an objective statement that explains what you were trying to achieve with your work. The objective can be thought of as the question that you are seeking to answer about the audit subject and can cover a wide range of scopes.



2. Which of the following represents a focused objective that will result in a relatively easy reporting process?

• Determine whether the entity is efficiently using resources to provide services to the public. Incorrect. This audit objective will cause you fits in the reporting phase. What is your conclusion going to be? “The entity is efficiently using resources?” Wow, that is a mouthful and will involve a wide range of work: it covers the entire entity and is vague in the quality we are trying to judge. Efficient can mean different things to different people and will likely cause your audit team problems as they try to reconcile to each other’s definitions.

• Determine whether the facility improvement program complies with provisions of the Davis Bacon Act. Correct. Thankfully, this objective identifies a specific subject and a specific compliance requirement. This objective is easy to turn into a conclusion, such as “The Child Protection Program complies with provisions of the Davis Bacon Act.” And the objective is focused enough and limited enough to keep all of the auditors working toward the same goal.

• Conduct a management control audit of the State of Mississippi. Incorrect. So your audit is going to take on the entire State of Mississippi. Good luck with that. I’ll give you 100 auditors and see you in five or so years, and won’t that report be fun to pull together?

• Does the entity comply with state regulations regarding payments to vendors? Incorrect. Although we narrowed the focus of the compliance issues with which we are somewhat concerned, we still could end up with a variety of results. There are likely 30 or so regulations regarding payments to vendors. And you are going to check the entire entity and all vendors? What if the entity is large and complex like the Department of Defense? This objective could cause trouble in the report-‐‑writing phase.



3. Which of the following statements is true about the relationship between the audit process and the reporting process?

• An unfocused audit with a vague objective can be remedied in the report-‐‑writing phase. Incorrect. An unfocused audit will result in an unfocused audit report. The auditors will be unable to conclude and will spend too much time in effort in clean up and reorganization. If you fail to plan, you plan to fail.

• A specific audit objective and focused audit process will ease the report-‐‑writing phase. Correct. The better the audit, the easier the report. An audit is best when it defines a clear audit objective at the end of the planning phase and sticks with it throughout the engagement. Otherwise, the audit process can go astray at many junctures.

• The report should be outlined at the end of audit fieldwork. Incorrect. Ideally, the team has a vision of the audit report at the end of the planning process. The fieldwork phase of the audit simply gathers evidence that you use to support the statements in your audit report.

• The executive summary cannot be envisioned until the detailed audit report is completed. Incorrect. The executive summary can be thought of as the abstract or thesis statement of the audit report and does not have to be an afterthought. As a matter of fact, it is best drafted at the end of the planning phase and shared with all the team members. It will obviously have holes, or places where more evidence and information is necessary, but the general sense of what you are going to say at the end of the engagement to the executives can be determined early in the audit process.

CHAPTER 3—AUDIENCE, TONE, AND LENGTH


Chapter 3: Audience, Tone, and Length Objective:

• Choose reporting expectations including audience, tone, and length that are appropriate for your audit team

Before you can cure your report-‐‑writing problems, you and your team need to agree on what you want the report to contain, look like, and achieve. What will be your expectations of the audit report? You are going to need to have a few powwows to discuss these expectations. In this chapter of the book, we will cover:

• identifying your audience and eliminating reading hurdles • establishing and controlling tone • determining an appropriate length for your report

1-3-1 Who is the Audience? Before you begin to write, you need to ask, “Who is the audience for this report?” Possible audiences include:

• the board • an executive • an owner • a front-‐‑line manager • the auditee • a regulatory agency • a shareholder • the grantor • the public • the press

The best writing works to please the audience—the reader, not the writer. And many of the readers on this list are pressed for time. Most prefer to get to the bottom line as soon as possible, with a minimum of detail.



Not all people are like that; some personalities seem to like beaucoup detail. But I would say that 90% of executives want you to summarize your thoughts quickly so that they can get on to more pressing matters. (No, your audit results are not usually their most pressing matter. Sorry to burst your bubble.) Ask yourself, “What problems does my audit solve for this audience? What questions do they want answered?” A board member probably wants to know if the executives they hired are doing their jobs and whether there are any lurking problems that could get the organization into trouble or get them sued. An executive wants to know if the folks they hired are doing their jobs and whether there are any lurking problems that they need to resolve right away. A manager wants to know . . . well, if the folks they hired are doing their jobs and whether there are any lurking problems that could get them or their employees into trouble or get them fired. Do I even need to go on? In general, a front-‐‑line manager is going to want more detail than a high-‐‑level executive because they are the ones that must implement the recommendations. And where should we tell them the answer? As soon as possible!!! We serve a customer, and the customer expects us to answer certain questions for them. These questions should be answered as plainly and as early in the audit report as possible. Don’t make them fish for it, thumbing through that boring scope, methodology, and background. Background should go where its name implies—in the back! 1-3-1A Who is the Main Audience for Your Report? This is often a very difficult question for an audit shop to answer. Is the main audience the front-‐‑line manager or the executives or the board of directors? I always like to make the person who pays my salary happy. That’s just one of those selfish “I want to keep my job!” rules of thumb. But as we discussed, you usually can’t make both of these readers happy. The executives want less detail, while the manager wants more.



1-3-1B How Do You Find out What the Client Cares About? You have to talk to the client to find out what they care about. Talk to the client! Are you crazy? Early in my career at the legislative auditor, we underwent a change in leadership. And a new crop of unusual folks was hired. One of the new leaders, Brad, noticed that it took months for us to get our reports out. And he noticed that the legislature wasn’t responding to or acting on our recommendations. We were ever so proudly sending 60-‐‑page reports to the legislature and waiting for their amazed and incredulous response. We expected the legislative building to rock off of its foundation. It is a good thing we weren’t holding our breath. Brad was pretty radical for a state audit shop. He had a ponytail and knew nothing about accounting. He held a masters degree in English, of all things. And he kept saying, “Have you ever asked the clients what they want?” And the response from the powers that be was either “We have always done it this way,” or, “We know what the customer wants; we don’t have to ask.” Brad, the ponytailed English major, did not give up. He edited every report that went out and continued to express dismay that no one was reading them. After several months, the leadership finally agreed with Brad that we should at least visit the legislature and see what was happening to our reports. Brad found out that legislative aides were receiving a stack of mail three and a half feet high per day! (This is before email, obviously.) Where do you think our reports ended up in the stack? Well, they weren’t at the top, because it took the legislative aides a long time to pore over the information in our reports to get anything useful out of them. One dedicated legislative aide spent hours writing for his boss executive summaries of our lengthy reports. Had we not talked to the client, we would still be waiting for some sort of response. 1-3-1C Create a Report with Layers Needless to say, Brad’s discovery made our leadership a little sad. We had been doing the wrong thing for so long that it was disheartening. Brad had an answer, however. He said that WE should be creating the executive summaries for the legislature. Since then, the legislative auditor’s report has grown layers.



The legislative auditor sends layered emails to interested parties to say that the office just issued a report. Here is an example of such a layered email:

The Auditor’s Office has just issued a report on the Lottery Commission. The Lottery Commission does not accurately calculate jackpots. If you want more information, click here.

Then when you click on the link, it takes you to another webpage that gives you one more paragraph with only four lines of detail. At the end of that detail, it asks you to click for further detail, and then you are taken to the executive summary. When you are finished with the executive summary, you can click to the full report if you need it. How friendly is that? If you don’t want the detail, you don’t have to have it. Brad’s radical ponytail ideas eventually won out. But are they that radical? NOPE. They are purely practical. Another way to layer a report is to design the top layer for the executives and the back layer for the managers. For example, the audience may want to know:

• Are funds being spent in accordance with grant provisions? • Are we exposing ourselves to risk? • Are we getting the most value from our investment? • Are the financial statements accurate?

The answers to these questions should be spelled out in the first sentence on the first page of the report. Why make readers work for the answer? You could even use one of the questions as a title and then answer it in the following paragraph. Example:

Title: Are we in compliance with federal grant requirements? Text: We are in compliance with federal grant requirements except in a few minor instances.

If someone is paying your salary, you should do your best to please them, right? And that means giving them the information they want in the manner that they want it. 1-3-1D Are You Setting up Hurdles for the Reader? Do you have time to read everything that comes across your desk and through your computer word for word? The majority of us would say no.



I am a scanning reader. I try to glean the key take-‐‑aways from each document by reading titles, looking at pull quotes, and concentrating on the first sentences of paragraphs. You need to do whatever it takes as a writer (and as a formatter) to make it easy for the reader to get to your core message. No one cares as much about what you have written as you do. In the 1980s, 400 banking executives participated in a little experiment. These 400 executives were sent a routine three-‐‑page memo. (Another pre-‐‑email story… I’m so OLD!) In the middle of the second page, a sentence told them that they were entitled to a gift certificate. All they had to do is call to have it mailed to them.1 How many executives got the gift certificate? Just 14 out of 400. And they don’t think it was because all of them read that far; they think just one guy read it and told his buddies. Good writers tear down hurdles for readers. They try their hardest to make the text accessible and digestible. How many hurdles are you making your reader jump over to get at your message? 1-3-1D-1 Hurdle #1: Your Job Title

I assume that you are reading this book because you are an auditor. Have you ever noticed that folks aren’t that interested in talking to you at parties? Do they always want to get a refill on their glass of punch soon after you tell them your occupation? Face it—we don’t exactly have a reputation for being exciting communicators. Some audit shops approach auditing as they would a hunting expedition—being happy to bag the big findings. Audit shop cultures range from being “gotcha” auditors to “collaborative” auditors singing, “We are the world! We are the children!” And while some audit shops are always whacking the client over the head with a big stick, others have no teeth at all. Your reputation for being a reasonable, concerned professional will help get your reports read. But, being unreasonable, self-‐‑aggrandizing, and unprofessional is a hurdle that even good writing won’t overcome. 1-3-1D-2 Hurdle #2: How You Have Treated Your Reader in the Past

I’m also going to assume that you are reading this book because you want to change the way you do things. You want your report and report process to be better.

1 Hershkowitz, Sue, “Mastering Communications—It Takes More than Just the Technology.” Procomm Magazine, March 1990.



If you have been abusing your reader by rambling on and on about stuff that no one cares about; if you have created ugly, unappealing formats for your documents; or if your reports have been too little, too late—you are going to have to shake things up quite a bit. You are going to have to show the reader that this is a new day and a new approach. And that may take creating a whole new audit report format: a new look and feel. This will temporarily catch their attention and wipe the slate clean of your past mistreatments. Then you have to rebuild the rapport that you have lost and maintain it. Once, I worked as a controller for a large organization. Right before I got the job, the organization had updated its general ledger software, and the transition was a mess. The IT department sent all the users massive memos explaining the glitches. And they seemed to send something every week. Because I was new to the job and was still enthusiastic, I read everything that came into my mailbox, including these IT memos. After several months, I finally realized that no one was referring to them or discussing them. The memos never came up in our team meetings. I asked Cindy, a co-‐‑worker, what she did with the memos. Cindy lied to me and said that she read them. Another colleague revealed the truth—everyone kept the memos in their filing cabinet in date order. If we ever had a problem, we would call IT, as usual, and IT would sometimes respond, “We told you about that in a memo dated October 17, 1992.” From then on, I filed anything that the IT department sent in my filing cabinet in date order. They could have written to tell me that my leave had been terminated, that my pension was cancelled, that my house was on fire, and I would have filed it. I no longer trusted them and no longer made the effort to read their stuff. 1-3-1D-3 Hurdle #3: The Format

Are you still using Times Roman font, or a template for your report that was created sometime in the 80s? Time to put some lipstick on that pig! Format is the last thing you do but the first thing the reader will notice. While I am on the road, the hotels in which I stay typically offer both the Wall Street Journal and USA Today. I feel that I should read the Wall Street Journal because I am a CPA, but I always pick up USA Today. I choose that paper because of the format: the color, the large font size, the titles, the pictures, and the graphics. The Wall Street Journal’s articles are great, once I get over myself and actually read them. But the format is a hurdle that some mornings I don’t feel like jumping. The font is very small, the information is packed in, and the fabulous color they added to the front page about five years



ago—as a nod to the needs of the reader for some visual help and cues and with much pom

Documents

yellowbook-cpe.com€¦ · CHAPTER#4—EXPECTATIONS# AUDIT#REPORTING:#YELLOW#BOOK#STYLE# # 4# # Table of Contents Section 1: Whas’ up with Your Team’s Writing?