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When preparers or junior accountants complete their assignment, but before submitting it for review, I suggest they review it for reasonableness. I offered a “One-Minute Test for Preparers” in a previous column, but now I want to quantify it so staff have some guidance on when they should educate themselves more.

tax returns

  • If there is an unexpected outcome such as a large balance owing or a refund, they must find the reason and explain it on a spreadsheet. I define “big” as anything greater or less than 10% (or any percentage you choose) of last year in a category or for the final result. These differences must be examined and reconciled. This reconciliation must be included in the file for the reviewer to review.
  • Find out if a projection has been prepared for the client and, if so, reconcile the deviations of ±10% with the final result and put it on file.
  • “Large” and “substantial” differences can mean different things to different people, so use a difference of more than ±10% as a benchmark. Here are some illustrations:
    • If the adjusted gross income is $170,000 instead of $150,000, this represents a difference greater than 10%.
    • If the reimbursement is $10,000 instead of $8,500, this is a greater than 10% change; the same with a balance owing of $6,000 instead of $7,000.
    • The size of the return matters. In the previous example, if the client’s AGI was $1 million, the magnitude of the change would be much less than if the AGI was $70,000, but it would still be a difference. to examine.
    • Use judgment.
  • If something looks like a red flag that could cause an audit, question it.

financial state

  • Small changes in some valuation, provision, warranty or accrual accounts that remove the parentheses around the lower figure, i.e. turning a loss into a profit, may result in a different understanding of the business.
  • A cost of sales item of $18,000 would generally be irrelevant to a business with sales of $50 million and a cost of sales of $30 million, unless it only makes a loss of $10,000. $ becomes a profit of $8,000.
  • A $230,000 embezzlement might be irrelevant to a company with $50 million in revenue and $8 million in pre-tax profit if it was caused by a shipping clerk .
  • However, it may have a different relevance if it was caused by the person in charge of the shipment or by the controller.
  • This could have even more special meaning if this trend continues for four years – e.g. this year’s amount was $230,000, last year’s was $150,000, previous year’s $80,000 and $20,000 in the first year.
  • In the previous illustrations, a very small loss was converted into profit. The shipping clerk might be an isolated situation that does not affect the validity of the company’s financial results, but the controller is someone who has access to records that might affect the overall results. A continuing trend generally indicates a systemic weakness in controls. In addition, the loss suffered by the controller or shipping manager could be due to the lack of supervision or responsibility of an employee in a very responsible position.
  • Relevance and context matter.
  • As auditors, we take the notion of “fair presentation” very seriously in the audit report, but it may not mean the same to the manager planning the work as it does to the staff accountant. who actually performs the services. Both functions must be aligned in their purpose.
  • The quantified meaning of “material” can mean something different depending on context and perception. Field staff must learn to exercise awareness, judgment and curiosity about marginal transactions.
  • Materiality is usually measured against total transaction values, but sometimes the result can be misleading and staff need to be trained to know where this potential lies.

Although these ranges and illustrations are suggestions, they should not supersede the judgment or curiosity that a field staff member should exercise. Context matters.

Do not hesitate to contact me at [email protected] with your questions about practice management or assignments you may not be able to complete.

Edward Mendlowitz, CPA, is a partner at WithumSmith+Brown, PC, CPA. He is on Accounting Today’s list of the 100 most influential people. He is the author of 24 books, including “How to Review Tax Returns”, co-authored with Andrew D. Mendlowitz, and “Managing Your Tax Season, Third Edition”. He also writes a blog twice a week dealing with the issues customers have with with the Pay-Less-Tax Man Blog for the bottom line. He is an adjunct professor in Fairleigh Dickinson University’s MBA program and teaches end-user applications of financial statements. Art of Accounting is an ongoing series where he shares autobiographical experiences with advice he hopes his colleagues can adopt. He welcomes practice management questions and can be reached at (732) 743-4582 or [email protected].