But there's 12 months of expense, so it's ok.

noreply@blogger.com (Joel Ungar) — Tue, 04 May 2021 13:33:00 +0000

The best way to test accounts payable for understatement is subsequent disbursement testing - select payments made after the date of the financial statements. (Some people prefer confirming accounts payable but I find that to be ineffective.) Look at the supporting documentation and see whether it should be in accounts payable at the balance sheet date. If it should be and is included in payables, then great. If it should be and it isn't, that's a problem, especially if it's material.

Let's assume it's recurring monthly expenses - say utilities. I'm auditing 2020. It's a ready-mixed concrete company, and the plan uses a lot of electricity and water. I'm performing subsequent disbursement testing and select the electric and water bills paid on January 25. I get copies of the bills, and they cover the entire month of December. I check to see if they are in accounts payable, and they aren't. The two bills amount to $60,000. Materiality is $35,000. Problem.

I go to the controller and say we need to record an audit adjustment for these bills. The controller responds: "That's ok. There are 12 months of utility expenses in the income statement, so we're good." (I've even heard other auditors say that. Not me.)

Really? We're good?

The controller is telling me the utility expense accounts cover December 2019 - November 2020. December 2020 will hit the expense accounts in 2021.

Really? We're good?

This is when I visit our friend the Summary of Significant Accounting Policies. The summary lists out the accounting policies the company selected where it has a choice of various alternatives. I find the "Basis of Accounting" policy and it reads:

The Company maintains its accounting records and prepares its financial statements on the accrual basis in accordance with accounting principles generally accepted in the United States of America (GAAP).

Had the Company selected the cash basis of accounting, the controller would be right. Because that's what they've done here. The expense accounts only reflect the utility expenses paid in 2020. That's cash basis accounting, not accrual basis accounting.

There's a second problem here. Assuming the company has always recognized utility expense this way, they have consistently been one month short in utility expense. They have consistently underreported accounts payable. Cumulatively, they have overstated income and, in turn, equity. They've also overpaid taxes. Basically, they messed up in year one.

The correct answer here is to bite the bullet and correct it now. This is a correction of an error - we're talking material amounts here - and should be presented as such. Nobody likes corrections of an error. It makes the company look bad. If you're a continuing auditor, it makes you look bad. If you're a successor auditor, it kind of makes you look good, but you don't want to look good like that.

Of course, this applies to all expenses, not just utilities.

Agree? Disagree? Let me know.

I Read 48 Books in 2019. These 3 Mattered The Most.

noreply@blogger.com (Joel Ungar) — Sat, 04 Jan 2020 21:01:00 +0000

I read 48 books in 2019 totaling 13,235 pages according to Goodreads. 40 of them were read in the last four months of the year. Coincidentally, that was when I cut way back on my television watching. hard to say which books were the best, but there were three that had a big impact on me.

#1: The Miracle Morning: The Not-So-Obvious Secret Guaranteed to Transform Your Life Before 8 am by Hal Elrod.

A friend recommended this to me. I read it at the

beginning of the year but didn’t do anything with it then. Let’s be real: getting up early isn’t for everybody.

I am an early bird, but to do it would mean getting up even earlier. I reread it in August and started doing The Miracle Morning in early September.

Elrod reviewed systems used by many people to succeed, put them together and came up with what he calls SAVERS:

S: Solitude (or meditation) – 5 minutes
A: Affirmations – 5 minutes
V: Visualization – 5 minutes
E: Exercise – 20 minutes
R: Reading – 20 minutes
S: Scribing (journaling – he uses scribing because the acronym would be SAVERJ if he used journaling. Can’t blame him.) – 5 minutes

I did the full system for about six weeks. I pulled back because my getting up at 5:00 was disturbing my wife’s sleep.

I found that the solitude, affirmations, and especially visualizations weren’t connecting to me. Exercise and reading have stayed in the ritual. It’s rare that I don’t exercise for at least an hour now in the morning. When I’m on the treadmill or an exercise bike, I can multitask and read at the same time.

I reintroduced scribing on New Year's Day. My friend Preston True showed me Michael Hyatt’s Full-Focus Planner and its structure resonated with me. Solitude, affirmations, and visualizations may get reintroduced over time.

Even though I’m not “correctly” following The Miracle Morning, it has had a tremendous impact on my thinking. Most of my reading has been personal development, historical, or business-related. I am much more focused on personal improvement and goal achievement than I have been in years.

#2: The Total Money Makeover: A Proven Plan for Financial Fitness by Dave Ramsey.

I have used Quicken to manage our personal finances for 24 years. But I never really used it properly until I read The Total Money Makeover.

I know, you’re thinking Joel is an accountant, he must be good at this stuff.

I’ve dutifully downloaded or entered everything that impacted our financial lives, but I never really considered the information it generated.

It generates a lot of information, some of which surprised me. I never realized I spent over $900 on a fertilizer service. Or that we spent more than $1,000 annually on cable TV. We killed the latter expense, and we’re going to do the fertilizing ourselves in 2020.

Ramsey, in a folksy manner, makes several great points in his book.

Like getting rid of all debt as soon as possible (not including your mortgage). Stop using credit cards – pay cash. Create a budget that says where every dollar coming in is going to go for the month.

The budget process for us has been incredible. We set one up beginning in October and watch it carefully. If we go over budget somewhere, we reduce spending elsewhere. We budget for savings.

We’ve always paid our credit cards off each month. We were using four different cards. One has been retired.

One card I only use for reimbursable work expenses, and I pay it off as soon as I’m reimbursed. The Visa we use at Costco and is paid off immediately. The remaining credit card is being used as before but not for much longer. I use our debit card all the time.

Ramsey is well known for his baby steps. We are working our way through them. Our kids are done with college, so we don’t have to do the step on saving for college. Our mortgage has just over three years to go, and I plan on paying that off sooner.

That’s impact enough. That this process has my wife and me communicating better than we ever have on our finances is a bonus.

I wish I’d read this when it first came out.

#3: Deep Rules: Rules for Focused Success in a Distracted World by Cal Newport.

You know how sometimes when you are working you get into a state where you are totally focused on a project that you do not realize how time has gone by, and your work product is outstanding? Some people call that state “flow.” Newport calls it “deep work.”

Newport provides strategies to help you get to deep work on a consistent basis. He does it by getting rid of the things he doesn’t need to be doing. He doesn’t consider speaking engagements – his agent does that for him. That gives him more time to do his work. He makes

it difficult for people to contact him, again so he can spend more time doing deep work.

This strategy must work, as he has written three books. Newport is an associate professor of computer science at Georgetown University and has written six self-improvement books. Note that these books aren’t about his area of study – he still does that full-time.

One of the later chapters discusses getting rid of social media distractions. Newport doesn’t have a Facebook page (at least as of the writing of this book), nor is he is on Instagram or Twitter. He has a blog. He has a website. Again: this allows him to have more time to do his deep work.

Newport suggests to his readers that they take a 30-day social media vacation. From October 14 to November 14, I was off Facebook, Instagram and Twitter; I stayed on LinkedIn as a professional necessity.

The first couple of days of my “vacation” I found myself reacting to various things or thoughts with “that’s a Facebook post.” After a few days, that stopped.

I found I didn’t miss Facebook all that much.

I didn’t get into political arguments with people I’ve never met. I didn’t get inundated with pictures of friends showing off what they bought or where they were or look at how great my life is. I missed learning of the passing of friend’s loved ones, though, and I regret that.

Since the end of my vacation, I am back on Facebook, but not nearly as much. I rarely look at it during the workday. I spend some time getting caught up in the evening. And I often find myself thinking that I could have used those 10 minutes to do something more important.

I plan on reading two of his other books this year, So Good They Can’t Ignore You: Why Skills Trump Passion In The Quest For Work You Live and Digital Minimalism: Choosing a Focused Life in a Noisy World.

And I’m finding I’m getting into flow / deep work much more often than I was before reading this book.

Parting Thoughts

Warren Buffet famously reads 500 pages a day. I don’t know how anyone can do that. I aim to read at least one hour every day.

As of January 1, 2020, the Kindle app says I have read 54 days in a row and 19 weeks in a row. I still read some books the old-fashioned way, but I intend to keep the Kindle streak going.

My official reading goal for 2020 is 52 books. As my busy season is starting, I might fall a bit behind. If I hit 52 before the end of the year, I’ll up the goal.

What books that you read in 2020 had a big impact on you? I would love to know.

Joel on Accounting and Auditing - Joel M. Ungar, CPA

But there's 12 months of expense, so it's ok.

I Read 48 Books in 2019. These 3 Mattered The Most.