This means that failing to spend 75% of the loan amount on payroll costs will reduce the amount of forgiveness but not render the borrower ineligible for forgiveness. Additionally, the amount of forgiveness is based on the amount the borrower spends on payroll, and not on the total amount borrowed or spent. The Small Business Administration has released two new interim final rules providing additional guidance with respect to loan forgiveness and audits of loans under the Paycheck Protection Program .
In loan testing, loans to participants and the related interest are tested to determine whether the amounts due to the plan have been properly identified, valued, recorded, and disclosed in the financial statements. The SBA has not yet released information on when they will begin audits, how they will be completed or what information will be requested. However, we do know if the SBA decides to conduct an audit it will notify the lender in writing and the lender will then have five business days to notify the borrower of the audit request. If audited, the borrower will respond to the SBA’s questions and provide additional information either directly through the SBA or indirectly through the lender. SBA audit decisions are appealable and we expect an additional interim final rule addressing the appeal process.
Primary Debt Assertions
Auditing procedures to provide a reasonable basis for extending from an interim date to the balance-sheet date the audit conclusions from such principal substantive tests. The SBA has the authority to review any PPP loan, and such review may include a review of a borrower’s eligibility for PPP funds, loan amounts and use of proceeds, and loan forgiveness amounts.
Thus, the use of blank confirmation requests may provide a greater degree of assurance about the information confirmed. However, blank forms might result in lower response rates because additional effort may be required of the recipients; consequently, the auditor may have to perform more alternative procedures. Confirmation requests should be tailored to the specific audit objectives.
The auditor will also request a copy of the title report and mortgage insurance policy for the property in question. The title report should not show any outstanding claims, liens or other defects.
Directional Risk For Debt
Because sources of audit evidence that reflect the same values may label and format their data differently, the objective of this standard is for the CPA firm to maintain data in a consistent manner so that the RPA can work on numerous audit engagements. Because RPA replaces the structured, time-consuming, and repetitive activities that auditors perform, the audit process should inherently be more efficient. In addition, as the auditors have more time to perform complex testing involving the investigation of accounting anomalies, the effectiveness of the audit will also improve. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
In both of the above examples, if the auditor concludes that the effectiveness of such substantive tests would be impaired, additional assurance should be sought or the accounts should be examined as of the balance-sheet date. Before applying principal substantive tests to the details of asset or liability accounts at an interim date, the auditor should assess the difficulty in controlling the incremental audit risk.
Meant that, the audit should test the addition of the borrowings during the audited period as well as payment of the borrowing to lenders by obtained its supporting documents for vouching. Borrowing listing must be prepared to keep tracking of the movement of its balances. In the borrowing listing, the audit could get information such as sources of those borrowings and ending balances of the current borrowed amount which presented in the financial statements as mention above.
Potential Applications Of Rpa To Audit
Substantive tests that are based on such documents and relate to the completeness assertion for the remaining period may be ineffective because the documents may be incomplete. Likewise, substantive tests covering the remaining period that relate to the existence assertion at the balance-sheet date may be ineffective if effective controls over the custody and physical movement of assets are not present.
- Because an automation solution has not yet been fully deployed at this firm, parallel comparisons of the traditional method to the new cannot be made.
- This mindset is ingrained in auditors during their time as students and improves with experience.
- In determining the effectiveness and efficiency of employing confirmation procedures, the auditor may consider information from prior years’ audits or audits of similar entities.
- Additionally, the amount of forgiveness is based on the amount the borrower spends on payroll, and not on the total amount borrowed or spent.
- This includes the objective, key assertions as well as the specific audit procedures for the audit of loan and advances.
If there are questions regarding debt agreements and their presentation, I include additional language in the representation letter to address the issues. For example, if an owner loans funds to the company but there is no written debt agreement, the owner or management might verbally explain the arrangement. In such cases, I include language in the management representation letter to cover the verbal responses. As you think about the above risks, consider the control deficiencies that allow debt misstatements. To perform effective and sufficient testing on borrowings is not only focus on control testing but also focus on control validation by selecting some supporting document for vouching. Auditors should check presentation and disclosure of loans and advances has been made as per relevant accounting standards.
Auditor should send confirmation to related parties and match replies with the amounts outstanding against each party. Founded in 1894, Harter Secrest & Emery LLP is a full-service law firm providing legal services to clients ranging from individuals and family-owned businesses to Fortune 100 companies and major regional institutions. With offices in Rochester, Buffalo, Albany, Corning, and New York, NY, the firm comprises more than 120 attorneys and total staff of 260. Coordinating the testing of interrelated accounts and accounting cutoffs. Evaluating the information, or lack thereof, provided by the third party about the audit objectives, including the reliability of that information.
Financial records demonstrating the companies need for access to capital through the PPP loan (per the above and because of the SBA safe harbor, this may be applicable only for loans in excess of $2 million). Fn 1 Bill and hold sales are sales of merchandise that are billed to customers before delivery and are held by the entity for the customers. Mortgage Settlement Services Integrated mortgage settlement services software and provider marketplace. MoreRisk Assessment Free, secure risk analysis tool for banks and credit unions.
Sba Issues Guidance On Loan Forgiveness And Audit Procedures
One thing to consider is the number of hours you are going to have for the audit. Your budgeted audit hours will determine what procedures you will be able to perform.
Understanding its control, assertions and possible risk is a good start for all auditors to design effective audit procedures. A portion of the mortgage audit should also be dedicated to analyzing the appraisal, mortgage insurance and title search on the property that’s used as collateral for the loan. The appraised value must be sufficient to cover the entire balance of the loan unless additional property is pledged as collateral. The mortgage file should include copies of comparable sales and a description of the valuation method the appraiser used to prepare his report, along with a confirmation of the size of the property and any buildings located on the site.
Borrowers should work closely with their accountant and other advisors in preparing the documentation and maintaining copies. According to the SBA, borrowers must retain all records for six years after the date the loan is forgiven or repaid. Decisions about coordinating related auditing procedures should be made in the light of the assessed level of control risk and of the particular auditing procedures that could be applied, either for the remaining period or at year-end, or both. Factors to be considered before applying principal substantive tests to the details of particular asset or liability accounts as of a date that is prior to the balance-sheet date. When using confirmation requests other than the negative form, the auditor should generally follow up with a second and sometimes a third request to those parties from whom replies have not been received. For example, if—during the walkthrough—we see that one person approves loans, deposits loan proceeds, and records the related debt, then we will perform fraud-related substantive procedures. Before specifically go to the understanding control of borrowings, the position of the borrowing which presented in the balance sheet, a part of the financial statement is really important for accountants when preparing financial statements for their company.
In short, borrowing is referred to as a liability that one company owes to other related corporate companies or financial institutions to run their business. When the auditor is finished, he will prepare a report detailing the results of the review. The report will identify areas of weakness in the company’s approval and lending procedures. The auditor will recommend possible corrections for any issues he discovers during the audit.
As businesses who received a PPP loan begin to submit forgiveness applications, many will face additional scrutiny in the form of an audit conducted by the Small Business Administration . Although we do not know how in depth the audits will be, the content below provides a brief overview of the SBA audit scope and process as well as a checklist all borrower’s should follow to prepare for any potential audit. Fn 3 The need to maintain control does not preclude the use of internal auditors in the confirmation process. Section 322, The Auditor’s Consideration of the Internal Audit Function in an Audit of Financial Statements, provides guidance on considering the work of internal auditors and on using internal auditors to provide direct assistance to the auditor. The auditor should direct the confirmation request to a third party who the auditor believes is knowledgeable about the information to be confirmed. This section does not address the extent or timing of confirmation procedures. Guidance on the extent of audit procedures is found in section 350, Audit Sampling, and Auditing Standard No. 13, The Auditor’s Responses to the Risks of Material Misstatement.
Thus, when designing the confirmation requests, the auditor should consider the assertion being addressed and the factors that are likely to affect the reliability of the confirmations. The auditor should exercise an appropriate level of professional skepticism throughout the confirmation process . Professional skepticism is important in designing the confirmation request, performing the confirmation procedures, and evaluating the results of the confirmation procedures. Examples of such tasks include audit data preparation, file organization, integration of data from multiple files, performance of basic audit tests in Excel, copying and pasting data, and manual annotations. These tasks are not only time consuming and rule based; they are also prone to error.
There are several circumstances in which a borrower will not be penalized for reductions to FTEs. First, a borrower is exempt from the loan forgiveness reduction if it reduced its FTEs during the period from February 15, 2020, through April 26, 2020, and subsequently restores its FTEs by no later than June 30, 2020. In connection with this, if the borrower makes a good-faith, written offer to rehire an employee on the same terms as before he/she was furloughed and such offer is rejected, that employee is treated as rehired for this purpose. The borrower must maintain records of such offer and rejection and must inform the applicable state unemployment insurance office of the rejected offer within 30 days. Second, a reduction in FTEs as a result of an employee’s termination for cause, voluntary resignation or voluntary reduction in hours will not reduce a borrower’s loan forgiveness. Once your risk assessment is complete, decide what substantive procedures to perform.
What Does A Title Company Do?
Additional testing of RPA, as well as actual implementation on real audit engagements, is necessary to obtain a better understanding as to its benefits and challenges. In the meantime, it seems that RPA can be used to automate segments of the audit, but that caution and due diligence are needed in its development and implementation. Although preliminary assessments of the value-add of RPA indicate that it can lead to improved audit quality, it would be interesting to measure its usefulness on real audit engagements. This may be difficult to do, however, until prototypes are ready for deployment. As more about the cost and benefits of RPA is revealed over time, it will be important for CPAs to become familiar with its potential application to auditing.
For example, the authors overstated the loan amount balance of a few transactions and restarted the RPA to test whether it would detect the anomalies; it detected them all. In addition, as auditors are able to allocate more time to more complex areas of the audit, it is reasonable to assume that more anomalies would be appropriately investigated.
See paragraph 8 of Auditing Standard No. 15, Audit Evidence, which discusses the reliability of audit evidence. Provides guidance on performing alternative procedures when responses to confirmation requests are not received (see paragraphs .31 and .32). The forgiveness application and corresponding interim final rule confirm the rule previously announced by the SBA that eligible non-payroll costs cannot exceed 25% of the total forgiveness amount. Specifically, a borrower’s maximum forgiveness amount is determined by dividing the amount of total eligible payroll costs by 0.75.
Accuracy is checking the amounts and other data related to loans and advances are recorded at the correct amounts. Auditors need to check all loans and advance transactions are classified in accordance with applicable accounting standards. The CPA Journal is a publication of the New York State Society of CPAs, and is internationally recognized as an outstanding, technical-refereed publication for accounting practitioners, educators, and other financial professionals all over the globe. Edited by CPAs for CPAs, it aims to provide accounting and other financial professionals with the information and analysis they need to succeed in today’s business environment. The CARLab provided the RPA prototype to the CPA firm, and the firm is now experimenting with it and comparing it with alternative methods such as Visual Basic for Applications . Because an automation solution has not yet been fully deployed at this firm, parallel comparisons of the traditional method to the new cannot be made. Nevertheless, the authors conducted preliminary tests of the prototype’s usefulness to assess its value.