Template, template, template.
Here, let me talk about auditor’s redundant work, which would cause an extra audit cost, outside their control audit, or about/inside their substantive audit.
Let’s say, your auditor wants to test your fixed assets, particularly the existence assertion of fixed assets. Then, they would request you to prepare a fixed asset rollfoward schedule, wouldn’t they?
What would you do, between the two options below, to respond to the request?
Option 1 – You prepare the rollforward schedule for yourself, or
Option 2 – You would have your auditor prepare the rollfoward schedule.
Either way, you would incur an extra time or cost to “prepare” the rollforward schedule……
UNLESS you already have your fixed asset rollforward schedule prepared.
The Best Practice
There you go. If you want to avoid extra time or cost for your auditor’s substantive audit (i.e., their auditing numbers substantively as opposed their auditing internal controls), you should have prepared the schedule for each significant general ledger (G/L) account when closing the G/L accounts.
This (best) practice must be given a special consideration as you wouldn’t typically need to prepare the fixed asset rollfoward schedule during your G/L account closing.
(Note that a fixed asset account, e.g., building (cost), etc., does not account for acquisitions or disposals separately; i.e., the building (cost) “G/L” account does not list every building under the G/L account code, unlike the fixed asset subledger.
(Therefore, in order for you to know what specific buildings were acquired, if any, or disposed, if any, during a certain period, you will need to look into the fixed asset subledger, and for your auditor to know the same information, they will need the rollforward schedule, which list the building cost G/L account by each category of the acquisitions and the disposals.
(And that’s why you would want to use your own fixed asset rollforward schedule, which will be shared with your auditor, when closing the fixed asset G/L account in order to ensure your closing the account is accurate and will not cause any audit adjustment.)
The Templates as an Effective Entity Level Control
When considering the best practice as an accounting team, it will be ideal if the schedule is in the form of template.
Also note that the practice for the accounting team to prepare the audit-ready templates would be considered a good, effective Entity Level Control.
That is because, as a team, team members are different from one another in competency of understanding what is really requested by auditors; accordingly, the template for each G/L account will be an effective and efficient enabler tool for every member can easily understand what’s necessary to ensure accurately closing all the G/L accounts, by simply populating each column, by following the thought process of the particular template, till complete the entire template.
As part of an accounting management team, whether you are Controller, Director, or Manager, you can share the template (as a practice of knowledge sharing) with your subordinates so that every team member can be on the same page during the periodical G/L closing while nobody does not need to spend extra time for internal and/or external audit purposes.
That is the secret of a successful accounting team.
The Operating Lease Accounting Template – Example
For example, an Operating Lease accounting template, with a roll-forward/amortization schedule (for each lease contract entered into), may list a step-by-step procedure, per ASC 842, in an Excel format as follows:
Recognize the Initial Lease Liability that is the present value of any future lease payments, excluding the first payment made (as it’s not a “future” payment).
Recognize the Initial Right-of-Use (ROU) Asset that is the sum of:
The Initial Lease Liability
Lease payments made before the start date of the lease
Initial direct costs
Less lease incentive received
Recognize the first payment made in Cash (at commencement)
(Accordingly, the initial JE above tends to be;
(Dr.) ROU Asset – Operating
(Cr.) (Prepaid) Cash
(Cr.) ST/LT Liabilities – Operating (the Present Value of all the remaining future payments))
Note that, as a rent is typically paid on the first day of each month (or lease term/period), the initial payment is usually considered to be prepaid (for the month);
Prepare an amortization schedule for each lease for the monthly JE’s to close the ROU asset and lease liabilities G/L accounts at each month end.
The calculated JE for an operating lease:
(Dr.) Amortization of the lease liability (for the current month), measured using the effective interest method = The lease payment (for the month) – the amount of interest accrued (for the month)
(Dr.) Monthly straight-line lease expense = The lease liability (on Day 1) / the number of months in the lease term
(Cr.) Change in accumulated amortization of the ROU asset = Monthly straight-line lease expense – the interest accrued (for the month)
(Cr.) Accounts Payable (for the following month’s lease payment)
By Accountant following the step-by-step procedures (as exemplified using the Operating Lease accounting per ASC 842 above), s/he should be able to calculate the amount for each asset/liability and present the calculation schedule on a spreadsheet, which enables Review Manager to verify the calculations and resulted JE’s being accurate (per relevant ASC’s) as s/he checks related check boxes on the Closing checklist.