Audit & Assurance for Professional Services Firms

Unbilled work is often the largest and least documented asset on a professional firm’s balance sheet, which is why fieldwork spends so much time there.

Under ASC 606, most professional engagements are recognized over time, because the work creates no asset with an alternative use to the firm and the firm has an enforceable right to payment for performance completed to date.

Progress is usually measured with an input method, typically labor hours or costs incurred against total expected, so we test the inputs before we test the output.

We agree the balance engagement by engagement to signed engagement letters, the underlying time and expense detail, the approved billing rates, and the invoices actually issued after year-end.

Fees earned but not yet billable sit as a contract asset, an unbilled receivable. Once only the passage of time stands between the firm and payment, the balance becomes a receivable, and we test that the reclassification actually happened.

Fees collected before the work is performed are a contract liability. Retainers held against future work are the balance most often reported in the firm’s favor rather than the client’s.

Variable consideration is where judgment concentrates. Success fees, contingent fees, performance bonuses, and not-to-exceed caps all have to be estimated and then constrained, so revenue is recognized only to the extent a significant reversal is not probable.

We test realization history against the recorded balance, because work in process that consistently writes down is telling you the estimate is the problem rather than the collection effort.

Yes, as an accountant’s engagement over your trust records. We do not interpret professional conduct rules or opine on your compliance with them, which stays with the firm and its own counsel.

Where we serve as your auditor, the trust records sit inside that engagement, and the procedures below are the ones we run over them.

The core procedure is the three-way reconciliation: the trust bank statement, the trust account in the general ledger, and the sum of the individual client subsidiary ledgers all have to agree at the same point in time.

We test that no client subsidiary ledger carries a negative balance, because a negative client balance means one client’s funds were used to cover another client’s costs.

We trace a sample of receipts and disbursements to source documents, checking that earned fees were moved to the operating account and that unearned amounts were not.

Aged and unidentified balances get listed out. Funds sitting in trust with no active matter behind them carry their own handling requirements, and they are far easier to resolve on a schedule than at year-end.

We review the separation between operating and client funds, who is authorized to sign, and whether the person performing the reconciliation is also able to move money out of the account.

Anything those procedures turn up lands in the report and the management letter the engagement produces, which is where a partner group, an insurer, or a lender will look for it.

Partner capital is where the partnership agreement and the accounting records have to say the same thing, and in a firm that has recently admitted or paid out a partner, they often do not.

We start with the agreement itself: the capital contribution requirement, the income allocation formula, the distribution policy, and the buy-in and buy-out mechanics, including how a departing partner’s interest is valued and over what period it is paid.

From there we test a capital account rollforward for each partner, covering opening balance, contributions, allocated income, guaranteed payments and draws, distributions, and closing balance, and we tie the total to the equity section of the statements.

Admissions are tested against the documents that admitted the partner and the cash or note that funded the buy-in, since a buy-in funded by a firm loan produces a different balance sheet than one funded by the partner personally.

Withdrawals are the other side. A retiring partner’s payout is often spread over several years, and whether that obligation belongs in equity or in liabilities depends on the terms of the agreement rather than on what the firm calls it internally.

Mandatorily redeemable interests are the specific technical issue. ASC 480 generally treats an interest the firm is unconditionally obligated to redeem as a liability, but the scope exception at ASC 480-10-15-7A takes most nonpublic partnership interests back out, so an interest redeemable on death, retirement, or withdrawal at a formula amount usually stays in equity while one redeemable on a fixed date for a fixed amount does not.

Where the engagement calls for it we confirm balances directly with each partner, which surfaces disagreements while they are still an administrative matter.

Tax capital and book capital are different numbers and are not meant to agree. We reconcile the two so a partner reading a K-1 and a partner reading the financial statements are not arguing about which one is wrong.

Buy-sell and partnership agreements frequently name audited or reviewed statements as the valuation basis, so where an admission or a retirement is coming we scope the engagement around that timing.

At a professional firm the exposure sits between the timekeeper and the invoice. That stretch is what we walk.

Start with time capture. Hours posted to the wrong client, matter, or engagement corrupt everything downstream, work in process, realization, and per-partner profitability included.

We look at who can open a client or matter code, who can change a billing rate, and whether either action leaves a record that somebody independent actually reviews.

Bill review and write-down authority is second. Write-downs and write-offs reduce revenue, so we test who can approve them, at what threshold, and whether the approver is the same person who worked the file.

Custody of client money is third. Where the firm holds retainers or trust balances, we test that client and operating funds are never commingled, that the person reconciling cannot also disburse, and that outbound transfers require a second authorization.

Duty separation gets assessed across billing, collections, cash receipts, and vendor payments. Partner-managed firms rarely have the headcount to keep those four apart.

Client disbursements and pass-through costs get reviewed as well, since advanced client costs left sitting in a firm expense account quietly understate both work in process and margin.

Where headcount makes separation impossible, we set out the compensating steps a managing partner can run without help, and we say plainly which risk each one covers.

Findings are written up to be worked through, not filed. Anything reaching the level of a significant deficiency or a material weakness goes to those charged with governance in writing, as the standards direct.

Professional firms tend to trip this the year after a merger, or the year after a class of new associates arrives.

It turns on the participant count, not on fee revenue or the number of partners. A plan that files as a large plan has to attach audited financial statements to its Form 5500.

The line is 100, and the arithmetic behind it changed for plan years beginning on or after January 1, 2023. A defined contribution plan now counts only those participants holding an account balance on the first day of the plan year.

Firms carrying contract attorneys, per-project consultants, and seasonal administrative help felt that change most. People who were eligible and never contributed no longer count toward the 100.

Before assuming an audit is due, check the 80-120 rule. Where a Form 5500 was filed for the prior year, it lets the plan stay in the category it used then while the count drifts across the line.

Our testing runs to the plan as operated: entry dates, deferral and match calculations, distributions, loan activity, participant data, and the provisions of the document itself. Operational failures get raised while there is still time to correct them.

Compensation definition causes most of what we find at firms. Partner draws, guaranteed payments, bonuses, and reimbursed expenses each have to be tested against the plan document rather than against payroll habit.

Where a qualified institution has certified the plan’s investment information, an ERISA Section 103(a)(3)(C) audit narrows testing of that information. It is the engagement long known as a limited scope audit, and it now yields a two-part opinion rather than a disclaimer.

Firms running a cash balance or defined benefit plan alongside the 401(k) file a second return. We schedule the engagements together so census and payroll data is pulled once, and both reports are ready for the Form 5500 deadline, extension included.