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Completeness

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Completeness

Completeness

It is an audit objective.

As a former auditor for what’s now PricewaterhouseCoopers, we dealt with audit objectives.  These audit objectives were also learned in my Accounting/Auditing classes in business college at California State University, Fullerton.

The audit objectives were also reinforced in the CPA review course.  That is, a CPA examination test preparation course I took from Newt Becker my senior year.

Let’s see if I remember … ECVARP was the acronym Newt used.  Existence, Completeness, Valuation, Accuracy/Validity, Rights/Obligations, Presentation/Disclosure.  But this article isn’t just for CPAs.

This concept of completeness has been reinforced throughout my many years of practical and professional business experience.

Completeness – In a Word

Completeness, in a word, would appear to be somewhat self-defined.  But, for practical purposes, it is pretty difficult to get your arms around.

A synonym might be the word “thorough.”  In fact, we wrote an article about this: Be Thorough.

But thorough doesn’t completely (pun intended) describe the principle of completeness.  Being thorough means handling or detailing EVERYTHING that is in front of you.

Completeness is “thorough” and more.  Completeness is … “What else should I be looking at or detailing that isn’t in front of me yet?”

Achieving completeness is actually a challenging process or task.

A Day in The Life of an Auditor

As I occasionally do, I try to share concepts within the context of a story.  And sometimes, these stories hearken back to my days as an auditor for what’s now PricewaterhouseCoopers.

A standard and common task when auditing the books of any organization would be a search for unrecorded liabilities.  The task, to determine the completeness of a client’s Accounts Payable.  Here’s the question: Is the client’s listing of Accounts Payable complete?  Is everything the client owes recorded?  If not, then the client has potentially understated his expenses.  This means his Profit & Loss (P & L) or Income Statement would look better than they actually are.

So, what do you do? You could ask the client, “Is your Accounts Payable complete?”  But despite the answer, you must verify or test for completeness.

You Can’t Get Completeness From Within

So, here’s the conundrum of completeness: You can’t get completeness from within the item or subject you are testing.  Staying with our Accounts Payable example, how do you test for completeness?

You can’t just look at the list of vendors that comprise an Accounts Payable list and determine if it’s complete.  Remember, you can’t achieve completeness from within.

So, how do you get “outside” the population you are testing?  When it comes to Accounts Payable, you have to look at what generates Accounts Payable.

  • Mail.  You get the client’s mail before he does.  That’s right.  And you open it, too.  Is it any wonder that clients hate auditors?  It’s not enough that auditors ask a million questions and discover people’s mistakes.  They have to open the client’s mail before he does.  The reason?  You are looking for invoices sent to your client where he owes someone money.  And, if the goods and services were received on or before the balance sheet date, then it should be recorded in Accounts Payable.
  • Subsequent Payments.  You also look at everything the client pays after the balance sheet date.  You look at the invoices attached to the check.  Same as above, you are looking for payments on invoices that relate to goods and services received on or before the balance sheet date.  And, if the goods and services were received on or before the balance sheet date, then this should be recorded in Accounts Payable.

So, did we find unrecorded expenses or liabilities?  You bet.  The reason?  Because completeness – with anything – is hard to achieve.

The Four Outcomes of Completeness

When testing completeness, there are four options:  properly included, properly excluded, improperly included, improperly excluded.

Using our Accounts Payable example, and assuming we are looking at Subsequent Payments, here is the application:

  • Properly included.  An item paid after the balance sheet date – where the underlying invoice relates to goods and services received on or before the balance sheet date.  And, the item is included in Accounts Payable.
  • Properly excluded.  An item paid after the balance sheet date – where the underlying invoice relates to goods and services received AFTER the balance sheet date.  And, the item is NOT included in Accounts Payable.
  • Improperly included.  An item paid after the balance sheet date – where the underlying invoice relates to goods and services received AFTER the balance sheet date.  And, the item is included in Accounts Payable.
  • Improperly excluded.  An item paid after the balance sheet date – where the underlying invoice relates to goods and services received on or before the balance sheet date.  And, the item is NOT included in Accounts Payable (These are the unrecorded liabilities).

What If You’re Not an Auditor?

Ok, so that was all really boring stuff.  So, how does it relate to you, as a leader in your organization?  Well, if you think about it, and incorporate the completeness principle, you will use it all the time.

  • How do you know if you’re recruiting the best candidates for your organization?  Where’s the best place to find these people?  If you think of just Craigslist, are you completely covering the gamut of available talent?  What about local colleges and universities?  What about LinkedIn?  Etc.?  How do you know you are recruiting from a complete population of the best candidates?
  • You’re acquiring a competitor.  How do you know if your competitor has provided you a complete listing of all the assets you are entitled to?  How do you know whether the Accounts Payable listing is complete?  How do you know whether there are any other matters that haven’t been disclosed to you?
  • You are throwing a customer appreciation event.  How do you know if you have “improperly excluded” all of your customers?  Is your guest list complete?

Completeness is Key

Completeness is key in business.  Be encouraged to think about this concept.  But more importantly, be encouraged to embrace it and make it your friend.  It’s hard to get completeness from within.  You can only get it from without.

So, achieving completeness requires both some thought and some diligence.  We’re here to help.

Contact us!

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About the Author:

Ken Moll is the Principal and Founder of Blue Elevator®. With professional experience spanning four decades, Ken has a breadth of foundational business knowledge rarely found – making him part of an elite class of professionals. Ken's passion is helping clients of Blue Elevator® get their “business to the next level™.”