Our Friend, The Summary Memo

May 2008

Good old Sharon! She required that we use summary memos so that her life as a reviewer would be easier. But she probably knew that in writing one, the auditor would be forced to clarify his or her thoughts before wrapping up the project.

I have tried several times to work without them, and I just can’t stand it. Summary memos are just too helpful to ignore.

You might call it something else

You might call it something else—a lead sheet, a conclusions form, a top memo. And it might have different components than what I describe here. As we saw from the standards (in the last few newsletters), we don’t absolutely have to have them.

So if you don’t like the idea of a summary memo, no one could honestly criticize you for blowing them off. Many auditors are appalled at the idea of adding more to the working papers—horrified that someone would ask them to document even more stuff than they already do. I understand that. If you can figure out some other way to pull off the same feats, more power to you.

What the heck is a summary memo anyway?

A summary memo summarizes a group of working papers in a memo. (You suspected that, probably).

Let’s say that you are auditing a purchasing department. After gathering information and doing a risk assessment, you decide that you are going to focus on compliance in this audit. Your overarching objective is “Does the purchasing department comply with significant purchasing policies?” And then underneath that overarching objective you have three sub-objectives:

1. Are purchases of equipment exceeding $9000 conducted in accordance with policy?
2. Are purchasing procedures written in accordance with policy?
3. Are professional contracts let in accordance with policy?

You will likely create a set of working papers to support each sub-objective—Items 1–3 above. Let’s say that you like to use letters to designate groups of working papers.  So Objective 1 is working paper set A, Objective 2 is working paper set B, and Objective 3 is working paper set C.
So, working paper series A answers the question of whether purchases of equipment exceeding $9000 were conducted in accordance with policy.

The working paper hierarchy might look like this:

The summary memo summarizes what working paper series A accomplished and how you answered the audit objective with your evidence; sort of a narrative version of the audit program. And it might fall above or beneath the program on the hierarchy. Then A-1, A-2, A-3 , etc. speak to the performance and results of each audit program step.

If you like, you can create a “meta” summary memo; working paper series A, B, and C can be summarized in a master summary memo that speaks to your overarching audit objective “Does the purchasing department comply with significant policies?”

Now, don’t freak out! But you could have a summary memo for every audit program step. See working paper series A-4 above. That series contains plenty of working papers and may deserve some sort of summary that will help the reviewer sort through the group and make out what you were trying to do.

What can you put in a summary memo?

In my audit project management training, I ask the participants to break up in groups and then decide on the components of an ideal summary memo. Each group sketches out the components of the memo on a piece of flip chart paper on the wall. This simple little exercise usually causes quite a lot of debate. It uncovers passion for the content of the summary memo that many project managers are unaware that they possess. Other team’s memos were clearly inferior as they had left so-and-so off—and wouldn’t it be better if so-and-so were included?!?

Who is right here? All of them. And who is right in your world? Your boss. When you become king or queen of the audit shop, you can have it your way. But for now, consider these optional components and find out whether your boss wants them included in the summary memo:

• Source, purpose, procedure, results, conclusion
  
  As you know from previous newsletters, I am a BIG fan of including a narrative description of these five components on every working paper.
  
  Here is what a simple summary memo for series A might look like (this is just a sketch, you understand):
  
  SOURCE: Interviews, observations, and testing described in working paper series A
  
  PURPOSE: To answer the sub-objective “Are purchases of equipment exceeding $9000 conducted in accordance with state law?”
  
  PROCEDURE: satisfied program steps on A-PGM which called on us to:
  
  
  • Reiterate program step 1
  • Reiterate program step 2
  • Reiterate program step 3
  • Reiterate program step 4
  
  RESULTS: Several significant items on non-compliance were noted in our work:
  
  
  • Summarize results of program step 1
  • Summarize results of program step 2
  • Summarize results of program step 3
  • Summarize results of program step 4
  
  CONCLUSION: The purchasing department did not comply with significant purchasing policies regarding purchases of equipment exceeding $9000. In particular, the department allows the same person to initiate, approve, and receive equipment purchases over $9000. This issue has been developed into a finding at REPT-1. We did not find any questionable purchases.

• The summary memo can serve as an initial draft of the report
  
  Instead of referring to a finding in a working paper outside of the summary memo, you can include it in the summary memo. Or you can formalize the section where you discuss the objective and conclusion and then just pull it out later to plug into the report.

• The summary memo can be very detailed or highly summarized
  
  A summary memo can be a restatement of each supporting working paper underneath it PLUS an overarching conclusion that sums up the whole set —or it can be an overarching conclusion that sums up the whole set.

Which way is right? Your boss’s way. A good way to gauge how much detail they prefer is to ask them how long they think the summary memo should be. If they say “one page”, then it can’t reiterate all of the program steps and the detailed results of those steps; It will have to highly summarized. If they say “ten or so pages”, you know they want all the detail laid out for them in one place.

On a financial audit—the summary memo may be mostly numbers

On a financial audit, where the objective is to determine whether the financial statements are materially accurate and presented in accordance with GAAP, the summary memo might be a portion of the financial statements—like a breakout of the significant receivables categories on an Excel spreadsheet. Financial auditors often call these “lead sheets” and they contain a minimal amount of narrative.

Summary memos can take care of a good number of the required contents of working papers

The standards, of course, are silent regarding summary memos, as they are about most issues regarding working papers. The Yellow Book requires that you include the following in your working papers—somewhere:

• Characteristics of items tested
• Objective, scope, and methodology
• Nature, timing, and extent of procedures
• Audit evidence obtained and its source and the conclusions reached
• Support for significant judgments, findings, conclusions, and recommendations
• Evidence of supervisory review

The standards don’t say anything about how to pull this off or where it should go—just that it be documented somehow.
You could make the summary memo do the majority of this work for you. You might only take care of part of this stuff in the detailed, supporting working papers.

By the way, I’m not sure I’d want to document the characteristics of the items tested on the summary memo. Characteristics involve A LOT of detail (characteristics for document you tested might include the date and number and name on the file or document, the name of the person who signed off on the document, etc.) so that someone can replicate your work if they need to. But, if your supervisor wants that much detail, lay it on ‘em!

Send me some examples

I’d love to see what you are up to regarding summary memos. Send me a few and I will post them on my website for other auditors to refer to. They don’t have to be perfect and I won’t put your name on it unless you want me to.