Advertisement Agencies Working Patern Useful for Auditors

Advertising agencies provide a wide variety of services, from the development of the advertisement to its placement in the appropriate media. For each of these services, a variety of different payment options are available, from straight fee to commission basis, or some combination of the two. The auditor's job is to understand the compensation formula thoroughly, and to test the agency's records and documentation in support of the charges.

Each agency will have its own unique aspects, based on the type of work the agency has been hired to perform. The internal auditor cannot take a "boiler-plate" approach to the contract but should examine the contracting situation carefully to identify the unique audit needs of that agreement. This will require a high level of audit expertise, and the most seasoned internal audit professionals will need to be involved in the contracting process. Careful planning at the contract stage will allow far more effective and efficient auditing later.

Agency Services

There are three basic types of ad agency services: developing the advertising strategy and material, producing the advertising material, and media placement.

Developing the Advertising

Strategy and Material

At this stage, the agency develops the advertising plans and strategy and identifies the right advertising material for reaching the required marketing objective.

Production

Processes involved in producing advertising material will obviously vary according to the kind of piece it is. The auditor should review the supporting documents for production charges; the controls used to approve and pay invoices the agency receives for production work; and the controls used to ensure that the correct invoices are charged to the job.

Media Placement

The cost of media placement represents one of the most significant elements in an advertising program, and the auditor should give careful attention to this area. The type of media used will determine, to a large extent, the kind of methods the auditor will use in conducting this portion of the audit. One suggested procedure for network television time is to schedule media billings and trace them to appropriate supporting documents (Exhibit 2).

Generally, the agency will invoice the company based on their estimate of the monthly cost for media placement, i.e., network television time. The agency's estimate is based on the media plan established at the beginning of the year by the company's marketing department and the agency. The auditor should review these estimates to see that they fairly reflect the actual invoices received from the agency.

At the same time, the auditor should compare the actual invoices received from the agency to the invoices the agency received from the media. Also, it is a good idea to review the agency's cancelled checks in payment of these media invoices. There will be times when the estimate invoice will not be the same as the actual invoice. In these instances, the agency should either credit the company on the next invoice or charge the company for any additional time purchased. If the estimate charges are consistently and significantly greater than the actual media billings, the auditor should investigate the reasons.

The amount of cash discounts can be significant in media placement. The auditor should verify that the agency is taking advantage of all cash discounts and passing them along to the company in accordance with the agreement.

If the agency is compensated on a fee basis, the auditor should be able to trace the time reported to the company for a given job to the supporting time records at the agency. The review of media placement invoices can be simplified through the use of microcomputer spreadsheets, as illustrated in Exhibit 2.

Agency Expenses

Depending on how the agreement with the agency is written, the company may be responsible for paying out-of-pocket expenses incurred by the agency on behalf of the company. The auditor's review of these out-of-pocket expenses should include the type of expenses incurred, whether the expense are reasonable, and whether the agency has supporting documentation for these expenses.

For example, the contract may require that certain fees and related business costs be reimbursed to the agency. The auditor should be alert for unusual cases to determine the appropriateness and accuracy of the agency charges.

Agency Internal Controls

The auditor should review the agency's controls to be certain they are adequate and can be audited. The review should cover such areas as invoice approval and payment methods; procedures for capturing, tracking, and reporting billable time; procedures governing commissions; and verification of media placement. Without an adequate control system, the agency cannot assure accurate and consistent charges, and the auditor has no basis on which to examine the agency's supporting documentation. Exhibit 4 provides a questionnaire that may be used in assessing controls.