Financial Oversight · 2019-03-04 · Managementis responsible for the following: 1. Preparation...

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Financial Oversight

Agenda

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Introduction 9:00‐9:15

Audit Requirements 9:15‐10:00

Break 10:00‐10:15

Auditor Selection 10:15‐10:45

Auditor Execution Roles and Responsibilities 10:45‐11:15

Report Preparation and Issuance 11:15‐12:00

Lunch 12:00‐1:00

Internal Controls and Financial Reporting 1:00‐1:30

Report Submission/Corrective Action 1:30‐2:00

Break 2:00‐2:15

System Improvement 2:15‐3:00

Wrap‐Up 3:00‐4:00

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• Recite audit requirements for local governments in Georgia

• Identify the auditor and auditee responsibilities in an audit engagement

• Explain management’s assertions related to the financial statements

• Identify the steps necessary to take responsibility for your financial statements

• Discuss best practices in preparing for a financial statement audit

Learning Outcomes

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Continued on next slide

• Recall how to use the Compliance Auditing in Georgia Counties and Municipalities guide

• Define Internal Control

• Identify the components of a comprehensive framework of Internal control and explain the importance of internal controls over financial reporting

• Recall the elements of audit findings

• Discuss the submission of audit reports

Learning Outcomes

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THE BIG PICTURE

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GEORGIA AUDIT REQUIREMENTS

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Who Must Have an Audit?

Each unit of local government shall have an annual audit if…….

• > 1,500 population according to latest U.S. Census

OR

• > $300,000 expenditures

O.C.G.A. §36-81-7(a)(1)

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The objective of the audit is to obtain reasonable assurance (not absolute assurance) as to whether the financial statements are free of material misstatement caused by error or fraud*Reasonable assurance is a high level of

assurance and requires the auditor to plan and perform the audit so that audit risk will be minimized

*AU-C §200.12

Audit Objective

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The auditor’s objectives under AU-C Section 250 are the following:

Obtain sufficient appropriate audit evidence regarding material amounts and disclosures in the financial statements that are determined by the provisions of those laws and regulations generally recognized to have a direct effect on their determination

Perform specified audit procedures that may identify instances of noncompliance with other laws and regulations that may have a material effect on the financial statements

Respond appropriately to noncompliance or suspected noncompliance with laws and regulations identified during the audit

General Audit Objectives

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Other Audit Requirements?

• Conducted in accordance with generally accepted government auditing standards (GAGAS)

O.C.G.A. §36-81-7(b)


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Other Audit Requirements?

• Financial statements in conformity with generally accepted governmental accounting principles (GAAP)

• Opinion of auditor with respect to financial statements

• Material violations of state or local law discovered during audit

O.C.G.A. §36-81-7(c)

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O.C.G.A. §36-81-7(d)(3) states

• Audits not received within 180 days, audits not conducted, or failure to correct noted auditing deficiencies requires State Auditor to notifylocal government and each member of the General Assembly which represents districts within the local government’s jurisdiction

Consequences of Not Meeting Requirements

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O.C.G.A. §36-81-7(f) states

• Potential loss of state grant funds

• Notification in local newspaper of failure to submit audit

Consequences of Not Meeting Requirements

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Single Audits/Uniform Grant Guidance

• Expend > $750,000 of Federal funds

• Performed with annual financial audit

• Includes both financial and compliance components

• Requirements of Subpart F Of Title 2 Part 200 of the Code of Federal Regulations are applicable

Objective: To provide assurance to the US Federal Government as to the management and use of such funds by recipients.

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Leases

Question #1

What is GAGAS?

A. Generally Accepted Governmental Accounting Standards B. Government Accountability General Accounting Standards C. Generally Accepted Government Auditing Standards D. None of the above

Audit Requirements – Question

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Leases

Question # 2

Each unit of local government shall have an annual audit if………….?

A. > 1,500 population according to latest U.S. Census B. > $300,000 expendituresC. Either A or B D. The local government has more than 500 employees

Audit Requirements – Question

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AUDITOR SELECTION

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Auditor Competence

Knowledge of

• GAGAS

• Government environment

• GAAP – Generally Accepted Accounting Principles as established by the Governmental Accounting Standards Board

• GAAS – Generally Accepted Auditing Standards as established by the AICPA

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• Certified Public Accountants licensed to practice in Georgia

• Continuing Professional Education (CPE) every 2 years consisting of at least 24 hours that specifically relates to government auditing or the government environment

Auditor Competence

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• An additional 56 hours of CPE directed at maintaining audit competence is required for those for in-charge auditors

• External peer review every three years to determine auditor has quality controls in place

Auditor Competence

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Audit Concepts

• How often should my government bid audit services?

• Government Finance Officer Association recommends every 5 years

• Ideally a new auditor would be chosen• Lack of competition of qualified audit firms may make

choosing a new firm difficult• Should require current auditor in addition to other

interested firms to submit proposals

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DOAA Recommended Practice

• Use of multi-year agreements, perhaps 3 to 5 year period

• Ensure quality audit; therefore, price cannot be sole criterion

• Evaluate auditor rotation option at end of multi-year contract

http://www.audits.ga.gov/NALGAD/resource.html

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GFOA Recommended Practice

• Use of multi-year agreements consistent with legal requirements

• Use of periodic full-scale competitive process (RFP)

• Principal factor is auditor’s ability to perform a quality audit Price should not be sole criterion

Audit Procurement, GFOA Best Practice

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AUDITEXECUTION -ROLES & RESPONSIBILITIES

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Auditor/Auditee Understanding

AU-C Section 210, Terms of Engagement, requires the auditor to agree on the terms of the audit engagement with management or those charged with governance, as appropriate, and to document such agreement in an audit engagement letter or other appropriate form of written agreement.

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Such an agreement should include, but not be limited to, the following:

1. The objectives and scope of the engagement (primary objective of the audit is to express an opinion on the financial statements)

2. The auditor’s responsibilities

3. Management’s responsibilities

4. Limitations of the engagement

5. Identification of the applicable financial reporting framework

6. Form and content of report

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If the auditor believes that an understanding with the client has notbeen established, he or she should decline to accept or to perform the engagement.

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Engagement Letter

• Establishes required understanding between you and auditor

• Documents contractual duties agreed to between you and auditor

• Spells out responsibilities of auditor/management• Explains audit services• Avoids misunderstanding• Protects auditor from legal liability• Chairperson of the governing body should sign after

agreement by all members of the board

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Entrance Conference

Auditor Collects

and Assesses Evidence

Auditor Identifies any Audit

Issues

Auditor Documents Audit Issues

in Workpapers

Exit Conference

Written Responses to Findings

Major Steps in Conducting the Audit

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Auditor vs Management Responsibility – Big Picture

Management Responsibility

• Preparation and fair presentation of financial statements in accordance with GAAP

• Internal Controls• Design• Implement• Maintain

Auditor Responsibility

• Express an opinion on financial statements based on audit

• Plan/perform audit to obtain reasonableassurance that financial statements are free from material misstatement

High, but not absolute, level of assurance

What is material?

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Auditee Responsibilities

Management is responsible for the following:

1. Preparation and fair presentation of the entity’s financial statements

2. Selecting and applying the entity’s accounting policies

3. Designing, implementing, and maintaining effective internal control over financial reporting

4. Designing and implementing programs and controls to prevent and detect fraud

5. Identifying and ensuring that the entity complies with the laws, regulations, contracts, and grant agreements applicable to its activities

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Auditee Responsibilities

6. Making all financial records and related information available to the auditor

7. Providing the auditor, at the conclusion of the audit, with a letter that confirms representations made during the audit

8. Adjusting the financial statements to correct material misstatements

9. Affirming in the representation letter that the effects of any uncorrected misstatements resulting from errors or fraud aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole

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Auditor Responsibilities

The auditor is responsible for the following:

1. Conducting the audit in accordance with GAAS and, where applicable, GAGAS

2. Obtaining reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement or caused by error or by fraud and therefore whether a material misstatement may remain undetected

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Auditor Responsibilities

3. Determining whether to decline to express an opinion or to issue a report on the financial statements, in the event that the auditor is unable to complete the audit or is unable to form an opinion

4. Obtaining an understanding of the entity and its environment, including its internal control, sufficient to assess the risks of material misstatement of the financial statements and to design the nature, timing, and extent of further audit procedures to be performed

5. Ensuring that those charged with governance are aware of any significant deficiencies in internal control that come to the auditor’s attention

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Leases

Question #3

In a financial statement audit, the auditor is responsible for all of the following except:

A. Conducting the audit in accordance with GAAS and, where applicable, GAGAS

B. Obtaining reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement

C. The design, implementation, and maintenance of internal controlsD. None of the above

Audit Responsibilities – Question

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An audit conducted in accordance with GAAS and GAGAS is not designed to:

1. Detect error or fraud that is immaterial to the financial statements or

2. Provide an opinion on internal control

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In addition to the required matters previously discussed, GAAS indicate that an understanding with the client also may include other matters such as the following:

• The overall audit strategy

• Arrangements regarding involvement of specialists or internal auditors

• Arrangements involving a previous auditor

• Arrangements regarding fees and billings

• Conditions under which access to audit documentation may be granted to others

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• Additional services to be provided relating to regulatory requirements

• Written permission from the client if the auditor intends to share confidential information about the client with a third-party service provider

• Availability of documentation to regulators and others (this should be part of the understanding the auditor reaches with the client)

• Basis on which fees are computed and any billing arrangements

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• Management is responsible for adjusting the financial statements to correct material misstatements and for affirming to the auditor in the management representation letter that the effects of any uncorrectedmisstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.

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REPORT PREPARATION AND ISSUANCE

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FINANCIAL STATEMENT ASSERTIONS

Financial Statements

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Financial Statement Responsibility

• Management is responsible for ensuring that financial statements are fairly presented in accordance with GAAP.

• Management makes assertions regarding the recognition, measurement, presentation, and disclosure of information in the financial statements.

• The assertions identified in the AU-C 315, Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement, may be classified into three broad categories

1. Assertions about classes of transactions and events for the period under audit

2. Assertions about account balances at period-end

3. Assertions about presentation and disclosure

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1. Assertions about classes of transactions and events for the period under audit:

a. Transactions and events have in fact occurred and relate to the entity (occurrence)

b. All transactions and events have been recorded (completeness)

c. Transactions and events have been properly recorded based on appropriate amounts and other data (accuracy)

d. They have been recorded in the correct accounting period (cutoff)

e. They have been recorded in the proper accounts (classification)


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2. Assertions about account balances at period-end:

a. Assets, liabilities, and equity interests exist (existence)

b. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity (rights and obligations)

c. All assets, liabilities, and equity interests that should have been recorded have been recorded (completeness)

d. Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded (valuation and allocation)


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3. Assertions about presentation and disclosure:

a. Disclosed events and transactions have occurred and relate to the entity (occurrence and rights and obligations)

b. All disclosures that should have been included in the financial statements have been included (completeness)

c. Financial information is appropriately presented and described, and disclosures are clearly expressed (classification and understandability)

d. Financial and other information is disclosed fairly and at appropriate amounts (accuracy and valuation)

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• Management designates qualified individuals who are responsible and accountable for overseeing all services performed as part of the audit engagement as well as evaluating the adequacy and results of those services and accepting responsibility for the services.

• Management also adjusts financial statements for all material adjustments and confirms to the auditor in the management representation letter that all uncorrected misstatements that have been aggregated by the auditors during the current audit engagement are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.

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Management should perform an assessment of the entity to determine whether it is technically capable of preparing and/or performing a detailed review of the financial statements (necessary to assume responsibility) before they are issued.

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The assessment should take into consideration whether those responsible for financial reporting -

Are technically capable and have adequate training to prepare the financial statements

Understand financial reporting requirements

Have prepared the trial balance used in the financial statements

Have prepared the draft financial statements

Understand audit adjustments and how to post to the general ledger

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• If, in the auditor’s opinion, internal control deficiencies exist that impair and/or do not ensure the entity has qualified individuals with the necessary expertise to be responsible and accountable for overseeing all services performed as part of the audit engagement as well as evaluating the adequacy and results of those services (the financial statements), the auditor must report the deficiencies (based on severity) and take into consideration the implications on the audit opinion.

• Depending on the severity of deficiencies identified, the entity could lose its designation as a “low-risk” federal auditee.

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Responsibility for Your Financial Statements

Question #4

Who is responsible for ensuring that financial statements are fairly presented in accordance with GAAP?

A. The External Auditors

B. Management

C. Governing Body

D. The Department of Audits

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Responsibility for Your Financial Statements

Question #5

Which of the following are assertions regarding the recognition, measurement, presentation, and disclosure of information in the financial statements?

A. Occurrence

B. Completeness

C. Accuracy

D. Classification

E. All of the Above

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FINANCIAL STATEMENT PREPARATION

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Finance Staff of the Government

Advantages:

• In-depth knowledge of the Government and its financial operations

• May not add to the cost of financial operations and the audit of the Government

Disadvantages:

• Other competing work assignments

• May not possess the skills, knowledge, and experience (SKE)

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A CPA firm other than the External Auditor (outsourced)

Advantages:

• Possess the specialized skills, knowledge, and experience required for local government financial statements and related disclosures

• Maintains External Auditor Independence

Disadvantages:

• Added expense for the financial operations and audit of the Government

• Increased review with a second CPA firm

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External Auditor (CPA)

Advantages:• Possess the specialized skills, knowledge, and

experience required for local government financial statements and related disclosures

• Knowledge of the Government and its financial operations

Disadvantages:• May impair the independence of the External

Auditor• Added expense for the financial operations and

audit of the Government

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Auditor Independence when Preparing the Financial Statements

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Internal Controls are Critical to Financial Statement Preparation

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Auditor Independence when Preparing the Financial Statements

The article notes that a “finding” may not be required when:

1. Management is provided with draft financial statements and grouping codes that “map” the client’s trial balance to the financial statements,

2. Management reviews the financial statements using a disclosure checklist (example: the Georgia Department of Audits and Accounts (DOAA) Local Government Audit Review Checklist), and

3. Management takes responsibility for the fair presentation and related disclosures.

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Leases

Question #6

Is it acceptable for the auditor to prepare my government’s financial statements; and if so, does that constitute a finding?

A. No; YesB. Yes; NoC. Yes; Yes

Financial Statement Preparation

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How YOU Take Responsibility1. Review your Draft Statements and the associated

Groupings Schedules1. Fund Level

2. Entity‐Wide

2. Review a Disclosure Checklist1. Review calculations (For example, OPEB obligation, Net

Pension Liability, accrued interest expense, EMS accounts receivable)

2. Adjusting journal entries, reclassification journal entries, entity‐wide entries

3. Trial balance lead schedules and entity‐wide groupings

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How YOU Take Responsibility

3. Management Representation Letter1. Taking responsibility for the fair presentation of the

financial statements and related disclosures

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• Ultimately a subjective call by the auditor

• What helps?• CGFM Certification – AGA

• CPFO Certification ‐ GFOA• Education

• CVIOG – Level I & II Finance Officer Certification (Local)

• Experience• Auditor interaction with management

Skills, Knowledge, and Experience are Key

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USING THE GA DOAA LOCAL GOVERNMENT AUDIT REVIEW CHECKLIST

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DOAA Checklist

• http://www.audits.ga.gov/NALGAD/resource.html

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Why Should I Use the DOAA Checklist?• To ensure that your financial statements comply with state

laws, rules, regulations, and guidelines• Fund Structure as required by the UCOA

• SPLOST• E911• Hotel/Motel Tax

• Reports Required by State Law• SPLOST• Hotel/Motel Tax Reporting• State Grant Certification Form• E911 Report

• To ensure your financial statements are prepared in accordance with Governmental GAAP

• The DOAA will use the same checklist to review your financial statements as required by state law

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• The UCOA provides guidance on fund structure, flows between funds, and financial operations that are unique to Georgia local governments

• Compliance with the UCOA is required under Georgia law

Other References for Preparing and Reviewing Your Financial Statements

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https://www.dca.ga.gov/local-government-assistance/research-surveys/uniform-chart-accounts-ucoa


• Another Local Government’s Financial Statements similar in size (population/ budget/number of employees) and fund structure

• Other Local Governments recommended by your auditor

• Georgia’s Uniform Chart of Accounts (UCOA) an excellent resource when preparing and reviewing your Financial Statements

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• Government Finance Officers Association (GFOA) Certificate of Achievement for Excellence in Financial Reporting

http://www.gfoa.org/sites/default/files/GFOAGeneralPurposeChecklist.pdf

• GFOA Governmental Accounting, Auditing, and Financial Reporting (GAAFR) from GFOA, known as the “Blue Book”

• Governmental Accounting Codification from GASB

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Compliance Auditing in Georgia Counties and Municipalities

• Compliance Auditing in Georgia Counties and Municipalities - online at no cost from The UGA Carl Vinson Institute of Governmenthttp://cviog.uga.edu/_resources/documents/publications/compliance‐auditing‐publication.pdf

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• This guide is designed to assist auditors and local officials in conducting high-quality audits of local governments in compliance with state laws.

• The 2019 edition captures changes in state law through the 2018 session of the General Assembly.

• In addition, the guideFacilitates efforts to access state laws that directly relate to a

local government’s finance-related activities Includes updates for changes in state lawProvides a summary and checklistLists state-required audits and reportsProvides a Online version that is searchable

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• Appendix A provides a listing of state-required reports and audits.

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Local Governments are required to provide certain reports to the state related to solid waste management services.

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Below is an example from the Auditing and Financial Reporting section of the checklist.

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• Local LegislationNot addressed in the guide

Extremely important and must be carefully reviewed

Management is also responsible for compliance related to local legislation

Include in the checklist and review annually

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Internal Controls & Financial Reporting

A process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assuranceregarding the achievement of objectives relating to operations, reporting and compliance.

Committee of Sponsoring Organizations

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Internal Control - Defined

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• Committee of Sponsoring Organizations (COSO)

• http://www.coso.org/guidance.htm

• Standards for Internal Control in the Federal Government (Green Book)

• http://www.gao.gov/greenbook/overview

Two Options

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Internal Control Components

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Components ofInternal Control

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Components of Internal Controls

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Components of internal control include the following:

• Control Environment—sets the tone of an organization and influences the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure

• Risk Assessment—the entity’s identification and analysis of risks relevant to achievement of its objectives, forming a basis for determining how the risks should be managed


Components of Internal Controls

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• Control Activities—the policies and procedures (to address risk) that help ensure that management’s directives are carried out

• Information and Communications—the identification, capture, and exchange of information in a form and time frame that enable people to carry out their responsibilities

• Monitoring—a process that assesses the quality of internal control performance over time

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Auditee Responsibility toMaintain Internal Controls

• AU-C 210 and its interpretive guidance emphasize that management is responsible for establishing and maintaining internal controls, including monitoring.

• Management is also responsible for the fair presentation in the financial statements of financial position, results of operations, and cash flows, including the notes to financial statements, in conformity with GAAP.

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Auditee Responsibility toDocument Internal Controls

Financial Reporting Objective

Relevant controls pertaining to the entity's objective of preparing its financial statements that are presented fairly in conformity with GAAP pertain to the entity's ability to record, process, summarize, and report financial data consistent with the assertions embodied in the financial statements and to mitigate the risks of material misstatements in the financial statements.

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The entity’s documentation of internal controls pertaining to the financial reporting objective should include at least the following:

1. For significant classes of transactions—documentation of the entity's processes and important controls over the initiating, authorizing, recording, processing, and reporting of transactions

2. For significant account balances—documentation of reconciliation controls related to significant account balances

3. For significant or fraud risks—documentation of the controls related to that specific risk

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• Significant classes of transactions generally relate to major business processes and often consist of a high volume of transactions contributing to significant account balances.

• Some significant classes of transactions are composed of fewer material transactions. For example, at most governmental entities, the following cycles are significant classes of transactions:

Payroll

Revenue, cash receipts, and accounts receivable

Purchases and capital assets

Accounts payable and disbursements

Treasury

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Auditee Responsibility Steps in Documenting Internal Controls

Step 1: For each class of transactions in the entity’s operations that is significant to the financial statements, document sufficient knowledge of the information system to understand the following:

• The procedures, within both automated and manual systems, by which those transactions are initiated, authorized, recorded, processed, and reported in the financial statements

• The important controls (at a minimum, document controls related to authorization, separation of duties, reconciliations, and safeguarding of assets)

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Step 1 (continued):

• How incorrect processing of transactions is resolved

• The process of reconciling detail to the general ledger

• The related accounting records, whether electronic or manual; supporting information; and specific accounts in the financial statements involved in initiating, authorizing, recording, processing, and reporting transactions

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Step 2: Once the entity’s processes and important controls have been documented, identify the assertions and control objectives that are relevant to the process and identify "what could go wrong" that would result in a material misstatement to the financial statements.

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Step 3: Once the relevant assertions, control objectives, and "what could go wrong” that could result in a material misstatement of the financial statements have been identified, design and implement controls to mitigate the risks of misstatement. Be prepared to provide evidence that internal controls were implemented.

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Material Weakness• A deficiency or

combination of deficiencies

• Material misstatement not prevented, detected and corrected on timely basis

• Large amount of assets not capitalized, but expensed

Significant Deficiency• A deficiency or combination

of deficiencies

• Less severe, but management needs to know

• Accrued payroll not reversed from prior year

• Lack of segregation of duties

• Actual expenditures exceed budget

• Not consistently following policies

Audit Findings

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• What is the problem?

• Why is this an issue?Condition

• What is the expected condition?

• Based on policies, laws, best practice, standardsCriteria

• Why is there a difference between criteria and condition?

• What is the ROOT cause?Cause

• What is the risk?

• What can happen if not corrected? Effect

• What can be done to fix the root cause of a problem and improve processes?Recommendation

• Do you Concur or Agree/Disagree and CAPResponse

Elements of Audit Findings

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• Auditee required to prepare Corrective Action Plan (CAP) for each audit finding

• CAP to include

Names of people responsible for CAP

Corrective action planned

Anticipated completion date

Disagreement with audit finding, including explanation of why CIP is not required

Current Audit Findings

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Must state the following:

• Audit findings corrected

• Partial corrective action taken

• Explanation of different corrective action taken than previously reported

• Explanation of audit findings that are no longer valid

Prior Audit Findings

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Knowledge Check

Question #7Internal controls, no matter how well designed, implemented and conducted, can provide what type of assurance to management and the governing body of the achievement of the entity’s objectives?

A. Reasonable

B. Absolute

C. Direct

D. Indirect

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REPORT SUBMISSION/ CORRECTIVEACTIONS

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Where Audit Reports Go

• State Law• Department of Audits and Accounts

O.C.G.A. §36-81-7

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• State Law• Department of Audits and Accounts

O.C.G.A. §36-81-7

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Department of Audits and Accounts

https://www.audits.ga.gov/Resources/localGovReports.html

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• State Law• Carl Vinson Institute of Government

O.C.G.A. §36-80-21

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The following slides provide instructions on how to navigate the website to upload the audit report.

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https://ted.cviog.uga.edu/financial-documents

Link to upload audit reports

Financial Data

Where Do Audit Reports Go

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Open Georgia

Federal Law

• Federal Audit Clearinghouse

https://harvester.census.gov/facweb/Default.aspx

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Federal Law

• Federal Audit Clearinghouse• Provides timely, public information on the annual use of over $400 billion in federal awards

• Collects and disseminates all information from Data Collection form and selected associated audit reports

• Submitted within the earlier of 30 days after receipt of auditor’s report or no later than 9 months following end of fiscal year

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EMMA – Continuing Disclosure

• SEC Rule 15c2-12 requires:• Annual Financial Information/Audited Financial Statements

• Event Notices

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DOAA Review Process

Level 1 Deficiencies must be corrected and the annual financial report reissued

Level 2 Deficiencies become Level 1 if repeated in the next year

Level 3 Deficiencies are recommendations for future reporting periods

Level X Reports Required by State Law

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Leases

Question #8State law requires audit reports to be submitted to the DOAA within _____ days of the reporting entity’s fiscal year end and submittal of the corrective action plan within______ days of the audit report due date.A. 30; 180B. 180; 30C. 60; 120D.120; 60

Knowledge Check

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SYSTEMS IMPROVEMENTS

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An Audit Can…….• Be a useful financial

management tool

• Provide leverage for dealing with constitutional officers

• Provide transparency for users

An Audit Cannot…..• Eliminate or uncover all

fraud• 13% identified through audit• Most fraud uncovered by

tips

• Provide absolute assurance

• Be a substitute for good internal controls

An Audit Can/Cannot……….

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Best Practices for Preparing for Audit

Prior to the end of the fiscal year, hold a planning meeting with your auditors and key staff members to develop an audit schedule and discuss any significant events during the year. Discussion should include but is not limited to:

• Unusual and/or complex transactions outside the normal course of business

• Changes in Finance Department staff or Senior Management

• New GASB Standards• Changes in state law or local ordinances• Recent annexations

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The audit schedule should include the following:• Dates of fieldwork• Who will prepare the financial statements (auditor or

staff)• Deadlines for draft of financial statements, final

financial statements and issuance of report• Presentation of findings/management comments to

the Governing Body• Deadline for corrective action plan and completion

and issuance of report• Schedule of periodic meetings with the audit team to

assess progress of the audit

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In addition to the planning meeting and the audit schedule, normally the auditors will provide the local government with a Prepared By Client List (PBC).

The list includes items that the auditors will need upon their arrival for fieldwork. Examples of items include:

• Copies of Minutes of the governing body meetings held during the fiscal year and through date of issuance of report

• Trial Balance • Organizational Chart• Bank Reconciliations and supporting documentation

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The local government should assign each of the items listed on the PBC to the appropriate staff member, in addition to the due date.

Select one individual to be the primary liaison with the auditors.

Ensure that management has adequate time to review all work-papers and schedules prior to submitting to the auditors.

All of the information requested within the PBC, in addition to supporting documentation or work-papers completed by local government prior to commencement of fieldwork.

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Financial Data Review Components

• Review the comments from the DOAA and GFOA (if applicable) from the previous year to ensure that appropriate response and corrections are included in the financial statements and related disclosures

• Balance Sheet Accounts• Does supporting documentation exist for each

account?• Cash – Supported by a bank reconciliation• Receivables – Supported by a detail listing by customer• Allowance for uncollectible – Is the amount reasonable

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account?• Fund Balance/Net Position – Does beginning fund

balance/net position tie to last year’s ending fund balance/net position reported in the financial statements

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account?• Inventory – Supported by list of items in inventory• Capital Assets – Detail supporting each of the

components – (i.e., Land, Buildings, Vehicles)• Any annexed properties removed from inventory• Additions are recorded correctly• Depreciation is calculated correctly• Did we sale any assets during the year. If so, were

the assets removed

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account?• Accounts Payable - Supported by detail of vendors

owed• Review items that have an invoice date older than

one year• Payroll Liabilities

• Does the salary expense reconcile to Form 941’s

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account?• Debt

• Review Debt Roll-Forward Schedule• Did the local government issue debt or refund debt• Principal and interest payments are recorded

properly and in agreement with documents

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• Revenues and Expenditures• Comparison of current year revenues and

expenditures to prior year• Investigate significant variances• Document the reason for the variance

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• Revenues and Expenditures• Comparison of budget versus actual by fund

• Are there significant variances• Document the reason for the variance• Did any department exceed budget at the legal level of

control

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Best Practices for Preparing for the Audit

• Ensuring that these requirements are met requires good communication, teamwork, and time management

• Ensure an exit interview occurs with the external auditor, key board members, and management to review the audit, any findings, and information from the financial statements

• Discuss what worked well, what didn’t work• How can things be done differently to make the audit

more efficient

• Remember, it takes considerable time and effort to ensure that the financial statements and the notes are consistent and cohesive

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• The process of upgrading the annual financial reporting process to meet management’s requirements will likely take two or three years.

• The “bar has been raised” for financial reporting and it will take several steps to meet these new requirements.

• Set goals and benchmark your performance

• Use the number of AJE’s as a tool to gauge your performance

• What is the number of repeat audit findings?

Adjusting Your Expectations

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Leases

Question #9

Detection of most fraud is by

A. Internal auditsB. Financial statement audits C. Tips D. Internal controls

Knowledge Check

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Leases

Question #10

Which of the following should be included in an audit schedule?

A. Dates of fieldworkB. Who will prepare the financial statements C. Due date for draft statementsD.All the Above

Knowledge Check

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Financial Oversight · 2019-03-04 · Managementis responsible for the following: 1. Preparation...

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Transcript of Financial Oversight · 2019-03-04 · Managementis responsible for the following: 1. Preparation...