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Thoughts on Auditing and Accounting: From the Trenches

Dive into the world of auditing and accounting from the perspective of experts Dale Dyches and Lesley Weston. Learn how they simplify U.S. GAAS, converge with ISA, and adopt a principles-based approach in setting standards. Understand the importance of clarity in communication, standards, and compliance with laws and regulations. Explore key elements in audit findings, management's response, and communication with governance. Discover unique control environment elements in NFPs and the critical role of internal control frameworks. Gain insights on fraud considerations, related parties, and segregation of duties in audit practices.

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Thoughts on Auditing and Accounting: From the Trenches

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  1. Thoughts on Auditing and Accounting: From the Trenches Dale Dyches, CPA, CFF Lesley Weston

  2. Make U.S. generally accepted auditing standards (GAAS) easier to read, understand, and apply • Redraft all auditing sections in the Codification of Statements on Auditing Standards (SAS) to apply clarity drafting conventions and converge with International Standards on Auditing (ISA) • Reflect a more principles-based approach to standards setting Clarity Standards

  3. Communication of significant deficiencies and material weaknesses in internal controls identified during the audit • Findings or recommendations should include the following key elements: • Condition • Criteria • Effects • Cause • Prevalence • Recommendations • Management’s Response Communication with those Charged with Governance

  4. Customization is critical • Need audit evidence • See HANDOUT Management Representations

  5. Under Clarity Standards, auditor has responsibility to consider laws and regulations in an audit of financial statements. • Those laws and regulations to which an entity is subject constitute the legal and regulatory framework. • This auditor responsibility does not extend to other assurance engagements. Compliance with Laws and Regulations

  6. Responsibility of Management • To ensure that the entity’s operations are conducted in accordance with the provisions of laws and regulations Responsibility of Auditors • To obtain reasonable assurance that the financial statements as a whole are free from material misstatement taking into account the applicable legal and regulatory framework Compliance with Laws and Regulations

  7. Noncompliance: acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations • Auditors are not responsible for preventing noncompliance and cannot be expected to detect noncompliance with ALL laws and regulations. Compliance with Laws and Regulations

  8. Audit Risk: For purposes of GAAS, the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated. During the planning and performance of the audit, the auditor is required to: • Identify and assess risks of material misstatement based on an understanding of the entity and its environment, including the entity’s internal control. • Obtain sufficient appropriate audit evidence about whether material misstatements exist. • Form an opinion on the financial statements, or determine that an opinion cannot be formed, based on an evaluation of the audit evidence obtained. Audit Risk

  9. Control Environment • Risk Assessment • Information System • Control Activities • Monitoring Internal Control Framework

  10. Control Environment elements potentially unique to not-for-profits (NFP): • Role of management and the governing board • Frequency of governing board meetings • Qualifications of management and governing board members • Governing board members’ involvement in the NFP’s operations • Organizational structure Internal Control Framework

  11. NFP areas that may include control activities relevant to the audit: • Restricted contribution identification, evaluation and acceptance • Promises to give valuation and recordation • Contributed goods, services, utilities and facilities valuation and recordation • Compliance with donor restrictions and board designations • Reporting requirements imposed by donors, contractors, and regulators • Conformity with NFP-specific accounting presentation and disclosure principles • New program identification and accounting • Segregation of duties Internal Control Framework

  12. Custody of assets • Authorization or approval of related transactions • Recording or reporting of related transactions Segregation of Duties

  13. Example: Three-Person Office Segregation of Duties

  14. Concerns • Misstatements resulting from fraudulent financial reporting • Misstatements resulting from misappropriation of assets • Auditors must exercise professional skepticism Consideration of Fraud

  15. Include the following: • Affiliates of the entity  • Entities for which investments in their equity securities would be required to be accounted for by the equity method by the investing entity  • Trusts for the benefit of employees • Principal owners of the entity and members of their immediate families  • Management of the entity and members of their immediate families  Related Parties

  16. Include the following (continued): • Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other   • Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other Related Parties

  17. May use third-party administrators to process transactions • Services provided by a service organization are relevant to the audit of a user entity’s financial statements • User controls • SOC 1 / SOC 2 Use of Service Organizations

  18. Specialized accounting and reporting principles • See HANDOUT Other Possible Disclosures

  19. Fair value presentation disclosure • Fair value option Fair Value

  20. Discrete construction projects • Option to capitalize interest during construction phase on direct borrowings Capitalization of Interest

  21. Generates an asset • Must be recalculated for each reporting period Lease at Below Market

  22. Involve the accountants • Bankers may not understand the levels of service or other nuances Loan Covenants

  23. Restricted Net assets resulting from contributions whose use is limited by donor-imposed stipulations Designated • Unrestricted net assets subject to self-imposed limits by the governing board Net Assets:Designated vs. Restricted

  24. Permanent endowment • Term endowment • Quasi endowment • Designated Endowment Disclosures

  25. Control testing of revenues • Have auditor test proper classification per Annual Financial Report (AFR) groupings Revenue Control Testing

  26. Consideration of bases for allocation annually • Are they still plausible? • Would change the bases result in more accurate allocation? • What other allocation bases would potentially lead to a more accurate Schedule of Functional Expenses? Functional Allocation of Expenses

  27. Questions?

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