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Making the Most of the A udit Process

Making the Most of the A udit Process. Presented by: Jeff J ensen, CPA Crowe Horwath LLP. Course Outline. What is the purpose of the audit? Responsibilities of Management, Auditor, and Audit Committees Audit planning tips and tricks Audit communications – the “fun” part of the audit!

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Making the Most of the A udit Process

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  1. Making the Most of the Audit Process Presented by: Jeff Jensen, CPA Crowe Horwath LLP

  2. Course Outline • What is the purpose of the audit? • Responsibilities of Management, Auditor, and Audit Committees • Audit planning tips and tricks • Audit communications – the “fun” part of the audit! • The Management Letter • C • D

  3. A Client Once Told Me This Joke . . . • Do You Know the Two Biggest Lies of Auditing? Client – “It’s Great to See You!” Auditor – “We’re Here to Help!” But it doesn’t HAVE to be like this….

  4. What is the Point of an Audit? • Really just focuses on the financial statements and compliance. • Offers only a back-handed level of assurance regarding internal controls. • Keeps the accounting department motivated to follow processes throughout the year. • Satisfy regulatory, grant and donor requirements.

  5. Audit Responsibilities

  6. Management Responsibilities • Maintain adequate records. • Maintain cost-effective level of internal control. • Respond fully to auditor information requests. • Facilitate communications with Board and Audit Committee (including discussions with auditors). • Follow-up on audit findings and recommendations.

  7. Auditor Responsibilities • Plan the audit to be cost effective while meeting all applicable professional standards. • Perform a reasoned risk assessment regarding areas of potential control weakness or complexity. • Maintain skeptical nature while treating management team with respect.

  8. Auditor Responsibilities (Continued) • Endeavor to obtain all relevant facts when considering audit findings and recommendations. • Exercise reasonable judgment in communications with management, the Audit Committee, and the Board.

  9. Audit Committee Responsibilities • Consider scope of audit services. Are additional services deemed necessary? • Review auditor’s qualifications. • Assess adequacy of management’s response to audit findings and recommendations. • Report to the Board outcome of annual audit. • Perhaps – review draft of Form 990 (Foundation/Auxiliary) before it is filed. • Have an established purpose for the committee.

  10. Management and Audit Committee – A-133 • Office of Management and Budget (OMB): “When procuring audit services, the objective should be to obtain high quality audits.” • President's Council on Integrity and Efficiency (PCIE) study from 2007 = 51% of sampled audits were “unacceptable or limited reliability” • What should you consider when selecting an auditor?

  11. Planning Tips and Tricks

  12. Planning Tips and Tricks • Have a call or meeting during the last quarter of the year to discuss logistics. When will: • Engagement letter be sent? • “PBC” letter be issued? • Trial balance be ready? • “Fieldwork” start? • Drafts of the audit documents be issued? • Audit Committee meetings be held? • Finals be released? • Draft 990 be released?

  13. Planning Tips and Tricks (Continued) • Have there been any significant changes to the organization’s programs or financial structure? • Has there been significant turnover? • Which management team member is the primary audit contact? • Are “preliminary” procedures worthwhile? • Does either party want formal, periodic progress updates?

  14. Planning Tips and Tricks (Continued) • Any new federal grants? • Reviews conducted by federal agencies or other regulatory/oversight bodies? • Stay in frequent contact • Discuss new pronouncements and requirements in advance • Ask questions throughout the year…don’t “just wait” until the audit fieldwork gets here

  15. Information Sharing and Brainstorming • AUDITORS and AUDITEES – What things have you done to make your audit more effective and efficient?

  16. Audit Communications

  17. Audit Communications – Auditor & Client • Auditors should keep management informed of all audit adjustments (including passed adjustments) during the audit process. Do not wait until the end to discuss them with management. • Auditors should not begin drafting (or sharing with Audit Committee) the management letter/finding section of the report before they have discussed all potential comments with management! • Discuss potential A-133 findings and questioned costs as they are identified • Management has more time to research the items. • Expanded sample sizes and alternatives could be considered.

  18. Audit Communications – Audit Committees • No Surprises During the Meeting! The Chair should be made aware of “issues” before the meeting. • Auditors should be sure they have addressed any concerns raised by the Audit committee during the pre-audit call. • Encourage the Committee to dialogue with management. • Always hold an executive session with the auditor – even if there are no real issues to discuss.

  19. Report Findings & The Management Letter

  20. The Management Letter – Differing Views • Auditors Intentions: • Adding value • Satisfying applicable standards • Accountability to Audit Committee • Auditee May Think: • Why is the auditor SO picky? • Stress...I am getting fired • I am an ethical person – that is not a risk here! • It may make you feel like this:

  21. How Can You “Get the Most” From the Management Letter? • Understand the following: • Background • Requirements • Classification levels • Collaborative effort: • Discuss issues early in detail • Mitigating control steps • Possible resolutions

  22. The Management Letter • Significant Deficiencies and Material Weaknesses MUST be included. • The importance of the COSO framework when considering potential audit comments. • Clarity standards give more encouragement for formal reporting of control deficiencies.

  23. What is a Significant Deficiency? • A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

  24. What is a Material Weakness? • A material weakness is a deficiency or combination of deficiencies in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.

  25. What is an A-133 (or GAS) Finding? • Government Auditing Standards (GAS), Section 7.18: • Auditors should report deficiencies in internal control, instances of fraud, noncompliance with provisions of laws, regulations, contracts, and grant agreements, and abuse and other deficiencies that have occurred or are likely to have occurred and are significant within the context of the objectives of the audit. • OMB Circular A-133, Section 105: • Deficiency which the auditor is required by Section 510 to report in the schedule of findings and questioned costs. • Internal controls • Compliance

  26. What is an A-133 (or GAS) Finding? • A-133 Section 510 • Significant deficiencies in internal control over major programs • Material non-compliance with provisions of laws, regulations, contracts, or grant agreements applicable to major programs • Known questioned costs over $10,000 relating to a major program compliance requirement • Known questioned costs over $10,000 for a federal program that is not audited as major • Circumstances concerning why the auditor’s report on major program compliance is other than unqualified, unless already reported in another finding • Known fraud affecting a federal award, unless already reported in another finding • Instances where the auditor has noted that the auditee’s summary schedule of prior audit findings materially misrepresents the actual status

  27. How Would YOU Classify These Items? • Credit card documentation is not consistent and/or approvals are lacking • If required, timesheets are not reviewed and approved • A-133 eligibility testing – 3 out of 60 individuals served were not actually eligible • Remember the impact of extrapolation!

  28. How Would YOU Classify These Items? • Monthly financial statements are not prepared and reviewed by management • Lack of Board-level financial oversight • General ledger accounts are not routinely reconciled

  29. How Would YOU Classify These Items? • Lack of segregation of financial duties • Unexpected audit adjustments • Restatements

  30. How Would YOU Classify These Items? • Lack of open lines of internal communication between the accounting department and the other departments within the organization • Poor contracting policies or ability to track contracts • Fraud has been committed by the Chancellor/President – but an immaterial dollar amount

  31. How Would YOU Classify These Items? • Late remittances of employee benefit plan withholdings • Lack of adequate IT controls – security vulnerabilities, etc. • Budgeting process is inadequate

  32. How Would YOU Classify These Items? • Inadequate accounting staff • CBO/Vice Chancellor can post journal entries without anyone else noticing or approving • Staff performance raises, etc. are not approved (or documentation is lacking)

  33. Questions?

  34. Thank You for Your Time Jeff Jensen, CPA Crowe Horwath LLP Office 916.441.1000 Jeff.Jensen@crowehorwath.com

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