Preparing for Your Audit

Preparing for Your Audit

Matthew Hodges, CPABrenda Hyatt-Neal, CPA, CFE

What is it?

What isn’t it?

How can I make this as painless as possible?

Overview

Why do we have to have it

Provides confidence for stakeholders in a government

Provides assurance of a true and fair view of government’s financial performance and position

Provided by independent CPA firm with necessary knowledge and experience of government accounting and auditing

What Is It?

Financial Statement Audit (GAAS)

Audit of Internal Control over Financial Reporting and on Compliance and Other Matters (Yellow Book)

Audit on Compliance for Each Major Program and on Internal Control over Compliance (Single Audit)

What Is It?

Auditing Standards:

◦ Auditing Standards Generally Accepted in the United States of America (AICPA)

◦ Standards Applicable to Financial Audits contained in Government Auditing Standards (Comptroller General of U.S.)

◦ Single Audit Act and OMB Circular A-133

Requirements and guidance on how to conduct an audit, including CPE for governmental audits.

Financial Statement Audit

Opinion◦ Unmodified (“clean”)◦ Modified

Scope limitation Presentation

Reasonable Assurance

Financial statements free from material misstatement


Procedures performed depend on auditor’s judgment

Assess risk of material misstatement due to:◦ Fraud◦ Error

Evaluate accounting policies and presentation


Plan audit to obtain low control risk

Consider and test internal control design, implementation and effectiveness, but do not opine

Report if any material weaknesses or significant deficiencies are identified

Report on any instances of noncompliance or other matters

Audit of Internal Control

Opinion on compliance for each major program

Reasonable assurance

Direct and material effect on major federal program

Audit of Compliance

Report if any material weaknesses or significant deficiencies over compliance are identified

Follow up on prior audit findings

Audit of Compliance

Threshold

◦ Current threshold: $500,000 of expenditures of Federal awards

◦ Under “Supercircular”: Effective for fiscal years beginning 12/26/14 (one

year after issuance of Supercircular) $750,000 of expenditures of Federal awards

Single Audit

Determine Major Federal Award Programs

◦ Determine Type A vs. Type B

◦ Complete risk assessment

Low risk Type A

High risk Type B

◦ Percentage of coverage

Single Audit

Knowledge of government and its environment

Identify and assess risks

Professional judgment

Develop audit strategy and plan to address risks of material misstatement and noncompliance

Risk-Based Approach

Not a guarantee of an outcome

◦ Professional judgment

Not absolute assurance

◦ Reasonable assurance

◦ Accounting estimates

◦ Sampling

What Isn’t It?

Not a fraud examination

◦ Management and board’s responsibility to prevent and detect fraud

◦ AU-C Section 240 (SAS 122)

◦ Auditor responsible to obtain reasonable assurance financial statements are free from material misstatement, whether caused by fraud or error.

What Isn’t It?

Not a fraud examination

◦ Maintain professional skepticism

◦ Consider potential for management override of controls

◦ Communicate to Management and Board

What Isn’t It?

Engagement letter

◦ Read it

◦ Overall description of services

◦ Responsibilities of management and audit firm

How Can I Make this as Painless as Possible?

Engagement letter

◦ Communicate the agreed-upon timeline for audit to your staff as soon as possible to avoid scheduling conflicts

◦ Presumption in most engagement letters that the auditors will have access to all staff and all relevant financial documentation


Engagement letter

◦ Maintain clean, orderly records that can be obtained in a timely manner

◦ Lack of access to documentation may result in a scope limitation and modified audit report


Planning phase

Fieldwork

Financial Statements

Engagement wrap-up

Reporting to those with governance


Planning phase:◦ Trial balance - ASAP◦ Analytical procedures◦ Materiality◦ Confirmations◦ Evaluating your industry

Economy Competitors Vendors Customers


Single Audit

◦ SEFA

Prepared by management

Includes all forms of Federal assistance (grants, loans, insurance, cash and non-cash, etc.)

Review for completeness

Used by auditor for risk assessment


Planning phase

◦ Major programs

◦ Materiality

◦ www.omb.gov

◦ Planning test


http://www.omb.gov/

http://www.omb.gov/

http://www.omb.gov/

Planning phase

◦ Independence – we must maintain

◦ Who prepares the financial statements?

If the auditor prepares, is this a matter of convenience or necessity?

We can help with a goal in mind


Fieldwork

◦ Walkthrough

◦ Documentation

◦ Communicate

◦ Repeat periodically


Preparing for fieldwork

◦ # of auditors used

◦ What do they want when they get here


Balance Sheet◦ Cash/Investments◦ Accounts Receivable◦ Inventory◦ Fixed Assets◦ Deferred Inflows◦ Other Assets


Balance Sheet◦ Accounts Payable◦ Accrued expenses◦ Payroll liabilities◦ Deferred Outflows◦ Long-term liabilities◦ Notes payable


Equity Fund Balance

◦ Non-spendable◦ Restricted◦ Committed◦ Assigned◦ Unassigned


Balance Sheet◦ The point is to support the numbers that you are

reporting. Third party confirmations Supporting/convincing documentation

Be prepared to prove your numbers


Statement of Revenues, Expenditures, and Changes in Fund Balances

◦ Revenues Contracts, federal awards, grants, bonds and taxes

◦ Expenditures Contracts, federal awards, grants, bonds and general

operations


After the fund financial statements are supported we will look at your reconciliation that converted your statements to the government-wide financial statements.


Fieldwork is the meat and potatoes that support:◦ MD&A◦ Notes to the financial statements◦ SEFA◦ Supplemental schedules◦ CAFR – to some extent


Internal Controls over Financial Reporting and Compliance

◦ Internal controls are a means to an end, not an end in itself

◦ Detect and Correct Issues Fraud Error

◦ Communicate Corrective Actions to Auditor


Internal controls

Single audit

Note disclosures


Internal Controls over Financial Reporting and Compliance

◦GFOA puts it this way:

◦ “Prudence in the management of public funds requires that there be adequate control procedures in place to protect those funds.”

◦ “A sound framework of internal control is necessary to afford a reasonable basis for finance officers to assert that the information they provide can be relied upon.”


Single Audit

◦ Auditors do not look at all compliance requirements

◦ “Direct and material”

◦ Auditees must comply with all compliance requirements


Single Audit

◦ Grant manager:

Summarize and communicate information

Maintain clean and orderly documentation

Document policies and procedures


Single Audit

◦ Grant manager:

Identify all sub-recipients and pass-throughs for Notes to SEFA

Document monitoring process for sub-recipients

Document and communicate to auditor any other internal or external audits or reviews, along with findings relevant to audit


Single Audit

◦ Grant manager:

Ensure time records are kept for each Federal award where payroll is charged

File grant financial reports timely

Keep an inventory of equipment purchased with Federal dollars (update once every two years)


Financial Reporting and Note Disclosures

◦ Ensure reconciliations and detailed agings have been prepared for all significant financial statement areas and that reconciliations agree to financial statements

◦ Prepare a budget-to-actual comparison and current year to prior year comparison and identify significant variances. Know where to find reliable documentation to verify your explanations.


Financial Reporting and Note Disclosures

◦ 2014 Governmental Accounting Auditing Financial Reporting (“GAAFR”) book by Stephen Gauthier

◦ Use GFOA’s updated disclosure checklist (or can even ask for a copy of your auditor’s disclosure checklist)

Resources

CPE

◦ GFOASC

◦ 2013 COSO Framework (Start with 20 page Executive Summary on www.coso.org)

◦ Supercircular (GFOA has a Best Practice for Implementing OMB Uniform Guidance)

◦ GASB Updates (they issued five new GASBs during this presentation)

Resources

http://www.coso.org/

Questions?

Preparing for Your Audit

Documents