Tag Archives: Audit

What to do when the audit ends

Erin MiranteOctober 14, 20200 Comment

Financial audits conducted by outside experts are among the most effective tools for revealing risks in not-for-profits. They help assure donors and other stakeholders about your stability — so long as you respond to the results appropriately. In fact, failing to act on issues identified in an audit could threaten your organization’s long-term viability.

Working with the draft

Once outside auditors complete their work, they typically present a draft report to an organization’s audit committee, executive director and senior financial staffers. Those individuals should take the time to review the draft before it’s presented to the board of directors.

Your organization’s audit committee and management also should meet with the auditors prior to the board presentation. Often auditors will provide a management letter (also called “communication with those charged with governance”), highlighting operational areas and controls that need improvement. Your nonprofit’s team can respond to these comments, indicating ways they plan to improve the organization’s operations and controls, to be included in the final letter. The audit committee also can use the meeting to ensure the audit is properly comprehensive.

Executive director’s role

One important audit committee task is to obtain your executive director’s impression of the auditors and audit process. Were the auditors efficient, or did they perform or require redundant work? Did they demonstrate the requisite expertise, skills and understanding? Were they disruptive to operations? Consider this input when deciding whether to retain the same firm for the next audit.

The committee also might want to seek feedback from employees who worked most closely with auditors. In addition to feedback on the auditors, they may have suggestions on how to streamline the process for the next audit.

No material misrepresentation

The final audit report will state whether your organization’s financial statements present its financial position in accordance with U.S. accounting principles. The statements must be presented without any inaccuracies or “material” — meaning significant — misrepresentation.

The auditors also will identify, in a separate letter, specific concerns about material internal control issues. Adequate internal controls are critical for preventing, catching and remedying misstatements that could compromise the integrity of financial statements. The auditors’ other suggestions, presented in the management letter, should include your organization’s responses.

If the auditors find your internal controls weak, promptly shore them up. You could, for example, implement new controls or new accounting practices.

The Game Plan of an Audit

Pam WilliamsOctober 27, 20150 Comment

by Steve Schulz history-telecom-audit

Last week while talking to my brother on the phone he asked me what I did as an auditor. I began explaining what the purpose of an audit was, what some basic procedures were, and what different issues raised during an audit when he stopped me and said he had no idea what I was talking about. I sat there in silence for a second and realized there has to be a better way to explain to someone with no knowledge of accounting what I did day in and day out; then it hit me. As huge football fans, I could compare the two with ease – the players/team were the entity, each play was like a new transaction, and the officials were like the auditors. I called him back and went on to explain the following:

Having the necessary personnel – Having the necessary personnel is essential for both the engagement team and the entity. First and foremost, the audit staff must be independent and possess the proper level of training and knowledge to carry out the engagement(s) at hand. The entity also needs to have the appropriate staff able to handle daily processes that oversee the internal controls and maintain records of transactions. In comparison to football, officials must be unbiased, knowledgeable, and properly trained to work their assigned position. Each side of the ball will need the correct number of players and the offense will need to be in the proper formation before any play can be run. In all respects, failure to have the proper personnel may result in unfavorable conditions that gather insufficient audit evidence used to determine an opinion.

Building off of a strong pre-season – During the pre-season, teams, officials, and the league must prepare efficiently and effectively in order for things to run smoothly during the year. In audit this is similar to the planning stages. When planning the engagement, the audit team will come up with a strategy to understand the scope, timing, and direction of the audit; much like a team devises a game plan going into each game.

The players and the officials – Officials monitor each play just like auditors test the transactions of entities. During fieldwork, auditors will examine different accounts, test controls, and perform other procedures required to meet the needs of the game plan formulated during planning. If the results of the auditor’s test dictate that more testing is necessary, the auditor will need to carry out further procedures to get a better look into the area being tested. In comparison, officials on the field will use their training, judgement, and experience to call plays as accurately as possible however, sometimes they will need to investigate the issue further and will go to the replay system for help. This gives the referee the opportunity to get a closer look at the play and make a more accurate ruling, similar to further audit procedures.

Making the right call – Understanding that not all transactions are perfect, auditors must determine what differences or errors are material and force the auditor to alter their opinion on either the controls or financial statements. Likewise, officials are tasked to make sure that every game is played fairly. Some things, like a holding penalty, will not determine whether a game was played, as a whole, fairly or not but major issues might. An example of this would be like playing with deflated footballs. This would cause an unfair advantage and may cause the contest to come under question and possibly a forfeit. In short, a holding penalty would be the equivalent of a five dollar difference between the receipt and what was recorded in the books while playing with deflated footballs would be the equivalent of a material misstatement.

Langdon & Company LLP has lots of professionals and football fans alike that would be happy to answer any of your audit questions. Please contact our office for more information.

Steve ([email protected]) is a staff auditor with Langdon & Company LLP. He focuses primarily on healthcare and nonprofit organizations.

How to Prepare for an Audit

Pam WilliamsAugust 17, 20150 Comment

by Lee Byrd

For many organizations, an audit is an annual process that requires the Organization’s personnel to devote additional time and effort above and beyond their day-to-day responsibilities. It can be tiresome and unwelcome to those assigned with task of handling the audit. However, there are many ways in which an Organization can prepare for an audit which could lead to less time the auditor’s spend on site, decreased stress around deadlines, and an overall more efficient audit process.

PBC List – PBC stands for “Prepared By Client” and this is a schedule of initial audit requests provided by the auditor, which are to be prepared by Organization personnel. Because the auditor’s schedule is often tight, it is essential that the items on the PBC List are prepared and ready for the auditor prior to the start of fieldwork. Items that are not completed timely could cause significant delays in the audit process.
Prepare throughout the year – If the Organization has been audited before, personnel likely have an idea of key information or schedules that will be requested by the auditor. Rather than waiting until the PBC List is received, it may be helpful to update these schedules periodically throughout the year. Such items include investment, debt or fixed asset rollforwards which must be prepared from underlying data and records. As these schedules are updated, be sure to keep those supporting documents in a file or folder to provide the auditor at year-end with the audit package.
Organization – Keeping your audit files and underlying support organized will be key to aiding the audit efficiency. Items from the PBC List should be accumulated in folders and labeled according to the PBC List numbering, if possible. This will aid the auditor in identifying and processing the information quickly. Additionally, having supporting documentation such as invoices and deposits filed in an orderly manner will allow Organization personnel to quickly pull support requested by the audit throughout fieldwork. The less time it takes to provide the auditor requested documentation, the less time the auditor must spend on site.
Designated Personnel – While it is important to delegate preparation of audit schedules and accumulation of other requested support to financial personnel throughout the organization, it is important to designate an individual, such as a controller or CFO, as the audit contact. This individual will be responsible for communicating deadlines and any delays to the audit team. More importantly, this individual should review all schedules and support prepared by other personnel prior to providing that information to the audit team. Ensuring that provided information is complete and accurate will prevent duplication of effort and audit findings.
Information is Key – Know what has happened within the organization during the year. The auditor will ask about significant events, variances from prior year, and variances from budget, just to name a few. Providing clear, concise explanations for these variances will allow the auditor to document appropriately. Additionally, any information that can be provided to the auditor prior to the start of fieldwork will allow the auditor to develop expectations and may reduce the number of variance inquiries made throughout the audit.
Communication – Your chosen auditor should always be open to communication from their clients, whether during the actual engagement or throughout the year. Be sure to reach out with questions so that issues can be resolved prior to the start of the audit. Additionally, if you feel that you will not have the requested information prepared by the designated date, notify the auditor immediately so that scheduling and deadlines can be addressed as soon as possible.

It is equally important to the audit firm and the Organization for the audit to be as efficient and seamless as possible. The above suggestions should aid in creating a pleasant audit experience for all parties involved.

Langdon & Company LLP’s audit team is here to help. Contact us with questions regarding your audit engagement. Lee Byrd ([email protected]) is an Audit Manager at our Firm and has over 7 years of experience with a variety of clients.

The Importance of Separation of Duties

Pam WilliamsApril 27, 20150 Comment

by Katie Anthony

It is important to have levels of separation of duties in your business. You may say that you are a very small business and cannot afford to have many employees. That may be true, in which case you can add approval and double sign-offs on items of significance as well as review of certain processes. You may be in a situation where you do not even have enough employees to do this. In such a case, it might benefit your company to set up a monthly or quarterly review by an outside accounting firm.

You may be asking why separation of duties is so important. A big reason is that although a greater number of frauds are perpetrated by employees low on the ladder, greater amounts are stolen by employees at the management level. The ACFE Report to the Nations on Occupational Fraud and Abuse: 2014 Global Fraud Study reports that employees committed 42% of occupational frauds but caused a median loss of $75,000, while executives committed 19% of occupational frauds with a median loss of $500,000. These high level employees are trusted and intelligent, so they are able to get away with the fraudulent activities for a longer period of time, enabling them to steal larger amounts of money. fraud triangle

There are three elements to occupational fraud, which are opportunity, rationalization, and pressure, as credited to Donald Cressey. He believed that these three elements must all be present for an ordinary person to commit fraud (Fraud Examiners Manual: 2014 US Edition).

Let’s start with rationalization. You may not think you are able to influence someone else’s rationalization. However, some people rationalize fraudulent actions by saying that they are owed what they are stealing from the organization because they feel underappreciated. You need to take steps to make sure that you pay your employees appropriately for their roles and that you do things occasionally to show your employees that you appreciate them. Employees sometimes even rationalize their behavior based on what they see employees higher than themselves doing. That means you! Keep in mind that your employees are watching you to set the tone of the business.

While you cannot remove pressures employees feel from those outside of your organization, you can make sure that you don’t put too much pressure on them from within. This means doing evaluations that are not only one-sided, but rather structured so that your employees can give feedback about their workloads and stress levels. If you overwork your employees they may feel pressure to take shortcuts that eventually lead to fraudulent actions.

Last but not least, is opportunity. Separation of duties and reviews can really help with this element. If employees feel that no one looks at their work, they may take that opportunity to begin stealing, especially if the other two elements of the fraud triangle are present. By adding separation of duties and reviews, you are filling a gap that will help keep your business healthy. If, despite all your precautions, one of your employees IS stealing, separation of duties and reviews will help catch them. The ACFE Report to the Nations on Occupational Fraud and Abuse: 2014 Global Fraud Study goes on to show that review is second only to a tip in discovering frauds in small businesses.

While no plan to prevent and detect fraud is perfect, each step you take will help. Langdon and Company LLP knows that you want to keep your business healthy and thriving. L&C can help you define the duties in your processes that need separation as well as provide review services for your organization. Contact our office today with any questions or concerns you have.

Katie ([email protected]) is an Audit Staff at L&C and works with a variety of clients.

SSARS 21: Statement on Standards for Accounting and Review Services: Clarification and Recodification

Pam WilliamsApril 20, 20150 Comment

by Lee Byrd

Representing the most significant changes to the compilation and review literature in decades, the AICPA Accounting and Review Services Committee recently issued Statement on Standards for Accounting and Review Services (SSARS) No. 21. The guidance aids in drawing a definitive line between preparation and reporting services and is composed of four sections as follows:

Section 60 – General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services, provides a foundation for the other three sections and guides professionals on their responsibilities related to engagements performed in accordance with SSARS.
Section 70 – Preparation of Financial Statements, applies when an accountant is engaged to prepare financial statements but is not engaged to perform an audit, review or a compliation on those financial statements. Professional judgment should be used in determining the type of engagement requested by the client (i.e. whether the CPA is engaged to prepare financial statements or simply assist in their preparation). A report is not required for a preparation engagement but the CPA should include a legend on each page of the financial statements stating, “no assurance is provided.”
Section 80 – Compilation Engagements, applies when an accountant is engaged to perform a compilation engagement. The guidance provides new compilation report language, distinguishing this report from an assurance engagement report for audit or review services. CPAs may add additional paragraphs for explanatory purposes.
Section 90 – Review of Financial Statements, applies when an accountant is engaged to perform a review of financial statements. The accountants’ review report has been updated to require the use of headings in the report and the name of the city and state of the CPA’s issuing office.

Successful business group. CPAs are required to begin using SSARS 21 for financial statements with periods ending December 15, 2015 and thereafter; however, the standard allows for early implementation. The standard also requires a signed engagement letter for all SSARSs engagements, signed by both the CPA and management or those charged with governance. Additionally, while audit, review and compilation engagements require participation in a peer review program, preparation services do not fall within any of the aforementioned categories and therefore, are not subject to peer review.

Langdon & Company LLP‘s accountants are very familiar with this new standard and would be happy to answer any questions you may have. Please contact our office for additional information.

Lee Byrd ([email protected]) is an Audit Manager at our Firm and has over 7 years of experience with a variety of clients.