Those Charged With Governance 1

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1 TOPIC: Those Charged With Governance OFFICE: Auditor STATE: MI DATE: 03/10/09 QUESTION: Michigan's Office of the Auditor General is interested obtaining policies (or a description of current practice in the absence of a policy) regarding communications with those charged with governance, especially the issues of determining who those charged with governance are, and examples of such communications. Also, please indicate in your response what entity within the legislative branch, if any, has been deemed as "those charged with governance" (e.g. legislative audit committee, other legislative committees, legislative leadership, legislative fiscal agencies, or the legislature as a whole) including the type of entity audited (e.g. statewide CAFR, university, discretely presented component unit receiving a direct appropriation, etc.). State Delaware Illinois Comments We consider the Governor and Legislature as those charged with governance. In SAS 114 meetings to go over the letter, the Controller General has attended as a representative of the Legislature and the Office of Management and Budget (OMB) Director has attended to represent the Governor. Attached is a copy of the SAS114 letter that was sent for the FY07 CAFR (KPMG audits the state's CAFR). If an agency s organizational structure includes a governing board, then all communications with those charged with governance required under professional standards are sent to the chairperson or equivalent. These entities not only are component units but many primary governmental entities also (i.e. Capital Development Board, Human Rights Commission, etc.) For legislative agencies we determined that those charged with governance was the Joint Committee on Legislative Support Services (comprised of the four legislative leaders). By statute, the Joint Committee is responsible for general policy and coordinating activities among the commissions. For our CAFR audit those charged with governance was determined to be only the State Comptroller, a constitutional officer. As the state s accountant the Comptroller has the authority and responsibility to issue the CAFR. By statute and our normal distribution process all our final reports are sent to the Legislative Leaders, the Governor, and the Legislative Audit Commission. We send annual formal communication to the Legislative Audit Commission of our planned audits and audit scope. Indiana Compliance with the required communication requirements is ensured via documentation checklists and final report processing forms. The Indiana State Board of Accounts audits the state of Indiana, counties, cities/towns, schools, special districts, libraries and townships. For the state, those charged with governance were determined to be the Governor s Office of Management and Budget. This office oversees the fiscal responsibilities of the state. Management was determined to be the Auditor of State (in Indiana this office maintains the accounting records). For local governmental units, those charged with governance were determined to be the governing board that governs the finances of the unit. To avoid conflicts with Indiana s open door law, our policy is to communicate with the governing board s president. We then place the responsibility on the president to communicate with the other board members. Those Charged With Governance 1

2 State Comments We have procedures in our audit program that prompt our examiners to communicate with those charged with governance with an entrance conference and at the exit conference. We have provided a working paper in the form of an agenda that the examiner should use to ensure that all required communications have taken place for each meeting. Our goal is to establish the face-to-face communication that is desired for proper two-way communication. For the most part we have received positive feedback from those charged with governance concerning these communications. Admittedly, sometimes these faceto-face meetings are hard to get. In circumstances where the examiner cannot get a face-to face meeting we have instructed the examiner to try to communicate by phone. If unsuccessful with phone, we then move to and then snail mail. If no communication is achieved, then the examiner is instructed to consider as a risk in the risk assessment process. Kansas Attached are the agenda working papers that we use as a guide for our meetings with those charged with governance. We consider those charged with governance to be agency management, or the oversight board. Those are the folks who are responsible for the operations of the agency. Here's the passage from our policy manual: New York North Carolina The startup letter generally will be sent to the agency head; in an audit of a Board or Commission, the agency head is considered to be the executive director (or equivalent) of the Board or Commission, not the Chair. A copy also will be sent to the chair of any oversight body, such as the Executive Director of the Board of Regents in the case of a university, the Secretary of SRS in the case of a State hospital, or the chair of the Board of Nursing in an audit of the Board. In the rare situation in which the person or body charged with governance of an audited entity is not clearly evident, audit standards require that auditors document the process followed and conclusions reached for identifying those charged with governance. In such cases, the audit manager or supervisor will prepare a workpaper documenting how the Division determined which body, or which individual, is responsible for governance of the audited entity. Our division audits local governments (mainly counties, cities, towns, villages, and schools). For each one of these local governments listed, there s a separate governing body elected to office by the voters within the particular jurisdiction. Usually the chief executive officer of the locality is also separately elected. As such, we identify those charged with governance for most local governments in NYS as the board members and chief executive officers elected by the voters. Our communications with those charged with governance are continuous throughout our audits (from the up-front engagement letter) and culminate with the written audit report that is addressed and remitted to the governing board. Here is a link to one of our documents entitled "Understanding the Audit Process" that we provide and discuss with our auditees early on in the audit process, and another document entitled "Responding to an OSC Audit Report: Audit Responses and Corrective Action Plans" that we provide near the end of the audit process, Attached our some of the standard documents we use in our financial audits: work paper documenting our rationale for identifying those charged with governance and our decision to communicate certain matters to a subgroup, etc.; an inquiry letter used in our risk assessment process (although we encourage making these Those Charged With Governance 2

3 State Comments inquiries face-to-face); and a letter to those charged with governance sent at the end of the audit. We also copy whoever is identified as charged with governance when we send our engagement letter. So far we have not identified any legislative group as being charged with governance for purposes of the required communications. They don t seem to be in a close enough position to respond meaningfully to the (e.g. specific risks related to a department or program). We have also been on the fence about whether the governor should be included in our communications for cabinet departments since he/she does set the strategic direction at a very high level. The same applies to our Office of State Controller in regards to responsibility for financial reporting. Perhaps what we ve really concluded is that communicating with a subgroup (e.g. individual university boards or state agency department heads) of those charged with governance is adequate. North Dakota Ohio Tennessee Virginia Our state operates in a very decentralized manner. Agencies essentially all prepare individual sets of financial statements that are compiled centrally by the Office of the State Controller to prepare the state s CAFR. Our audit effort tends to mirror the operations, with individual audits performed and results compiled centrally. The Legislature is in charge of governance. They have a policy setting role. Since it is not practical for us to communicate everything to them, we treat the Legislative Audit and Fiscal Review Committee as a conduit. Biennially we make the required communications to them. Each audit, financial and operational, we go further and determine if there is another board that could be in charge of governance. When in doubt we address our engagement letters to them, and cc: the director of the agency. This has the required planning communications. We also make the required inquiries of the board, or the chair anyway. The reports are then also distributed to them. We do not have this in the policy manual yet, but it will be put there soon. We just revised our guidance a bit. The attachment is the revision we intend to adopt. The State Audit Division considers those charged with governance to be a board of directors, fiscal review committee (legislature), or some other type of commission or authority. These groups would govern at the state-wide level or at each individual department or agency. Our County Audit Division developed the attached document to assist them. In Virginia, we do several different things. On the legislative side, we go over our work plan with the Joint Legislative Audit and Review Commission (JLARC) at the beginning of each year, discussing the purpose of our audits and where we see the most risk (at a very high level). We issue the final copy of our reports initially to the Speaker of the House and to the Chairman of JLARC with an overview in the electronic communication of any issues we believe should be highlighted. Additionally, we have identified key legislative staff that we have assigned a director to be a liaison with and if issues arise that we believe that legislative staff would be interested in, we contact them and discuss. This is more informal, but has resulted in good sharing of information. On the Executive side, I (Deputy) meet annually with the Governor s Chief of Staff to cover risky audits, fraud considerations and whatever else might come up in the course of our conversation. The meeting usually lasts about an hour. Then, I have various directors meet with the Cabinet Secretaries to discuss issues related to the agencies in their secretarial area. Generally we have a list of talking points to Those Charged With Governance 3

4 State Comments ensure there are certain things covered in all of the discussions, and then each director deals with the specific issues related to the agencies that Secretary has knowledge about. All of these discussions are documented centrally in one document to support the statewide CAFR as well as the individual agency audits. When the audit reports are released, a preview copy is made available to the Chief of Staff, and each Cabinet Secretary also receives the reports related to agencies they are responsible for and we are available for questions if they have any. For entities with a Supervisory Board, such as the Colleges and Universities and other component units, the Director responsible for the audit meets with either the Audit Committee, Audit Committee Chairman, or the full Board, depending on the wishes of the Board, at the beginning of each audit. Then, at the completion of the audit, the director again meets with either the Audit Committee or the full Board to discuss the results of the audit. Two documents are attached. One is the standard outline we use when meeting with a Board. The other is the outline of the issues discussed with the Chief of Staff and the Cabinet Secretaries for Those Charged With Governance 4

5 ARIZONA SAS 114 Governance Those charged with governance We must communicate with those charged with governance matters related to the financial statement audit that are, in our professional judgment, significant and relevant to the responsibilities of those charged with governance in overseeing the financial reporting process. Those charged with governance means the person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. In some cases, those charged with governance are responsible for approving the entity s financial statements (in other cases management has this responsibility). Management means the person(s) responsible for achieving the objectives of the entity and who have the authority to establish policies and make decisions by which those objectives are to be pursued. Management is responsible for the financial statements, including designing, implementing, and maintaining effective internal control over financial reporting. We are responsible for determining the appropriate person(s) within the entity s governance structure with whom to communicate. Based on research and in order to establish consistent Office policy, we have developed the following table to clarify who the Office considers to be those charged with governance and those in management: County College State County or State Department Governance Governing Board County Manager Governing Board Chancellor/District President Governor Director of Department of Administration Department Head (individual, elected/appointed, Commission or Board) Management County Manager Finance Director Vice President/Vice Chair-Financial Services Comptroller Director of Department of Administration Comptroller Department Head Finance Director/Controller University Arizona Board of Regents University President University President Vice President-Finance Comptroller As demonstrated in the table above, those charged with governance can also be part of management or vice versa. The County or State Department referred to in the table is for those engagements in which a department issues separate stand alone financial statements, but is not a separate legal entity (examples include Arizona Correctional Industries, ALTCS, State Treasurer, and county self insurance funds).

6 ARIZONA SAS 114 Governance The SAS indicates that since governance structures vary by entity, the appropriate person(s) with whom to communicate may not be clearly identifiable. In this case, the SAS states we and the engaging party should agree on the relevant person(s) within the entity s governance structure with whom to communicate. So, if there are additional persons who the audit team or auditee believes should be included in those identified as those charged with governance, you should consider the circumstances, the types of communications required, and come to an agreement. In these cases, the Financial Audit Division Director and Director of Professional Practice should be consulted, and when necessary, the Auditor General. This discussion, analysis, and conclusion should be documented in the Administrative File. The Understanding of and Risks Related to the Entity and Its Environment (UEE) form is where the auditor can document the individuals determined to be those charged with governance. Since many of those charged with governance are at the highest levels of the governments audited, our Office has determined that written communications will be necessary in order to comply with SAS 114. Therefore, the Engagement Letter was modified, a second letter for the Governor was created, and a SAS 114 letter was developed to communicate the results of the audit. Communication The principal purposes of communication with those charged with governance are to: Communicate clearly with those charged with governance the responsibilities of the auditor in relation to the financial statement audit, and an overview of the scope and timing of the audit. Obtain from those charged with governance information relevant to the audit. Provide those charged with governance with timely observations arising from the audit that are relevant to their responsibilities in overseeing the financial reporting process. Many matters may be discussed with management in the ordinary course of an audit, including matters to be communicated with those charged with governance in accordance with the SAS. These discussions recognize management s executive responsibility for the conduct of the entity s operations and management s responsibility for the financial statements. Before communicating matters with those charged with governance, you may discuss them with management unless that is inappropriate (i.e., questions of management s competence or integrity). In addition to recognizing management s responsibility, these initial discussions may clarify facts and issues, and give management an opportunity to provide further information and explanations. In addition, when the entity has an internal audit function, the auditor may discuss matters with the internal auditor before communicating with those charged with governance. Engagement Letter This letter was modified for communications necessary under SAS 114, including sending it to those charged with governance and management. In addition, this letter may be sent to any individual(s) within the entity you feel should receive a courtesy copy. The SAS requires that we provide an overview of the planned scope and timing of the audit. This information was added in the second paragraph of the financial statement audit section. This should be modified to meet the specific circumstances of the audit, however, it should not be so specific to compromise the effectiveness of the audit. The Governor will receive an engagement letter for the State of Arizona audit, and an additional letter explaining that the universities and other State departments (such as, the Office of the Treasurer) that

7 ARIZONA SAS 114 Governance receive separate financial statement audits have also received an engagement letter. This cover letter will direct the Governor to communicate with the Auditor General or the Financial Audit Director if he/she has any questions regarding the audits. SAS 114 Letter This letter was developed to communicate with those charged with governance either during or usually after the audit has been completed. Those topics to be communicated are as follows: Qualitative aspects of significant accounting practices Significant difficulties encountered during the audit, if any Disagreements with management, if any Uncorrected misstatements, if any Corrected material misstatements Management representations Management consultations with other independent accountants Other audit findings or issues, if any In addition, if matters/concerns arise during the audit, timeliness of our communications is crucial. The communication with those charged with governance must occur on a sufficiently timely basis to enable those charged with governance to take appropriate action. (i.e., significant difficulties encountered during the audit that cannot be resolved with management; especially if the difficulties could result in a modified opinion). Therefore, an interim letter has been developed to deal with those situations. Adequacy of two way communication We should evaluate whether the two way communication between us and those charged with governance has been adequate for the purpose of the audit. This has been added as a step to the Audit Administrative Checklist under the final section. This is the final determination that must be documented. However, adequacy should be considered throughout the audit as issues/concerns arise (see interim letter). Inadequate two way communication may indicate an unsatisfactory control environment. To help make this evaluation, consider the following observations: The appropriateness and timeliness of actions taken by those charged with governance in response to matters communicated by our auditors. The apparent openness of those charged with governance in their communications with us. The apparent ability of those charged with governance to fully comprehend matters communicated by us, such as the extent to which those charged with governance probe issues and question recommendations made to them. Difficulty in establishing with those charged with governance a mutual understanding of the form, timing, and expected general content of communications. Where all or some of those charged with governance are involved in managing the entity, their apparent awareness of how matters discussed with us affect their broader governance responsibilities, as well as their management responsibilities. If the two way communication is not adequate, there is a risk we may not have obtained all the audit evidence required to form an opinion on the financial statements. Therefore, we should consider the effect, if any, on our assessment of the risks of material misstatements. At this point, the auditor may

8 ARIZONA SAS 114 Governance discuss the situation with those charged with governance. If the situation cannot be resolved, one option may be to modify the opinion on the basis of a scope limitation. If the matter is serious enough to consider terminating the audit, please consult the financial audit director for the appropriate actions to take. Other special audits SAS 114 applies to other special audits (e.g., DES ALTCS, DHS Behavioral Health Services, Criminal Justice Commission Drug and Gang Account) where an opinion is issued on financial statements/schedules. As a result, an engagement letter and a SAS 114 letter will need to be modified accordingly.

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44 Form 46 (03/08) ITEMS TO DISCUSS AT EXIT CONFERENCE WITH THOSE CHARGED WITH GOVERNANCE INDIANA Purpose: Source: Procedure: To analyze the communications with those charged with Governance to determine if adequate to plan and perform the audit. Exit Conference Form 004, Documentation of evidence gathered at exit conference, Other information as listed Held exit conference with management and those charged with governance. During the exit conference I used the attached agenda to guide the discussion. After the exit conference I documented in the observation column information obtained during the exit conference. I reviewed this information to make a determination as to whether the communication with those charged with governance was adequate. Per SAS 114, paragraph 60, inadequate two-way communication may indicate an unsatisfactory control environment, which will influence the auditor's assessment of the risks of material misstatements. If, in the auditor's judgment, the two way communication between the auditor and those charged with governance is not adequate, there is a risk that auditor may not have obtained all the audit evidence required to form an opinion on the financial statements. The auditor should consider the effect, if any, on the auditor's assessment of the risks of material misstatements. The auditor may discuss the situation with those charged with governance. If the situation cannot be resolved, the auditor may take such actions as: Modifying the auditor's opinion on the basis of a scope limitation. Obtaining legal advice about the consequences of different courses of action. Communicating with third parties (for example, a regulator), or a higher authority in the governance structure that is outside the entity, such as the responsible government agency for certain governmental entities. Withdrawing from the engagement. Reference all items discussed to the appropriate audit documentation. Attendance: Those charged with governance in attendance were: The unit s management in attendance were: State Board of Accounts staff in attendance were: Conclusion: Option 1: Option 2: The communication made with those charged with governance as documented in the observations column was adequate. The communication made with those charged with governance as documented in the observations column was not adequate. Due to the inadequate communication, we have decided to do the following: IN1.docx Page 1 of 5

45 Form 46 (03/08) ITEMS TO DISCUSS AT EXIT CONFERENCE WITH THOSE CHARGED WITH GOVERNANCE INDIANA 1. Significant Accounting Practices The auditor should explain to those charged with governance why the auditor considers a significant accounting practice not to be appropriate and, when considered necessary, request changes. If requested changes are not made, the auditor should inform those charged with governance that the auditor will consider the effect of this on the financial statements of the current and future years, and on the auditor's report. Inappropriate accounting practices discussed and suggested changes: Comments by management present: Comments by those charged with governance present: Observations: 2. Difficulties Encountered During the Audit The auditor should inform those charged with governance of any significant difficulties encountered in dealing with management related to the performance of the audit. Significant difficulties encountered during the audit may include such matters as: Significant delays in management providing required information An unnecessarily brief time within which to complete the audit. Extensive unexpected effort required to obtain sufficient appropriate audit evidence. The unavailability of expected information Restrictions imposed on the auditors by management Management's unwillingness to provide information about management's plans for dealing with the adverse effects of the conditions or events that lead the auditor to believe there is substantial doubt about the entity's ability to continue as a going concern. Difficulties discussed during exit: Comments by management present: Comments by those charged with governance present: Observations: 3. Misstatements and the Effect on the Opinion Uncorrected Misstatements The auditor should communicate with those charged with governance uncorrected misstatements and the effect that they may have on the opinion in the auditor's report, and request their correction. In communicating the effect that material uncorrected misstatements may have on the opinion in the auditor's report, the auditor should communicate them individually. Where there are a large number of small uncorrected misstatements the auditor should communicate them individually. Where there are a large number of small uncorrected misstatements, the auditor may communicate the number and overall monetary effect of the misstatements, rather than the details of each individual misstatement. The auditor should discuss with those charged with governance the implications of a failure to correct known and likely misstatements, if any, considering qualitative as well as quantitative considerations, including possible implications in relation to future financial statements. IN1.docx Page 2 of 5

46 Form 46 (03/08) ITEMS TO DISCUSS AT EXIT CONFERENCE WITH THOSE CHARGED WITH GOVERNANCE INDIANA The auditor should also communicate with those charged with governance the effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances or disclosures, and the financial statements as a whole. Uncorrected misstatements discussed: Comments by management present: Comments by those charged with governance present: Observations: Corrected Misstatements Material corrected misstatements that were brought to the attention of management as a result of audit procedures should be communicated to those charged with governance. The auditor also may communicate other corrected immaterial misstatements, such as frequently recurring immaterial misstatements that may indicate a particular bias in the preparation of the financial statements. Corrected misstatements discussed: Comments by management present: Comments by those charged with governance present: Observations: 4. Disagreements with Management The auditor should discuss with those charged with governance any disagreements with management, whether or not satisfactorily resolved, about matters that individually or in the aggregate could be significant to the entity's financial statements or the auditor's report. Disagreements with management may occasionally arise over, among other things, the application of accounting principles to the entity's specific transactions and events and the basis for management's judgments about accounting estimates. Disagreements may also arise regarding the scope of the audit, disclosures to be included in the entity's financial statements, and the wording of the auditor's report. Disagreements do not include differences of opinion based on incomplete facts or preliminary information that are later resolved. Disagreements discussed: Comments by management present: Comments by those charged with governance present: Observations: 5. Management s Consultations with Other Accountants IN1.docx Page 3 of 5

47 Form 46 (03/08) ITEMS TO DISCUSS AT EXIT CONFERENCE WITH THOSE CHARGED WITH GOVERNANCE INDIANA In some cases, management may decide to consult with other accountants about auditing and accounting matters. When the auditor is aware that such consultation has occurred, the auditor should discuss with those charged with governance his or her views about significant matters that were the subject of such consultation. Consultations with other accountants discussed: Comments by management present: Comments by those charged with governance present: Observations: 6. Other Significant Issues The auditor should communicate with those charged with governance any significant issues that were discussed or were the subject of correspondence with management: Business conditions affecting the entity, and business plans and strategies that may affect the risks of material misstatement. Discussions or correspondence in connection with the initial or recurring retention of the auditor including, among other matters, any discussions or correspondence regarding the application of accounting principles and auditing standards. Other significant issues discussed: Comments by management present: Comments by those charged with governance present: Observations: 7. Control Deficiencies Control deficiencies identified during the audit that upon evaluation are considered significant deficiencies or material weaknesses under Statement 112 must be communicated in writing to management and those charged with governance as a part of each audit, including significant deficiencies and material weaknesses that were communicated to management and those charged with governance in previous audits, and have not yet been remediated. Control deficiencies discussed: Comments by management present: Comments by those charged with governance present: Observations: 8. Fraud and Illegal Acts IN1.docx Page 4 of 5

48 Form 46 (03/08) ITEMS TO DISCUSS AT EXIT CONFERENCE WITH THOSE CHARGED WITH GOVERNANCE INDIANA Communicate with those charged with governance fraud involving senior management and fraud (whether caused by senior management or other employees) that causes a material misstatement of the financial statements. Communicate with those charged with governance illegal acts that come to the auditor's attention. Fraud and illegal acts discussed: Comments by management present: Comments by those charged with governance present: Observations: 9. Audit Results and Comments/Findings not Already Discussed Audit results and comments and/or findings discussed: Comments by management present: Comments by those charged with governance present: Observations: 10. Management Representations The auditor should discuss representations the auditor is requesting from management. The auditor may provide those charged with governance with a copy of management's written representations. Representations discussed: Comments by management present: Comments by those charged with governance present: Observations: IN1.docx Page 5 of 5

49 Form 16 (05/08) ITEMS TO DISCUSS AT ENTRANCE CONFERENCE WITH THOSE CHARGED WITH GOVERNANCE INDIANA Purpose: Source: Procedure: To analyze the communications with those charged with Governance to determine if adequate to plan and perform the audit. Entrance Conference Form 014, Documentation of evidence gathered at entrance conference, Other information as listed Held entrance conference with management and those charged with governance. During the entrance conference I used the attached agenda to guide the discussion. After the entrance conference I documented the observation information obtained during the entrance conference. I reviewed this information to make a determination as to whether the communication with those charged with governance was adequate. Per SAS 114, paragraph 60, inadequate two-way communication may indicate an unsatisfactory control environment, which will influence the auditor's assessment of the risks of material misstatements. If, in the auditor's judgment, the two way communication between the auditor and those charged with governance is not adequate, there is a risk that auditor may not have obtained all the audit evidence required to form an opinion on the financial statements. The auditor should consider the effect, if any, on the auditor's assessment of the risks of material misstatements. The auditor may discuss the situation with those charged with governance. If the situation cannot be resolved, the auditor may take such actions as: Modifying the auditor's opinion on the basis of a scope limitation. Obtaining legal advice about the consequences of different courses of action. Communicating with third parties (for example, a regulator), or a higher authority in the governance structure that is outside the entity, such as the responsible government agency for certain governmental entities. Withdrawing from the engagement. Reference all items discussed to the appropriate audit documentation. Attendance: Those charged with governance in attendance were: The unit s management in attendance were: State Board of Accounts staff in attendance were: Conclusion: Option 1: Option 2: The communication made with those charged with governance as documented was adequate. The communication made with those charged with governance as documented was not adequate. Due to the inadequate communication, we have decided to do the following: IN2.docx Page 1 of 5

50 Form 16 (05/08) Introduction ITEMS TO DISCUSS AT ENTRANCE CONFERENCE WITH THOSE CHARGED WITH GOVERNANCE INDIANA Auditor should discuss with those charged with governance the purpose of the two-way communication process. When the purpose is clear, the auditor and those charged with governance are in a better position to have a mutual understanding of relevant issues and the expected actions arising from the communication process. During this discussion, the auditor should discuss their expectation that communication will be two-way, and that those charged with governance will communicate with the auditor matters they consider relevant to the audit. Such matters might include strategic decisions that may significantly affect the nature, timing, and extent of audit procedures; the suspicion or the detection of fraud; or concerns about the integrity or competence of senior management. In this communication process, the auditor should appoint a person who will be in charge of communicating with those charged with governance. The auditor and those charged with governance should also determine the form of communication to be used. Person assigned to discuss items with those charged with governance: Form of Communication: The process for taking action and reporting back on matters communicated by the auditor: The nature and extent of communications with those charged with governance about misappropriation perpetrated by lower level employees: 1. Express an Opinion on Financial Statements The auditor is responsible for forming and expressing an opinion about whether the financial statements that have been prepared by management, with the oversight of those charged with governance are presented fairly, in all material respects, in conformity with generally accepted accounting principles, or with another comprehensive basis of accounting (cash basis). Comments by management present: Comments by those charged with governance present: Observations: 2. Management and Those Charged with Governance s Responsibility The audit of the financial statements does not relieve management or those charged with governance of their responsibilities. Comments by management present: Comments by those charged with governance present: Observations: IN2.docx Page 2 of 5

51 Form 16 (05/08) ITEMS TO DISCUSS AT ENTRANCE CONFERENCE WITH THOSE CHARGED WITH GOVERNANCE INDIANA 3. Audit Performed in Accordance With Generally Accepted Auditing Standards The auditor is responsible for performing the audit in accordance with generally accepted auditing standards and that the audit is designed to obtain reasonable, rather than absolute assurance about whether the financial statements are free of material misstatement. Comments by management present: Comments by those charged with governance present: Observations: 4. Consideration of Internal Control Over Financial Reporting An audit of the financial statements includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control over financial reporting. Comments by management present: Comments by those charged with governance present: Observations: 5. Responsibility to Communicate Significant Matters The auditor is responsible for communicating significant matters related to the financial statement audit that are, in the auditor's professional judgment, relevant to the responsibilities of those charged with governance in overseeing the financial reporting process. Comments by management present: Comments by those charged with governance present: Observations: 6. Responsibility to Communicate Matters Required by Laws or Regulations The auditor is also responsible for communicating particular matters required by laws or regulations, by agreement with the entity or by additional requirements applicable to the engagement. Comments by management present: Comments by those charged with governance present: IN2.docx Page 3 of 5

52 Form 16 (05/08) Observations: ITEMS TO DISCUSS AT ENTRANCE CONFERENCE WITH THOSE CHARGED WITH GOVERNANCE INDIANA 7. Responsibility for Other Information Presented in Report If the entity includes other information in documents containing audited financial statements, the auditor should communicate with those charged with governance the auditor's responsibility with respect to such other information, any procedures performed relating to the other information, and the results. Other information that may be included in the report: Required supplementary information: Management discussion and analysis Schedule of funding progress Schedule of contributions from the employer and other contributing entities Budgetary comparison schedule for general fund and the major special revenue funds Supplementary information: Schedule of expenditures of federal awards Combining statements Capital asset schedule Debt schedule Statistical information if a CAFR report Comments by management present: Comments by those charged with governance present: Observations: 8. Planned Scope and Timing of the Audit How the auditor proposes to address the significant risks of material misstatement, whether due to fraud or error. The auditor's approach to internal control relevant to the audit. Inform entity that we will not express an opinion on the effectiveness of internal control over financial reporting. The concept of materiality in planning and executing the audit, focusing on the factors considered rather than on specific thresholds or amounts. Comments by management present: Comments by those charged with governance present: Observations: 9. Other Discussion Points The views of those charged with governance concerning: The appropriate person(s) in the entity's governance structure with whom to communicate. The allocation of responsibilities between those charged with governance and management. IN2.docx Page 4 of 5

53 Form 16 (05/08) ITEMS TO DISCUSS AT ENTRANCE CONFERENCE WITH THOSE CHARGED WITH GOVERNANCE INDIANA The entity's objectives and strategies, and the related business risks that may result in material misstatements. Matters those charged with governance consider warrant particular attention during the audit, and any areas where they request additional procedures to be undertaken. Significant communications with regulators. Other matters those charged with governance believe are relemant to the audit of the financial statements. The attitudes, awareness, and actions of those charged with governance concerning (a) the entity's internal control and its importance in the entity including how those charged with governance oversee the effectiveness of internal control and (b) the detection or the possibility of fraud. The actions of those charged with governance in response to governance practices, and other related matters. The actions of those charged with governance in response to previous communications with the auditor. Inquire directly of the audit committee (or at least its chair) regarding the audit committee's views about the risks of fraud and whether the audit committee has knowledge of any fraud or suspected fraud affecting the entity. Comments by management present: Comments by those charged with governance present: Observations: IN2.docx Page 5 of 5

54 NORTH CAROLINA PURPOSE: To identify the parties considered to be those charged with governance. Note: Auditing Standards use the term those charged with governance to refer to those with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity, including overseeing the entity s financial reporting process. It uses the term management to refer to those who are responsible for achieving the objectives of the enterprise and who have the authority to establish policies and make decisions by which those objectives are to be pursued. Management is responsible for the entity s financial statements, including designing, implementing, and maintaining effective internal control over financial reporting. As a general rule, those charged with governance will be: Boards of Trustees for Universities, Community Colleges, and Smart Start Partnerships. Agency Heads for general government agencies. However, in some instances, agencies may have governing boards or commissions what will have to be evaluated on a case-bycase basis. When the auditor communicates with a subgroup of those charged with governance, such as the audit committee or an individual, the auditor should determine whether the auditor also needs to communicate with the governing body. In some cases, all of those charged with governance are involved in managing the entity. In these cases, if matters required matters are communicated with a person(s) with management responsibilities and that person(s) also has governance responsibilities, the matters need not be communicated again with the same person(s) in his or her governance role. The auditor should, nonetheless, be satisfied that all of those charged with governance with whom the auditor would otherwise communicate in their governance capacity are adequately informed if the auditor has communicated with only some people having both management and governance responsibilities. SOURCE: PROCEDURES:

55 CONCLUSION: NORTH CAROLINA

56 STATE OF NORTH CAROLINA Office of the State Auditor Beth A. Wood, CPA State Auditor 2 S. Salisbury Street Mail Service Center Raleigh, NC Telephone: (919) Fax: (919) Internet Pro Forma Inquiry Letter to Those Charged With Governance Replace *1 with organization name. Replace *2 with audit year. Replace *3 with an appropriate pronoun for the organization name (i.e. Department, Division, Commission, etc.). For agencies known as Office of..., replace with the full organization name. Replace *4 with the audit committee or equivalent s name. These inquiries should be addressed to the lead person(s) charged with governance (e.g. chair of the board of trustees, or if deemed appropriate, the chair of the audit committee or other group with equivalent authority and responsibility). In circumstances where the agency head is determined to be the only person charged with governance, these inquiries should be directed to him or her (may be done at the entrance conference or some other forum). If desired, auditors can make inquiries of the entire body (arrangements can be made to send all of the copies for the audit committee or equivalent to the committee chair for distribution to the other members). Also, these inquiries may be made informally such as through an in-person interview or by . [Date] Name and Title of Board Chair or Equivalent Members of the *4 (if applicable) [Address] Dear : As described in our engagement letter dated, we are conducting a financial audit of the *1 for the year ended June 30, *2. Professional auditing standards require that we make certain inquiries relevant to our audit, which are presented below. 1. Please provide your views about: a. the significant business risks that the *3 faces and strategies to address the risks;

57 Name, Title date Page 2 b. the risks of fraud, including both financial reporting and misappropriation fraud, and whether the *4 has knowledge of any fraud or suspected fraud affecting the *3; c. other matters that warrant particular attention during our audit. 2. Please describe, if applicable, the *4 s role in oversight of the *3 s assessment of the risks of error or fraud and the programs and controls established to mitigate these risks. 3. If management has discussed with the *4 the nature of, and accounting for, any unusual transactions, please provide a description of the transactions. 4. If the *4 has reviewed and approved any transactions with related parties, please provide a description of the transactions. Significant findings from our audit will be included in our audit report, including any instances of fraud unless such instances are considered clearly inconsequential. However, we will directly communicate to you all instances of fraud involving management that come to our attention. We will not communicate to you any inconsequential misappropriation of assets by employees unless you specifically request that we do so. Also, at the conclusion of the audit, we will communicate to you in writing certain other matters related to our audit results. Please let us know should you wish to discuss these or any other matters related to our audit. You may contact _, Audit Manager, at 919-xxx-xxx or, Audit Supervisor, at 919-xxx-xxxx. Thank you for your assistance with our audit responsibilities. Sincerely, BETH A. WOOD, CPA STATE AUDITOR Audit Manager

58 Pro Forma Concluding Letter to Those Charged With Governance Replace *1 with organization name. Replace *2 with audit year. Replace *3 with an appropriate pronoun for the organization name (i.e. Department, Division, Commission, etc.). For agencies known as Office of..., replace with the full organization name. Replace *4 with the date of the auditor s report. Replace *5 with the date of the engagement letter. This letter must be sent to whoever has been identified as those charged with governance (see planning segment for identification). When there is a governing board, copies should be sent to the board chair and the chair of the audit committee (if applicable). In some circumstances, auditors may deem it necessary to send letters directly to all members of the board and/or audit committee.

59 Date [Name of the body or individual(s) charged with governance] *1 Address We have completed our audit at the *1 for the year ended June 30, *2, as described in our engagement letter dated *5. Professional standards require that we provide you with the following information related to our audit. Significant Accounting Policies Management, along with the Office of the State Controller, has the responsibility for selection and use of appropriate accounting policies. The significant accounting policies used by the *3 are described in the notes to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during the year ended *2. [If there were any changes to the accounting policies, amend the previous paragraph with language such as the paragraph below.] The *3 changed accounting policies related to [Describe Change] by adopting Statement of Governmental Accounting Standards No. [X], [Name of Statement]. Accordingly, the cumulative effect of the accounting change as of the beginning of the year is reported in the financial statements. [Amend or delete last sentence as needed. Add a sentence to briefly describe impact on the statements.] In accordance with the terms of our engagement letter, we advised management about the appropriateness of accounting policies and their application. [If needed, add a description of alternative accounting policies that may be more appropriate for the entity or that are more commonly used.] We noted no transactions during the year for which there is a lack of authoritative guidance or consensus. [amend if necessary, see below] [If there were significant transactions for which there is a lack of authoritative guidance or consensus, describe in general terms. PPC s Audits of State and Local Governments has some example language.] Accounting Estimates [Delete this section if no significant accounting estimates.] Accounting estimates are an integral part of the financial statements prepared by management and are based on management s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimate(s) affecting the financial statements was (were): Management s estimate of the [Describe Accounting Estimate] is based on [Describe Basis for Estimate]. We evaluated the key factors and assumptions used to develop the