Annual Audit and Other Financial Matters

Transcription

1 Getting Ready for Your Annual Audit and Other Financial Matters by Donna M. Ingram, CPA, CFE, Cr.FA, CFF Donna M. Ingram, CPA, PC

2 Role of the Auditor The role of the independent auditor is to examine, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

3 The best time to start planning for next year s audit is right after the auditors leave this year!

4 Ensuring a Smooth Annual Audit Engage g your independent auditor early Do planning BEFORE year end Assign duties to your staff and auditor Don t select auditor on cost alone Identify potential problems/risk and discuss Prepare all year long Reconcile monthly Know your financial results Identify potential internal control weaknesses and address resolution Consider prior year findings and internal control comments

5 Relationship with Auditor Audit process should not be an adversarial one (unlike some IRS audits) Work together to save money, complete the process more quickly and to achieve a better final product Urge you staff to cooperate fully with the auditors and respond to their requests timely Provide adequate work space Be available during the audit process

6 Remember, your auditor IS NOT responsible for your system of internal control, your recordkeeping or preparing your financial i statements?

7 Organization and Accuracy Plan to have the following available: General ledger and trial balance Bank statements and reconciliations Subsidiary ledgers Support for assets acquired New loan documents and amortization schedules New lease agreements Reconciliations of other assets and liabilities

8 Policies and Procedures Update your policies and procedures manual regularly Provide a copy to your auditor Provide your auditor with an organizational chart and duties assigned key personnel Be prepared to discuss and defend your system of internal controls

9 Auditing Standards SAS 99 Risk Assessment Standards SAS 114 SAS 115

10 SAS 99 Requires a brainstorming session Requires inquiries about fraud Improved analytical l procedures Must consider potential for management overriding controls Journal entries Estimates

11 Background of Risk Assessment Standards d The objectives of the SASs are to improve audit effectiveness by requiring: A more in-depth understanding of the entity and its environment, including its internal control. More rigorous assessment of the risks of material misstatement (whether caused by error or fraud) of the financial statements. A linkage between the assessed risks and the nature, timing, and extent of audit procedures performed in response to those risks.

12 Understanding the Industry and Operations Business operations Competition and market share Major source of revenue Major suppliers Flow of funds Production methods Purchasing methods Management and employee compensation Accounting and control systems

13 Risk Assessment Overview Fraud Risk Factors Brainstorming Inquiries Analytical Procedures Other New Process Risk Assessment Respond

14 SAS 114 No longer applies to only audit committees Stresses the importance of effective two-way way Requires certain communication Significant findings Issues related to the audit An overview of the planned scope and timing of the audit Representations the auditor is requesting from management Significant findings from the audit should be in writing when, in the auditor s profession judgment, oral communication would not be adequate. Other communications may be oral or in writing.

15 Paragraph 5 of SAS 114 The auditor must communicate with those charged with governance matters related to the financial statement audit that are, in the auditor s professional judgment, significant and relevant to the responsibilities of those charged with governance in overseeing the financial reporting process.

16 SAS 115 Definitions A significant deficiency is a deficiency, or 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. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that t a material misstatement t t of fthe entity s financial statements will not be prevented, or detected and corrected on a timely basis.

17 Deficiency Evaluation Severity depends on magnitude Material weakness if magnitude material and reasonably possible Possible significant deficiency if magnitude material but probability remote Control Deficiency Significant Deficiency Material Weaknesses

18 Relationship with Risk Assessment It is anticipated that more deficiencies will be detected in the audit process Understanding Walk through Risk assessment/brainstorming Test of controls Substantive ti testst

19 Common Concerns Segregation of duties Bookkeeping assistance Depreciation schedules Fraudulent activity Financial statement preparation

20 Management Responsibilities Focus on internal control awareness, assessment and monitoring Timely address known deficiencies Stress importance of financial i statement closing process Be prepared: Educate Communicate Prioritize Act

21 Prepare the Schedule of Federal Funds Identify CFDA number Remember additional internal control and compliance tests required Subject to more scrutiny with potential for findings and internal control comments Review and understand contracts and pertinent compliance requirements Evaluate systems and controls Are outside parties performing services? Are controls monitored?

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23 Why should internal control matter to management? A lot of money flows through the organization Perception and negative publicity Influences future grants and funding decisions It s the right thing to do

24 Impact of an Economic Recession Intense financial pressures during economic crisis have led to an increase in fraud Layoffs are pervasive and are leaving holes in the organizations internal control systems More than half in survey (55.4%) said that the level of fraud has slightly or significantly increased in the previous 12 months increase financial pressure was biggest factor Remember desperate people p do desperate things Loyal employees have bills to pay and families to feed and in a good economy would never think of committing fraud against their employers Fraud levels are expected to continue rising!

25 2012 ACFE Report to the Summary of Findings Nations Survey participants estimated that the typical organization loses 5% of its revenues to fraud each year. Applied to the 2011 Gross World Product, this figure translates to a potential projected annual fraud loss of more than $3.5 trillion. The median loss caused by the occupational fraud cases in our study was $140,000. More than one-fifth of these cases caused losses of at least $1 million. 25

26 2012 ACFE Report to the Nations The longer a perpetrator has worked for an organization, i the higher h fraud losses tend to be. Perpetrators with more than ten years of experience at the victim organization caused a median loss of $229,000. By comparison, the median loss caused by perpetrators who committed fraud in their first year on the job was only $25,000. The vast majority (77%) of all frauds in our study were committed by individuals working in one of six departments: accounting, operations, sales, executive/upper management, customer service and purchasing. This distribution was very similar to what we found in our 2010 study. 26

27 The Victim - This Could Be You or Your Client Organization Type of Victim Median Loss

28 How Occupational Fraud is Committed Occupational Frauds by Category Frequency 28

29 Checks and Balances Realistic budgets should be prepared Monthly financial statements should be prepared and reviewed Journal entries should be approved and reviewed Bank statements should be opened and reviewed by independent party Competent internal and external accountants

30 How Can we Minimize the Risk? Preventive Controls Detective Controls Thorough Investigations

31 Preventive Controls Stop errors and fraud before they occur! Don t be a rubber stamp supervisor Put locks on filing cabinets Dual signatures/approvals on large checks Use passwords that prevent access to certain software applications Require approvals on timesheets before a paycheck is generated

32 Detective Financial Controls Designed to catch the errors or frauds that make their way through the preventive controls. A well-communicated detective ti control can be one of the strongest deterrents in preventing an error or fraud in the first place!

33 Detective Controls Monitoring by Management Bank statement and reconciliation Documentation to support check requests Journal entries closely reviewed Financial reports reviewed

34 Financial Controls The following duties should be segregated g to the maximum extent possible: Billing (invoicing customers for goods and services provided by the organization) Recording revenue in the accounting records Receipt of payments (opening mail, collecting funds, etc) Initial recording of collections Preparation of deposits Posting of receipts to the accounting records Reconciling the bank statement Reconciling accounts receivable subledger with the general lledger balance

35 General Controls Applies to all aspects of revenue and cash receipts accounting. Immediate restrictive ti endorsement of checks received, using a stamp that marks the organization s account name and account number on the backs of all checks received (this simple step makes it much more difficult, if not possible, to steal the checks and deposit them into another account.)

36 General Controls-Continued Continued Timely depositing of funds received, in order to minimize the risk of subsequent theft (in addition to reducing the risk of theft, making deposits daily also makes it easier to reconcile daily postings to deposits later) If large volumes of cash or checks are handled in public or centralized areas, organizations should add additional safeguards

37 Purchasing Controls Financial Controls Properly inventory the items purchased and reconcile receiving reports with inventory records Segregate the duties of placing orders with vendors, receiving items from vendors, and approving vendor invoices for payment Maintain adequate physical security over supplies, inventory, and assets

38 New Vendor Controls Require that the following information be obtained from all new vendors Complete name Employer identification number Type of entity Street address Phone and fax numbers Contact t names

39 Safe-guards Over the Check- Wii Writing Process The use of pre-numbered checks in sequential order Prohibiting the signing of checks in advance Limiting (or prohibiting) the use of signature stamps (or electronic signatures) and keeping such stamps locked up when not in use Promptly updating the bank s listing of authorized signers when a check signer is no longer authorized Maintaining proper physical security over unused checks or authority to generate electronic checks

40 Reviewing and Approving Vendor Invoices Reconciling invoices with purchase orders as to descriptions, quantities, and pricing Comparing prices charged with contracts, price lists, proposals, etc. Checking the mathematical accuracy of the invoice Recalculating any additional charges, such as shipping

41 Employee Travel and Expense Reporting Schemes Has become one of the most common forms of fraud and abuse in the United States Some employers have cited rampant abuse among employees in which the per incident loss is inconsequential, but the cumulative effect is quite large

42 Employee Expense Reporting Controls Financial Controls Over Employee Expense Reporting Use an expense reporting system that requires a detailed itemization of expenses claimed by employees on a day-by-day y y basis Institute a policy that clearly articulates all dollar limitations on spending for employees Document a policy that clearly identifies the nature of expenses that are allowable or unallowable

43 Role of Management Maintain a set of records that accurately represent the company s financial i position Develop and maintain a system of internal controls Set a good example

44 Going Concern Issues The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.

45 Going Concern Issues The consideration of an entity s ability to continue as a going concern is required in every audit performed under generally accepted auditing standards, and is an especially important consideration in the current state of the economy. An entity s ability to continue as a going concern is affected by many factors related to the current uncertain economy the industry and geographic area in which it operates, the financial health of its customers, suppliers, and financing sources.

46 Management s Plan If auditor believes there is substantial doubt about the ability of the entity to continue as a going concern he should consider management's plans for dealing with the adverse effects of the conditions and events. The auditor should obtain information about the plans and consider whether it is likely the adverse effects will be mitigated for a reasonable period of time and that such plans can be effectively implemented.

47 Going Concern Issues If the auditor concludes there is substantial doubt, he should consider the adequacy of disclosure about the entity's possible inability to continue as a going concern for a reasonable period of time, and include an explanatory paragraph (following the opinion paragraph) in his audit report to reflect his conclusion.

48 Going Concern Disclosure Pertinent conditions and events giving g rise to the assessment of substantial doubt The possible effects of such conditions and events Management's evaluation of the significance of those conditions and events and any mitigating factors Possible discontinuance of operations Management's plans Information about the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities

49 Going Concern Opinion The accompanying financial statements have been prepared assuming that the Entity will continue as a going concern. As discussed in Note X to the financial statements, the Entity has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described d in Note X. The financial i statements do not include any adjustments that might result from the outcome of this uncertainty.

50 Communication If, after considering identified conditions and events in the aggregate and after considering management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the auditor should communicate with those charged with governance: The nature of the events or conditions identified. The possible effect on the financial statements and the adequacy of related disclosures in the financial statements The effects on the auditor's report.

51 Open Forum and Questions