Iowa Municipal Professional’s Institute

Iowa Municipal Professional’s Institute

Accounting, Auditing and Other Fiscal Responsibilities

July 24, 2012

What’s In This For Me???

Fiduciary Role and Ethical Responsibilities

Audit RequirementsInternal ControlSingle Audit ComplianceAudit Reports

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I Q TEST

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P

NOANO

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PAY THROUGH THE NOSE

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Fiduciary Duty

– Understanding your fiduciary responsibilitiesDuty to the publicAccountabilityTone at the TopInternal Control

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Ethical Responsibilities

Public Purpose/Public Benefit Constitution of the State of Iowa

– Article III, Section 31

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Creating an Ethical Environment

Set the tone at the top Create a positive workplace Hire and promote appropriate personnel Confirm accountability for code of conduct Implement effective discipline Design, implement and monitor internal

controls

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I Q TEST

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BELT

HITTING

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HITTING BELOW THE BELT

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Accounting, Auditing and Other Fiscal Responsibilities

Accounting, Auditing and Other Fiscal Responsibilities

Audit

Requirements

Auditor’s Responsibility

“The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.”

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Management’s Responsibility

“It is management’s responsibility to design and implement programs and controls to prevent, deter, and detect fraud.”

Responsibility includes:– Setting the proper tone– Creating and maintaining a culture of honesty and

ethics– Establishing appropriate controls

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Risk Based Approach

Based on internal control Based on inquiries and interviews Based on audit risk

– Inherent risk– Control risk– Detection risk

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Audit Requirements

Chapter 11 of the Code of Iowa– Requires audit based on population

Annually if 2,000 or moreOnce every four years if 700-2000Not required if less than 700

– Citizens may petition for audit

– Statutory deadline: March 31 9 months after end of fiscal yearExtension process

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Audit Requirements

Chapter 11 of the Code of Iowa– Filing fees based on budgeted

expenditures– Requires request for proposal

(RFP) processWritten, competitive process

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Request for Proposal (RFP)

Chapter 11.6 of the Code of Iowa Sample RFP available at

– http://auditor.iowa.gov– Navigate to FAQs

Request for Proposals (RFP)

Preparing an RFP Evaluating an RFP Evaluated and approved by

Audit Committee/Council

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Management Advisory Services

Include MAS in the RFP – Can incorporate MAS within the audit and audit

report– Can separate MAS and issue separate report

– Agreed-upon procedures report

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Annual Financial Report (AFR)

Required by Chapter 384.16 and 384.22 of the Code of Iowa– Section 384.16 requires cities to use AFR in

completing the certified budget– Section 384.22 requires cities to file AFR with the

Auditor of State on or before December 1st

– Penalties imposed for late filing or failure to file

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Audit Committees

GFOA Recommended Practice– Management is responsible for

ensuring proper controls exist over transactions.

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Audit Committees

Role of the audit committee– Select the independent auditor

Request for Proposal (RFP)– Monitor the results of the audit– Evaluate the results of the audit

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Audit Committees

Role of the audit committee– Ensure audit findings and

recommendations are adequately addressed and resolvedSignificant Deficiencies

–Segregation of DutiesStatutory compliance

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Audit Committees

Role of the audit committee– Provide a direct link between Council

and auditor– Monitor adequacy of internal control

on an ongoing basis

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Expectations

Auditor should be engaged through request for proposal

Auditor should be independent

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Expectations

Auditor should provide guidance and suggestions– Operating procedures– Internal control – Significant deficiencies– Statutory compliance

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I Q TEST

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MANCAMPUS

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BIG MAN ON CAMPUS

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Accounting, Auditing and Other Fiscal Responsibilities

Accounting, Auditing and Other Fiscal Responsibilities

InternalControl

Internal Control Defined

Process effected by an entity’s board of directors, management and other personnel designed to provide reasonable assurance regarding the achievement of objectives in three categories:– Effectiveness and efficiency of operations– Reliability of financial reporting– Compliance with laws and regulations

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Components of Internal Control

Control Environment - sets the tone for an organization. Consider the following:• Communication and enforcement of integrity and

ethical values• Commitment to competence• Participation of those charged with governance• Management’s philosophy and operating style• Organizational structure• Assignment of authority and responsibility

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Components of Internal Control

The entity’s risk assessment process – an entity’s identification, analysis and management of risks relevant to the preparation of the financial statements, such as:

• Changes in operating environment• New personnel• New or revamped information systems• Rapid growth• New accounting standards• New technology

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Components of Internal Control

Information and communication• The information system relevant to financial

reporting objectives includes the procedures (automated or manual) and records established to initiate, authorize, record, process and report entity transactions.

• Communication involves providing an understanding of individual roles and responsibilities pertaining to internal control over financial reporting.

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Components of Internal Control

Information and Communication (continued)- obtain sufficient knowledge of the information system to understand:• Classes of transactions significant to the financial

statements (F/S)• Procedures by which transactions are initiated,

authorized, recorded, processed and reported• Accounting records (electronic or manual) and

supporting documentation

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Components of Internal Control

Information and Communication (continued)- obtain sufficient knowledge of the information system to understand:• How the information system captures events and

conditions that are significant to the F/S• The financial reporting process used to prepare

the entity’s F/S, including significant estimates and disclosures

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Components of Internal Control

Control activities – policies and procedures that help ensure management directives are carried out. Examples include:• Authorization• Segregation of Duties• Safeguarding• Asset Accountability

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Components of Internal Control

Monitoring of controls – obtain information regarding the types of activities that the entity uses to monitor internal control over financial reporting, including how those activities are used to initiate corrective actions to its controls.

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Internal Control and Fraud

Control Environment– Elements of Fraud

OpportunityMotivationRationale

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Segregation of Duties

An internal control procedure whereby no one individual is placed in a position of being able to both commit and conceal an irregularity by performing incompatible duties.

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I Q TEST

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VIT _ MIN

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VITAMIN A DEFICIENCY

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Accounting, Auditing and Other Fiscal Responsibilities

Accounting, Auditing and Other Fiscal Responsibilities

Single Audit Compliance

What is a Single Audit?What is a Single Audit?

An audit performed in accordance with:

– Single Audit Act Amendments of 1996

– Office of Management and Budget (OMB) Circular A-133

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Criteria For Single AuditCriteria For Single Audit

Single Audit is required:

– A city expends $500,000 or more in Federal awards in one fiscal year

Single Audit is not required:

– A city expends less than $500,000 in Federal awards in one fiscal year

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Key DefinitionsKey Definitions

CFDA Number

Corrective Action

Federal Award

Internal Control

Internal Control over Federal Programs

Management Decision

OMB

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City’s ResponsibilitiesCity’s Responsibilities

Responsible for Identifying:

– Federal awards received and expended

– Federal programs

– CFDA title and number

– Award number and year

– Name of Federal entity

– Name of pass-through entity

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City’s ResponsibilitiesCity’s Responsibilities

Maintain internal control over Federal programs

Comply with laws, regulations and the provisions of contracts or grant agreements related to the Federal programs

Prepare financial statements (including the schedule of expenditures of federal awards)

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City’s ResponsibilitiesCity’s Responsibilities

Ensure required audits are performed and submitted when due

Follow up and take corrective action on audit findings

Transmit reporting package and Data Collection Form to the Federal Clearinghouse

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Grant AdministrationGrant Administration

Council Approval

Centralization

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Grant Supervisor’s Responsibilities:Grant Supervisor’s Responsibilities:

Maintain control file for all grants:

– Grant applications

– Signed grant agreements and amendments

– Identification of:

Grant name

Grant award number

Grant award amount

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Grant Supervisor’s Responsibilities:Grant Supervisor’s Responsibilities:

Identification of:– CFDA number

– Grant administrator

– Name of Federal agency

– Name of passthrough entity

– Report filing requirements

Completed financial reports

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Grant Supervisor’s ResponsibilitiesGrant Supervisor’s Responsibilities

Reconcile grant reports to the City’s financial reports

Perform periodic checks on grant files

Provide guidance to individual grant coordinators

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Accounting RecordsAccounting Records

Income and expenditures

Source documentation

Authorizations

Obligations

Balance of grant funds

Assets

Budget Control

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I Q TEST

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ESROH RIDING

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HORSE BACK RIDING

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Accounting, Auditing and Other Fiscal Responsibilities

Accounting, Auditing and Other Fiscal Responsibilities

Audit

Reports

Fund Accounting

Governments use to – Segregate resources

related to specific activities

– Provide accountability– Demonstrate statutory

compliance

Basis of Accounting– GAAP vs. Cash

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Audit Reports

Independent Auditor’s Report– Opinion

Unqualified Qualified DisclaimerAdverse

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MD&A

Management’s Discussion and Analysis– Prepared by Management– Introduces the Financial Statements– Narrative Overview

“Easy to Read”Explanation of City’s Financial Activities Performance and Financial Position for the

Fiscal Year

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Financial Statements

Statement of Activities and Net Assets – Cash Basis

Statement of Cash Receipts, Disbursements and Changes in Cash Balances – Governmental Funds

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Financial Statements

Statement of Cash Receipts, Disbursements and Changes in Cash Balances – Proprietary Funds

Reconciliations

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Notes to Financial Statements

Summary of Significant Accounting Policies

– Reporting Entity– Basis of Presentation– Measurement Focus and

Basis of Accounting– Budgets and Budgetary

Accounting

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Notes to Financial Statements

Cash and Pooled Investment Bonds and Notes Payable Pension and Retirement Benefits Risk Management Construction and Other Commitments

(Subsequent Events) Legal Compliance such as Budget

Overexpenditure

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Required Supplementary Information (RSI)

Budgetary Comparison Schedule– Original Budget– Amended Budget– Actual Results

Notes to RSI

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Other Supplementary Information

Statement of Cash Receipts, Disbursements and Changes in Cash Balances – Nonmajor Governmental Funds

Schedule of Indebtedness Bond and Note Maturities Schedule of Receipts by Source and Disbursements

by Function Schedule of Expenditures of Federal Awards

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Other Reports

Independent Auditor’s Report on Compliance and Internal Control over Financial Reporting

Independent Auditor’s Report on Compliance with Requirements Applicable to Each Major Program and Internal Control over Compliance- Single Audits

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Schedule of Findings and Questioned Costs

Part I: Summary of Independent Auditor’s Results (single audits)

Part II: Findings Related to the Financial Statements

– Significant Deficiency– Material Weakness

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Schedule of Findings and Questioned Costs

Part III: Findings and Questioned Costs for Federal Awards

Part IV: Other Findings Related to Required Statutory Reporting

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Accounting, Auditing and Other Fiscal Responsibilities

Information to have available and/or prepare for the audit

Records and documents needed for the audit

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Accounting, Auditing and Other Fiscal Responsibilities

City Finance Committee (CFC)– Administrative Rules

Promulgated by the CFC pursuant to the Code of Iowa to provide clarification and instruction regarding various statutory requirements for cities.

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Fraud in Government Accounting

5-Step approach for fraud detection:

1. Know fraud exposures in specific terms.

— What could go wrong?

— Who could do it?

— What opportunities exist?

— The pressures.

— Understand systems and controls.

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Fraud in Government Accounting

2. Know exposure-specific symptoms of fraud

Symptom — a condition that is directly attributable to dishonest or fraudulent activity.

3. Be alert for fraud symptoms

4. Incorporate steps into routine processes

that are likely to reveal fraud

5. Follow through on all observed symptoms

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Fraud in Government Accounting

In entities with lack of segregation ofduties, insist on appropriate oversight -

Example:● Council Member or Administrator:

— Review and approve invoices and compare to checks before counter signing— Don’t sign blank checks— Receive bank statement directly— Review and approve bank reconciliations

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Fraud in Government Accounting

In entities with lack of segregation ofduties, insist on appropriate oversight (continued) -

Example:● Council Member or Administrator:

— Review and approve payroll— Review and approve utility billing reconciliations— Document all decisions in minutes (payroll increases, changes in policies, etc.)

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Fraud in Government Accounting

Fraud prevention / detection techniques

Be alert for misuse of entity assets:

– Credit cards– Vehicles / gas – Supplies– Cell phones– Office telephones– Computers / internet

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Red Flags of Fraud

Fraud Danger Signals… (Red Flags)Borrowing money from co-workersCreditors or collectors appearing at the workplaceGambling beyond the ability to stand the lossExcessive drinking or other personal habitsEasily annoyed at reasonable questioning

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Red Flags of Fraud Cont.

Providing unreasonable responses to questions

Refusing vacations or promotions for fear of detection

Bragging about significant new purchases Carrying unusually large sums of money Rewriting records under the guise of

neatness in presentation

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What to do when you Suspect or Discover Fraud

Notify Office of Auditor of State– Annette Campbell 515-281-5834– Tami Kusian 515-281-7002

Note: The remaining steps must be tailored to each specific situation

Notify:– Auditor of State– CPA firm– Governing body (Consider quorums)

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What to do when you Suspect or Discover Fraud cont.

Secure all necessary records Consider need to:

– Stopping access to bank accounts– Stopping access to certain financial records

and/or processes– Securing physical access to items at risk

Change locks if necessary

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What to do when you Suspect or Discover Fraud cont.

Discuss with management and legal counsel advisability of placing individual on administrative leave.

Take notes and write up any pertinent information.

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Parting Thoughts & Suggestions

Authorize- Employees shouldn’t have the ability to do or spend whatever they want.

Reconcile- Make sure things match to a reliable source.– Does the bank statement match the general ledger?

Segregate duties- never give one person too much control over any function.

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Parting Thoughts & Suggestions cont.

Safeguard- Do you leave your personal laptop laying around the food court in the middle of a busy mall during the Christmas holidays? Do you leave the doors of your new car unlocked in downtown Des Moines?

Support documentation- As the old saying goes, if you didn’t write it down, it didn’t happen.

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I Q TEST

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BUSINES

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UNFINISHED

BUSINESS

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To: My Loving WifeSubject: I’ve Arrived

I know you’re surprised to hear from me.

They have computers here now and you are allowed to send emails to your loved ones.

I’ve just arrived and have been checked in.

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To: My Loving WifeSubject: I’ve Arrived

I see that everything has been prepared for your arrival tomorrow.

Looking forward to seeing you then.

Hope your journey is as uneventful as mine was.

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To: My Loving WifeSubject: I’ve Arrived

P.S. –Sure is hot down here!!!!

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Questions

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