©2012 CliftonLarsonAllen LLP 1 111 Educating Governance on the Audit Jackie Eckman, CPA Partner...
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Transcript of ©2012 CliftonLarsonAllen LLP 1 111 Educating Governance on the Audit Jackie Eckman, CPA Partner...
©2012 CliftonLarsonAllen LLP1 111
©20
12 C
lifto
nLar
sonA
llen
LLP
Educating Governanceon the Audit
Jackie Eckman, CPAPartner
CliftonLarsonAllen [email protected]
480-615-2310
©2012 CliftonLarsonAllen LLP2
Objectives
• Understand the objective of an audit and communicate to governance
• Educate governance on reported deficiencies• Educate governance on how your financial
statements can provide insight into your operations• Understand your single audit report, how programs
are selected and communicate this to governance• Define, measure and benchmark success
©2012 CliftonLarsonAllen LLP3
The Role of Governance
Establish the Strategic Direction and Mission of your Organization through Policy Making
©2012 CliftonLarsonAllen LLP4
Role of Governance in the Audit
• Participate in initial communication with the auditors• Establish two-way communication with the auditors• Communicate to the auditors their understanding of
fraud, fraud risk factors and the Organization’s strategy to address those risks
• Receive and review the final reporting package to determine whether the Organization is on track with its financial goals
©2012 CliftonLarsonAllen LLP5
What Does Initial Communication Entail?
• The auditors will communicate to governance– The purpose of the audit– Scope of the audit– Timing of the audit
• Establishing a liaison between the board and the auditors
• Establish two-way communication between the board and the auditors
• Respond to fraud inquiries
©2012 CliftonLarsonAllen LLP6
What is Two-Way Communication
• Two-way communication is the ability for the auditors to reach out to governance and governance to reach out to the auditors
©2012 CliftonLarsonAllen LLP7
What is the Reporting Package?
• So governance has their reporting package, now what?
©2012 CliftonLarsonAllen LLP8
Outline for a Board Presentation
I•Au
dit Process.
II
• Highlight Successes.
III
•Findings and Recommendations.
IV
•Benchmarking and Analysis.
©2012 CliftonLarsonAllen LLP9
What is an Audit?
An audit is the process of examining and verifying management’s assertions.
The objective is for the auditor to provide an opinion based on the examinations performed.
©2012 CliftonLarsonAllen LLP10
What is the result of an audit?
• Reasonable, but not absolute, assurance.
An opinion.
Findings and recommendations.
©2012 CliftonLarsonAllen LLP11
Why is an audit required?
Grant requirements.
• Single Audits
Federal laws and regulations.
Debt covenants.
• Charter School Board Requirements
State laws and regulations.
©2012 CliftonLarsonAllen LLP12
Why choose to have an audit?
• Donors• Board of Directors• Members/Constituents
Fiduciary responsibility to stakeholders.
• Honest feedback.
Independent examination.
©2012 CliftonLarsonAllen LLP13
How do auditors determine what to examine?
Risk based approach.
Apply risk factors to account balances and programs.
• Gained through inquiry• Gained through observation.
Factors based on understanding of entity.
©2012 CliftonLarsonAllen LLP14
Common Risk Factors for Account Balances
Balance.
Frequency of transactions.
Manual or automated.
Frequency of reconciliation.
Personnel and oversight.
©2012 CliftonLarsonAllen LLP15
Common Risk Factors for Federal Programs
Size.
Audited in past 2 years.
Prior year findings.
ARRA funding.
Changes in processes or personnel.
©2012 CliftonLarsonAllen LLP16
Audit Process
Engage with an audit firm.
Audit planning by firm.
Audit preparation by management.
©2012 CliftonLarsonAllen LLP17
Audit Process
Audit communication with governance and management.
Audit examination.
Communication of results.
©2012 CliftonLarsonAllen LLP18
Typical Reports Issued
Financial Statements with Opinion.
Single Audit Reports.
• Legal Compliance Questionnaire (Charter Schools)
Regulatory Report.
Letter to Governance.
Management Letter/Letter of Findings.
©2012 CliftonLarsonAllen LLP20
Audit Findings
• A deficiency – when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis
• A significant deficiency – a deficiency, or a combination of deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those charged with governance
• A material weakness – a deficiency, or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement will not be prevented, or detected and corrected on a timely basis
©2012 CliftonLarsonAllen LLP21
Audit Findings (In Plain English)
• Deficiency – either an error occurred or the design of the Organization’s controls may not prevent or detect an error
• Significant Deficiency – a deficiency occurred, but it is not material and in all likelihood would not cause something to materially misstated, but it’s important enough that it should be reported to governance
• Material Weakness – a deficiency is present and it is either material or it could cause a material misstatement
©2012 CliftonLarsonAllen LLP22
How Do We Report Findings to Governance
• Glossing over audit findings may cause unwarranted concern by governance
• Overemphasis of audit findings to governance may cause a similar result
©2012 CliftonLarsonAllen LLP23
How Do We Report Findings to Governance
• Know your board• Educate your board on what a finding is before
presenting the finding• Be prepared to present the what, when, where and
why, as well as the resolution and current status of the reported finding
• Don’t be afraid to discuss the findings• Don’t point fingers and start shouting the WHO• There will be times when the Who is appropriate
©2012 CliftonLarsonAllen LLP24
Tips For Presenting the Audit Report to Governance• Conduct a Governance training session prior to the
issuance of the audit reports• Develop and execute a framework for presenting the
financial statements to governance• Provide the reporting package to governance in
advance of the meeting• Request questions from governance in advance
©2012 CliftonLarsonAllen LLP25
Framework for Presenting the Audit
• Discuss the audit process– Define the scope of the audit– Reports that were issued– Opinions on those reports
• Highlight successes during the year• Discuss audit findings
– Select one finding to discuss and discuss the what, where, why, when, the resolution and the status
– Be prepared to address other findings• Present Benchmarking and trends
– Highlight successes within those benchmarks and trends
©2012 CliftonLarsonAllen LLP26
Comments from the Gallery
“What does this all mean?”
“The audit reports are usually just a
item on the consent agenda.”
“All they want to hear about is the
findings.”
©2012 CliftonLarsonAllen LLP27
Comments from the Gallery
“This is an impressive report,
but there is so much. Where do I start?”
“So how does this report tell us how
we are doing?”
“Any questions? Alright then. Thank
you.”
©2012 CliftonLarsonAllen LLP28
Benchmarking and Analysis
Benchmarking is using measurements for comparison and judgment.
Adds value by adding an emphasis.
Provides focus.
©2012 CliftonLarsonAllen LLP29
Benchmarking and Analysis
Measurements can be financial or nonfinancial measurements.
• Looking forward will require making assumptions
Measurements can look back or look forward.
• Board concerns and interest.• Management concerns that need Board attention.
When developing measurements, consider:
©2012 CliftonLarsonAllen LLP30
Examples:• Program expenses divided by total
expenses.What percent of dollars do we spend
on program?
• Cash balance divided by (cash expenses (total expenses less depreciation and other noncash items) divided by 360).
How many days of cash expenses do we
have on hand?
• Trend of A/R aging• Trend of average A/R ageAre we collecting
our receivables?
©2012 CliftonLarsonAllen LLP31
Examples:
• Average cost per participant vs. average revenue per participant
Are we charging enough for our
programs?
• Trend of total salaries divided by FTEs along with trend of benefits as a percent of salaries.
How does our compensation
compare?