©2012 cliftonlarsonallen llp 1 111 educating governance on the audit jackie eckman, cpa partner...

©2012 CliftonLarsonAllen LLP1 111

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LLP

Educating Governanceon the Audit

Jackie Eckman, CPAPartner

CliftonLarsonAllen [email protected]

480-615-2310

mailto:[email protected]

©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


The Role of Governance

Establish the Strategic Direction and Mission of your Organization through Policy Making


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


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


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


What is the Reporting Package?

• So governance has their reporting package, now what?


Outline for a Board Presentation

I•Au

dit Process.

II

• Highlight Successes.

III

•Findings and Recommendations.

IV

•Benchmarking and Analysis.


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.


What is the result of an audit?

• Reasonable, but not absolute, assurance.

An opinion.

Findings and recommendations.


Why is an audit required?

Grant requirements.

• Single Audits

Federal laws and regulations.

Debt covenants.

• Charter School Board Requirements

State laws and regulations.


Why choose to have an audit?

• Donors• Board of Directors• Members/Constituents

Fiduciary responsibility to stakeholders.

• Honest feedback.

Independent examination.


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.


Common Risk Factors for Account Balances

Balance.

Frequency of transactions.

Manual or automated.

Frequency of reconciliation.

Personnel and oversight.


Common Risk Factors for Federal Programs

Size.

Audited in past 2 years.

Prior year findings.

ARRA funding.

Changes in processes or personnel.


Audit Process

Engage with an audit firm.

Audit planning by firm.

Audit preparation by management.


Audit Process

Audit communication with governance and management.

Audit examination.

Communication of results.


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.


Audit Findings

Deficiency

Significant Deficiency

Material Weakness


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


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


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


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


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


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


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.”


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.”


Benchmarking and Analysis

Benchmarking is using measurements for comparison and judgment.

Adds value by adding an emphasis.

Provides focus.


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:


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?


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?


Common Ratios:


Brainstorming


Educating Governance

Impact and Value

Audit Process

Highlight Success Findings

Benchmarking

©2012 cliftonlarsonallen llp 1 111 educating governance on the audit jackie eckman, cpa partner...

Documents

audit scope

audit timing

role of governance

single audit report

benchmark success slide

audit jackie eckman

fraud risk factors

common risk factors