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The Audit Process: What Every Governing Body Should Know 2010 NHGFOA Conference May 6, 2010

The Audit Process: What Every Governing Body Should Know 2010 NHGFOA Conference May 6, 2010. Scott C. McIntire, CPA Melanson Heath & Company, PC smcintire@melansonheath.com (603) 882-1111. Session Outline . Pre Fieldwork Engagement Letter and Risk Assessment Fieldwork

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The Audit Process: What Every Governing Body Should Know 2010 NHGFOA Conference May 6, 2010

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  1. The Audit Process:What Every Governing Body Should Know2010 NHGFOA ConferenceMay 6, 2010 Scott C. McIntire, CPA Melanson Heath & Company, PC smcintire@melansonheath.com (603) 882-1111

  2. Session Outline • Pre Fieldwork Engagement Letter and Risk Assessment • Fieldwork • Post Fieldwork The Reports

  3. Nature and Purpose of the Financial Statement Audit • Role of Management • Role of Internal Control • Role of Governing Body • Objective of Fair Presentation • Concept of Reasonable Assurance

  4. Our Responsibilities, Objectives and Services • Primary responsibility • Primary responsibility is to Management and Officials. • Scope • Designed to obtain sufficient comfort over financial statements. • Primary objectives • Provide independent opinion to the relevant users. • Provide management with recommendations to improve internal controls and operational efficiency.

  5. Our Responsibilities, Objectives and Services (continued) • Standards on which audits are based • Audit performed in accordance with the standards established by the AICPA and Government Auditing Standards. • Services subject to AICPA and GAO Independence rules. • Communications with Management • Formal, periodic meetings with Management (Council, BOS, etc.) over the course of the year, and informally as appropriate.

  6. Our Service Deliverables • Audit Opinion • Single Audit Reports (if applicable) • Management Letter

  7. Our Audit Responsibilities • Our responsibility is to express an opinion on the Organization’s financial statements based on our audit. We conduct our audits in accordance with generally accepted auditing standards. • Our responsibility with respect to other information in documents containing audited financial statements is to read such information and consider whether the information or the manner of its presentation is materially consistent with information appearing in the basic financial statements.

  8. Our Audit Responsibilities(continued) • Our responsibility with respect to management communications is to communicate those matters that have come to our attention as a result of the performance of our audit. • Our audit does not relieve management of its responsibilities with regard to the financial statements.

  9. Management’s Responsibilities As part of the audit process, management is responsible for the following: • The Organization’s financial statement; • Establishing and maintaining effective internal control over financial reporting; • Identifying and ensuring that the Organization complies with the laws and regulations applic-able to its activities;

  10. Management’s Responsibilities(continued) • Making all financial records and related informa-tion available to the auditor on a timely basis; • Providing the auditor with a letter that confirms certain representations made during the audit; • Adjusting the financial statements to correct material misstatements and affirming to the auditor in the representation letter …

  11. Perspective on Fraud Risk and Responsibilities The auditor has a responsibility to: • Plan and perform the audit to provide reasonable assurance that the financial statements are free of material misstatement, whether caused by fraud or error. • Evaluate whether the Organization’s programs and controls that address identified risks of material mis-statement due to fraud have been suitably designed and placed in operation. • Evaluate fraud of any magnitude on the part of senior management and the impact on the control environment.

  12. Perspective on Fraud Risk and Responsibilities (continued) The Organization’s responsibilities include: • Design and implement programs and controls to prevent, deter and detect fraud (antifraud programs). • Ensure that the Organization’s culture and environment promote honestly and ethical behavior.

  13. SAS 104 - 111 In a nutshell: • More in-depth understanding of entity and its environment • More rigorous assessment of the risk of material misstatement of financial statements • Improved linkage between the assessed risk and the nature, timing and extent of audit procedures performed in response to those risks

  14. Materiality We identify and assess the risk of material misstatement at: • The overall financial statement and opinion unit level, and • In relation to classes of transactions, account balances and disclosures. Audit materiality will be set once reasonable estimates of year-end results are available from management. We consider both quantitative and qualitative factors in our assessment of materiality.

  15. Independent Auditors’ Report • Unqualified In accordance with generally accepted accounting principles (GAAP) • Qualified In accordance, but… • Adverse Not in accordance with GAAP • Disclaimer No opinion

  16. Independent Auditors’ Report(continued) We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of _______, New Hampshire, as of and for the year ended June 30, 2010, which collectively comprise the City’s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City of _______’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the _________ Authority Component Unit as of June 30, 2009 and for the year then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the compo­nent unit, is based solely on the report of the other auditors.

  17. Independent Auditors’ Report(continued) We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assur-ance about whether the financial statements are free of material misstatement. An audit includes examining, 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. We believe that our audit provides a reasonable basis for our opinions.

  18. Independent Auditors’ Report(continued) In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund infor-mation of the City of _______, as of June 30, 2010, and the respective changes in financial position and cash flows, where applicable, thereof and the respective budgetary comparison for the General Fund for the year then ended in conformity with accounting principles generally accepted in the United States of America.

  19. Independent Auditors’ Report(continued) The management’s discussion and analysis on the following pages and the Schedule of Funding Progress on page ___ are not required parts of the basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supple-mentary information. However, we did not audit the infor-mation and express no opinion on them.

  20. Independent Auditors’ Report(continued) Our audit was made for the purpose of forming opinions on the financial statements that collectively comprise the City of _______, New Hampshire’s basic financial statements. The introductory section, supplementary statements and schedules, and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The supplementary statements and schedules have been subjected to the auditing procedures applied by us in the audit of the basic financial statements and, in our opinion, based on our audit, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory section and statistical section have not been subjected to the auditing procedures applied by us in the audit of the basic financial state­ments and, accordingly, we express no opinion on them.

  21. Independent Auditors’ Report(continued) In accordance with Government Auditing Standards, we have also issued a report dated __________, 2010 on our consideration of the City’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agree-ments and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed with Government Auditing Standards and should be considered in assessing the results of our audit.

  22. Common Qualifications • Accrual basis • No Compensated Absences Liability • No OPEB Liability

  23. Adverse or Disclaimer • Not Presenting Government-wide FS (Lack of Capital Assets) • Too Many Qualifications • Management not taking Responsibility (Disclaimer)

  24. Statement on AuditingStandard 115 Communicating Internal Control Related Matters Identified In An Audit • Control Deficiency • Significant Deficiency • Material Weakness

  25. Control Deficiency - Definition • SAS 115 - exists when the design or operation of a control does not allow management or employees, in the course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

  26. Material Weakness - Definition • SAS 115 is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.

  27. Significant Deficiency - Definition • SAS 115 - is a deficiency, or a 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.

  28. Evaluating Deficiencies The severity of a deficiency depends on: • The magnitude of the potential misstatement resulting from the deficiency or deficiencies; and • Whether there is a reasonable possibility that the entity’s controls will fail to prevent, or detect and correct a misstatement of an account balance or disclosure. The severity of a deficiency does not depend on whether a misstatement actually occurred.

  29. Evaluating Deficiencies • No cash Reconciliation • $ 100,000 of Paid No Issue Checks • School has access to post journal entries to General Ledger and has a history of pushing year-end bills into next year • Water billing and abatements controlled by same individuals • No evidence of Department Head Approval on Invoice

  30. Material Weaknesses • Improve Financial Reporting and Accounting System • Centralize the Accounting Function • Improve Cash Reconciliation Process • Improve Treasurer’s Cash Book • Establish Capital Asset Record and Implement GASB 34 • Implement Internal Control Improvements

  31. Risk Assessment • Does Management perform its own assessment • Related parties • Close vendors – Conflict of Interest • Risk Appetite

  32. ARRA and Other Compliance • OMB A133 Compliance Supplement • www.federalreporting.gov • www.recovery.gov • The following link is the OMBs’ Implementation Guidance on ARRA funds: http://www.whitehouse.gov/omb/assets/memoranda_fy2009/m09-21.pdf • The following link is to OMB’s Compliance Supplement Addendum #1.  It is over 300 pages, but I would like to draw your attention to the links at the bottom of page 199 and top of 200.  I also suggest you review the last 5 pages (296-301).  These discuss internal controls over federal dollars and specifically ARRA money.  http://www.whitehouse.gov/omb/assets/a133_compliance/arra_addendum_1.pdf

  33. Questions?????

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