Module 5 The Role of External and Internal Auditors

1. Module 5 The Role of External and Internal Auditors Convery 2013

2. Learning Objectives • Distinguish among internal, external, federal auditors • Describe types of audits • Determine when an external audit by a CPA is required • Describe the benefits of an audit by an external auditor • Describe the standards used by external auditors • List schedules that are commonly prepared by clients for auditors • Tips for working with auditors • Describe the role of a Board’s Audit Committee Convery 2013

3. Types of Auditors • Internal auditors are employees of the organization (or contracted services) and they perform auditing tasks throughout the year on areas identified by management • External auditors are generally CPAs who are contracted to come in as independent professionals to “audit the books” and deliver an “opinion” • The GAO and each Federal agency has IGs (Inspectors General) who serve as external reviewers of NPOs and others that are recipients of federal financial assistance Convery 2013

4. Internal Auditors • Possibly members of the Institute of Internal Auditors (IIA) and hold a CIA Certified Internal Auditor (see www.theiia.org ) • Key purpose/role: • Gathers data, documents, and reports on management control issues • Makes recommendations related to solving problems, improving efficiency and effectiveness • Understands: • Management control • Operations management • Information technology • Financial accounting • Finance • Managerial accounting • Regulatory environment Convery 2013

5. External Auditors • Could be CPAs in public accounting firms • Are “engaged” to conduct either a • Compilation • Review • Audit (various types) • Engagement letters spell out the agreement between auditor and client, including fee structure Convery 2013

6. Types of Audits • Financial audit – to determine whether the financial statements “fairly present” the financial position and results of operations in accordance with GAAP • Performance audit – to determine whether the organization is “effectively” accomplishing its mission, and “efficiently” using its resources • Single Audit (or A-133 audit or Yellow Book audit) – done when the organization has expended more than $500,000 in federal financial assistance Convery 2013

7. When is an Audit Required? • If the Board requires it (e.g., through the by-laws) • If the organization receives more than $250,000 of public support a year (a Michigan rule, see www.ag.state.mi.us and Part III of the “Application for a License to Solicit Donations” • If it agrees to as a condition of receiving a grant or gift • If it receives more than $500,000 of federal financial assistance a year Convery 2013

8. Benefits of an Audit by an External Auditor • Provides the public with independent opinions on financial and other critical matters • Delivers a “management recommendation letter” pointing out areas where internal controls could be strengthened, among other suggestions • Delivers either: • an “unqualified (clean) opinion” • Qualified opinion (except for certain omissions or other points) • Adverse opinion when statements include material GAAP violations • Disclaimer – when the books are inadequate and can’t be audited or management limits the scope Convery 2013

9. Benefits of an Audit by an External Auditor, cont’d. • Ensures that sufficient “disclosures” are included in the financial statement Notes to provide important information for decision makers Convery 2013

10. Audit Schedules Prepared by Clients • Correspondence: attorney’s letters, bank confirmations, , grant and contract confirmations, contributions greater than $5,000 • General Planning: trial balance, memos on internal controls, minutes of Board of Directors’ meetings, list of employees and job descriptions, comparative financial statements with comments on fluctuations from previous year • Subsequent events: journal entries, including cash receipts and disbursements for year after the audit Convery 2013

11. Audit Schedules, cont’d. • Cash: bank reconciliation's • Investments - list • A/R support • Schedule of A/P • Payroll: reconciliation with payroll tax returns • Capital assets list, with depreciation schedules • Liabilities: copies of notes and leases • Net Assets: changes reconciled to last year’s balances • Permanent file changes: incorporating documents, retirement plans Convery 2013

12. Tips for Working with Auditors • Don’t be intimidated • Answer only what you know • Clarify exactly what is needed • Understand the purpose of the request • Ask when the request is needed • Maintain a control log of records released to the auditors • Keep prior year records accessible • Lock up confidential records, such as payroll Convery 2013

13. Audit Committees • A boards may adopt a bylaw or resolution that defines an audit committee’s purpose and responsibilities, particularly if federal grants are involved • Members should be directors who are not employees of the organization and who have no significant financial relationship with management • Responsibilities include: • Reviewing the organization’s system of internal controls • Appointing internal auditors and reviewing their work • Recommending an independent auditing firm to the board • Reviewing the audit engagement • Reviewing the annual financial statements, opinion rendered, and any management recommendations from the auditors Convery 2013

14. Generally Accepted Auditing Standards • General Standards • Competent • Independent • Due Professional Care • Field Work Standards • Adequate Planning • Understanding of Internal Controls • Sufficient evidential matter is collected • Reporting Standards • State whether GAAP was followed • Compare current period to past • Informative disclosures • Render an opinion Convery 2013