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Local Government Assistance

Justice of the Peace Manual

February 2002

CHAPTER 5
Auditing the Office
This part of the manual is intended to:

show why internal auditing is necessary;

offer guidelines for getting ready for the audit; and
provide some basic audit programs that can be used for justice of
the peace offices.

Justice of the peace offices are not all alike. Some of the information in
this part may need to be adapted to meet a county's individual needs.

Although this part was written with the internal audit function in mind,
much of the information provided should also prove useful for outside
auditors, justices of the peace and for those working in justice offices.

Definition - Auditing
Auditing is simply examining information and operations to ensure their
mathematical accuracy, legality and propriety. It is a process of
determining whether all transactions are properly recorded in the
accounts, and appropriately reflected in statements and reports.

The type of information and operations that can be examined include:

documents;
records;
reports;
systems of internal control;
accounting procedures; and
actual operations.

Someone who works for the organization being audited performs the
internal audit. For example, the county auditor is an internal auditor.
Objectives of Internal Auditing
The broad purpose of internal auditing in Texas counties is to help
ensure the integrity of the county's financial operations.

Texas statutes have five objectives for internal auditing of justice of the
peace offices. They are to help assure that:

1. the justice has collected all the money that he or she is supposed
to collect;
2. the money collected was properly remitted to the appropriate
party (e.g. Texas Comptroller, Parks and Wildlife, county
treasurer, etc.);
3. other property is properly managed;
4. all money and other property are properly accounted for, properly
reported and adequately safeguarded; and
5. the operations of the office conform to prescribed procedures.

No system of internal auditing can guarantee that collections, records

and reports are 100 percent complete and correct; however, internal
auditing can be a means for prevention and early detection and
correction of material mistakes and irregularities. Although not
specifically covered in the statutes, the internal audit function should
have another objective: to ensure the best and most efficient use of
the county's resources (the public's money).

The county auditor performing an internal audit has the authority to

require that improvements be made in procedures. However,
recommendations should be made in a constructive, friendly manner.
The goals of both the internal auditor and those being audited should be
the same.

Many internal audits have resulted in lower operating costs, more

efficient ways of getting things done and better service to the public.

In small justice of the peace offices, where the staff size does not
provide for a normal segregation of duties, the internal audit function
also provides needed additional oversight or review of work being
done.

Finally, a good internal audit function can also provide for more
efficient and less costly outside audits.

Internal Auditing Versus the Objective of an

Annual Audit by a CPA
The objective of an internal audit is significantly different from that of
the annual outside audit by a certified public accountant (CPA), which
is to express a professional opinion on the material accuracy of the
annual financial statements. "Material accuracy" usually implies a less
stringent level of review than an internal audit. For example, if the
collections of one justice out of four were minor in comparison to the
total fine revenue collected by the county, the CPA would likely spend
very little time auditing that office. The CPA's objective is to express an
opinion on the financial statements of the county as a whole, not on the
operations of one particular justice of the peace.

Many county commissioners and some county auditors make the

mistake of thinking that county officers have been sufficiently audited
by the independent CPA, when in fact some officers may not even be
audited if their operations are immaterial to the financial statements.

Although the independent auditor must test for compliance with the
county's system of internal controls, the auditor is not required to look
for improprieties. The test of compliance is merely to determine how
much additional test work must be performed to express an opinion on
the accuracy of the financial statements. However, the CPA must
investigate and report any improprieties discovered in the course of
testing for compliance.

Although required by generally accepted auditing standards (GAAS),

independent CPAs are sometimes not very familiar with state laws
regulating county government. Counties are highly regulated by statute
and compliance with these statutes may not affect the financial
statements; therefore, the CPA will normally not test for compliance
with state law even if familiar with the statutes. An example is the
requirement of the Public Funds Investment Act that the county have its
investment policy audited for compliance. If the commissioners expect
the independent CPA to conduct a more thorough examination of one
or all county officers or departments, they must add these requirements
to the contract for the annual audit.

Statutory Responsibility for Auditing - County

Auditors
The county auditor must audit the receipt books in criminal cases
monthly. [220]

The county auditor has the specific authority and responsibility to

examine the books, accounts, reports, vouchers and other records of the
justice. [221] The county auditor must examine the reports made to the
commissioners court about the collection of money, and at least once
each quarter, check the books and examine in detail the reports of the
justice of the peace. [222]

A justice of the peace shall deliver receipt books, or a copy of any

receipt records contained in a computer database, to the county auditor
at the end of each month's business, or at the end of each month to
allow the county auditor electronic access to receipt records contained
in the computer database. The county auditor shall examine the receipt
book or computer records and determine whether the money collected
has been properly satisfied. If all receipts have been used the county
auditor shall keep the book. If any receipt in the book has not been
used, the auditor shall return the book to the justice of the peace. The
county auditor may keep a copy of computer-generated receipt records
delivered to the county auditor. Any person may inspect a receipt book
or a computer-generated receipt record kept by the county auditor. [223]

The county auditor or the treasurer, if there is no county auditor, must

examine the accounts, dockets and records of each justice of the peace
to determine if any money belonging to the county and in the
possession of the justice has not been accounted for and paid over
according to law. [224] If the auditor finds that such money does exist,
he must report the findings to the commissioners court at its next
meeting for the purpose of instituting a suit for the recovery of the
money.

The county auditor must fully examine the accounts and reports of each
justice of the peace at least once each county fiscal year. [225] The
examination has to be done without advance notice. The auditor has to
verify the correctness of the accounts and after audit completion report
the findings to the commissioners court at the next meeting.

What to Do if Required Audits are Not Being Performed

When required audits are not being performed, the justice should take
the following steps to ensure account audits are completed.

The first step should be to ask the appropriate official (county auditor or
county treasurer) in writing, that the audits be performed, citing the
appropriate legal reference.

If this written request proves unsuccessful, the next step depends on

which official is failing to fulfill the audit responsibilities.

If it is the county auditor, write to the district judge and include a copy
of the original request to the county auditor.
If it is the county treasurer, write to the commissioners court and
include a copy of the original request to the treasurer.

If both approaches fail, consult the county and district attorneys for
further advice.

It is also recommended that the justice ask for an audit of the justice of
the peace office be included in any outside audit of the county's
financial records.

Audit Plan and Calendar

The audit plan and calendar are integral parts of the internal audit. The
audit plan, prepared in advance by the officer who will conduct the
audit, should be designed to ensure that:

no procedures or items are overlooked;

audit work and staff are allocated appropriately between offices
to be audited;
the examination of specific areas is coordinated with the
workload in the justice office (for example, the auditor should not
plan to examine the docket book on arraignment day); and
all assignments are completed in a coordinated manner.

The basic components of an audit plan include:

areas to be examined;
estimated hours required;
dates and times when examinations are to be performed;
staff assignments;
audit procedures to be followed; and
estimated deadlines for completion of fieldwork and release of
the audit report.

The plan serves as a guide for the review, although circumstances

revealed during the audit may require revisions to the original plan. In
any case, the audit plan should be updated as needed to reflect changes
in the justice office as well as new audit methods and techniques. The
officer conducting the audit should develop the calendar specifying the
dates and times of audits to be conducted.

Performing the Examination

The audit involves five steps:

1. Review internal controls and any prior audit reports and work
papers. Internal controls are the procedures established by
management of the county to protect assets and ensure integrity
 of the data collected, as well as the accounting system. These
procedures include: segregation of duties; independent checks of
performance such as inventories and bank reconciliations;
controlled access to assets and records such as locked storerooms
and computer passwords; and the use of prenumbered documents
such as vouchers, invoices and checks. [226]
2. Determine the extent of audit (revising this scope as needed).
3. Perform the audit review in accordance with the revised scope for
the particular office.
4. Document and evaluate the audit results.
5. Prepare the written report.

Review of Internal Controls and Previous Audits

After becoming familiar with the office to be examined through a
review of internal controls, the internal auditor should have a general
idea of the reliability of the internal control of that office. The purpose
of this review, conducted before the actual audit, is to determine
whether any recent changes in the four elements of internal control
would change the auditor's opinion of the controls' reliability.

The internal auditor should refer to the justice's office files to be

audited and, if necessary, actual tests of transactions and note any
recent changes in:

division of duties;
personnel;
procedures; and
actual performance of procedures.

The auditor should assess the impact of any recent changes (such as
addition or loss of key personnel or changes to statutes or relevant
county policies) on the reliability of the accounting function in the
office under review. The result should be an up-to-date judgment of the
office's internal controls.

The internal auditor should also review the results of the previous audit
of that office and should provide for follow-up examination of
problems or situations that required correction.

Extent of Examination
Using professional judgment about the reliability of the accounting in
the office under examination, and considering any other relevant factors
(such as the examples listed below), the internal auditor must decide the
extent of the examination to be conducted. Assuming that each and
every transaction cannot be reasonably audited, the auditor must decide
how many records need to be examined to judge that the figures in
monthly reports, journals or ledgers are complete and correct.

Sample size can be determined through statistical sampling or by simple

judgment.

Statistical sampling is the only approach, outside of a 100 percent test

of transactions, that can be used to make provable assertions about a
probable error rate or a rate of occurrence in the overall population.
This method, however, is too involved to adequately explain in this
manual. The auditor should be familiar with the method and it may be
found in most auditing textbooks.

Judgment sampling, while simpler, carries a greater risk of a sample

size that is either larger than necessary (wasting the auditor's time) or
smaller than necessary (providing insufficient evidence). Using the
average count of items under review is not always the appropriate
sample size. The internal auditor uses knowledge of the office under
review and other factors, such as the reliability of existing internal
controls, to decide the appropriate sample size.

Auditing Factor Effect on Sample Size

Excellent internal controls
Good internal controls Small portion of sample
Poor internal controls
Larger than average sample size
Unreliable internal controls
Larger than average sample size
High turnover of personnel
Testing entire sample may be
New personnel
necessary
Fewer personnel than office Larger than average sample size
had in prior years reviewed
Larger than average sample size
Unfavorable publicity
Larger than average sample size
Good recent external audit
report
Larger than average sample size
Large population from which
Smaller than average sample size
to sample Larger than average sample size
Many large individual
Larger than average sample size
transactions

These are just a few examples. Many other factors may affect an
auditor's choice of sample size.

The transactions or records to be examined should be selected

randomly. Usually, the auditor would look at high-dollar items or
unusual and high-risk items such as refunds or voids that may be
susceptible to fraud. A random number table may be used to select the
remaining transactions to be reviewed. A random number table can be
developed using a computer application with functions able to generate
random number lists and extracting random samples. One such program
is available from the Texas State Auditor's Web site located at
http://www.sao.state.tx.us/Resources/Tools/toolbox.cfm.

The internal auditor should examine all unusual transactions whether or

not they fall in the sample. Also, some county offices are relatively
small and 100 percent auditing may be done in relatively little time.

Steps in Audit Programs

The internal auditor is now ready to apply the steps of the internal audit
program to the transactions selected for examination. (Sample audit
programs are discussed in the subsequent section of this chapter.)

The steps should be performed in order, exactly as indicated, and

initialed when completed.

Deviations from the program must be noted and explained.

Audited transactions should be identified on related documents.

Transactions with errors should be specially noted.

Internal audit procedures must be well planned and documented

thoroughly. Written audit documents are necessary to:

1.prevent any misunderstanding of what is to be done;

2.make sure that no procedure is overlooked;
3.assign responsibility for the performance of audit procedures;
4.provide the proper audit routine;
5.ensure continuity of audit procedures over time;
6.facilitate review of audit work performed;
7.provide a written record of all audit work performed;
8.provide a basis for the audit report;
9.provide documentation for questions that may be posed by county
officials and others, such as the press; and
10. help an external auditor evaluate the internal audit function.

Since internal auditing in Texas counties usually involves the same

types of audits on and the same offices month after month or quarter
after quarter, the same audit programs may be used each time.

Just prior to each audit, however, the program should be reviewed in

light of any new conditions in the office to be audited that might affect
normal examination procedures (such as staffing changes, an unusually
busy month, changes in statutes or publicity surrounding the office).
In addition, the scope of the audit may need to be changed once the
examination begins, based on the findings that emerge.

Audit Programs
This manual discusses five audit programs detailed below.

1. Cash Count and Reconciliation

2. Cash Receipts
3. Cash Disbursements
4. Property
5. General Review

Cash Count and Reconciliation Audits

The most convenient time to count cash is at the closing or opening of
a business day. Cash counts also should be made on a surprise basis at
irregular intervals.

1. Select the cash drawer or fund to be audited.

2. Count the cash in the drawer or fund. Use the cash count and
reconciliation form (Exhibit 17) to record your results. Never
allow the custodian of the counted cash to leave the auditor alone
with the cash. Have the custodian sign the cash count and
reconciliation form upon completion.
3. Using books of prenumbered receipts or cash register tapes, add
the amount that should have been received. Enter the results on
the "reconciliation" section of the cash count and reconciliation
form.
4. Enter on the cash count and reconciliation form the amount of
cash that should be in the drawer or fund for making change.
5. From the total money counted, subtract the total receipts indicated
by the receipt books/register tapes (Step 3) and the authorized
change fund (Step 4).
6. The answer should be zero. If it is not, recheck the entries and
math on the cash count and reconciliation form. If they are
correct, the problem is probably in the receipts.
7. Account for all receipt numbers. Examine any unused receipts
held by the custodian of the drawer/fund. Make sure that unused
receipts are all there and in an unbroken series.
8. Examine the used receipts to verify the amounts recorded are in
accordance with statutory requirements (a sample may be used).
9. If the receipt copies are to be validated, check that they are
validated for the proper amount and date (a sample may be used).
10. Examine all receipts that are voided or cancelled. All copies of
the receipts should be there and all should be marked void.
11. Investigate any non-cash items included in the count for
 applicability.
12. Notify the justice of the peace of any differences or discrepancies
found during the cash count and reconciliation.
13. Observe and evaluate the internal controls over cash observed
during the examination period. List any improvements that might
be made.
14. The following additional procedures should be performed to
reconcile cash and receipts with bank balances:
a. Obtain the most recent bank statement and prepare a
reconciliation for the current statement period. Investigate
any unusual items (such as disbursements to unusual
parties, any outstanding items, deposits in transit or signs of
alteration). Obtain and examine copies of all cancelled
checks. Use the bank reconciliation form for reconciliation
(Exhibit 18).
b. Match deposits shown by the bank statement with the
specific days' receipts. Pay special attention to the five days
preceding the date of each bank statement. Investigate any
discrepancies. Use bank reconciliation form for
reconciliation.

Cash Receipts Audits

1. Verify the cash balance for the office that is responsible by

counting and reconciling (see the cash count and reconciliation
procedures above).
2. Determine the number of receipts used and account for all
numbers by using a cutoff point of prenumbered receipts from the
last audit and at the end of the current period under audit.
3. Examine receipts and determine if proper amounts were received.
Examine any necessary supporting documents (for example, fee
schedules, state and local court cost documents, docket books or
tickets).
4. If a receipt has been voided or cancelled, examine all copies of
the receipt, noting whether they are all present and marked void.
5. Foot (add up) various amounts on receipts, where applicable.
6. If necessary, based on professional judgment, obtain written
confirmation (Exhibit 19):
a. from selected payers as to amounts paid;
b. from selected individuals as to amounts owed; and
c. from selected individuals as to the fact that nothing was
paid.
7. Where possible, trace transactions from original documents to
receipts; for example, from complaints to receipts.
8. Trace receipts to accounting records and reports:
a. to book of original entry (receipts journal);
 b. to subsidiary records (for example, docket books); and
c. to monthly reports.
9. Foot and cross-foot accounting records and reports.
10. Match amounts received against amounts remitted to county
treasurer and other parties. Check amounts on accounting records
and reports against cancelled checks, check stubs and supporting
documents.
11. If applicable, examine the county's agreement with the bank
depository to see that interest being paid is in accordance with
contractual provisions. Check interest computations. Where
applicable, ensure that interest earnings follow the source.
12. Compare current audit period reports with reports of prior
periods. Investigate any discrepancies.
13. Notify the justice of any differences or discrepancies found.
14. List any improvements that can be made in this area of the
operations.
15. Review bank accounts controlled by the justice of the peace to
determine whether they are covered by the county depository
agreement.
16. Determine whether all deposits are made within the deadlines
established by Chapter 113 of the Local Government Code and
Article 103 of the Code of Criminal Procedure.
17. Determine that the justice of the peace retains only restitution or
other funds held on behalf of third parties in the bank account.
Check that all county and state funds are deposited with the
county treasurer.
18. Check that unidentified funds are reported to the county treasurer
and Texas Comptroller's office in accordance with the unclaimed
property provisions of the Property Code.
19. Reconcile the receipt book each month. If a computer is used to
process receipts instead, verify transactions printout each month.

Cash Disbursements/Remittances Audits

1. Obtain a list of all disbursements made during the period under

audit. Note: Only the county treasurer should be allowed to
disburse county funds, except restitution money and fees held for
merchants for hot checks and the related fees, which are
transferred to the county prosecutor; restitution in other cases
adjudicated in the justice of the peace court; refunds of cash
bonds held for various writs and services; and, in some cases,
cash bail bonds. All of these may be processed through the
county treasurer.
2. If a check has been voided, examine all copies of the check,
confirming that they are all accounted for and all marked void.
3. Foot amounts on checks and supporting documentation.
 4. Examine supporting documentation to ensure that disbursements
are proper and correct. Pay special attention to refunds.
5. Trace transactions from original documents to checks.
6. For example:
a. from refund requests to checks; and
b. from receipts to checks.
7. Trace checks to accounting records and reports:
a. to books of original entry (disbursements journal);
b. to subsidiary records (for example, docket books); and
c. to monthly reports.
8. Foot and cross-foot accounting records and reports.
9. If necessary, obtain confirmation from payees as to amounts
received (for example, by contacting other counties for amounts
sent to their constables).
10. Notify the justice of the peace with any differences or
discrepancies found.
11. List any improvements that can be made in this area of
operations.

Property Audits
All county property, regardless of location, should be examined and
counted by internal auditors at least once a year. It is not necessary to
check all offices at the same time. In many instances, property audits
are conducted in conjunction with normal audits of county offices and
departments.

1. Obtain the property inventory record for the justice office to be

audited.
2. Verify the existence, location and inventory number for all
property shown on the inventory. Investigate any discrepancies,
paying special attention to unrecorded transfers between offices
and unrecorded disposals.
3. Note property not shown on the inventory, listing any found.
Locate and review supporting documentation for such property.
4. Trace significant disposals, since the last audit, to accounting
records and, if applicable, to the treasurer's cash receipts. Review
minutes of commissioners court for authorizations to sell or
otherwise dispose of such property.
5. Trace significant purchases since the last audit from invoice to
actual purchase. Match the invoice description to the actual
property.
6. If applicable, determine the location of and reason for property
out for repairs and maintenance. If necessary,
a. obtain written confirmation from service provider as to the
property's existence, work being done and the inventory
number; or
 b. visit the service location personally to verify the property's
existence and inventory number.
7. Note the condition of property. Investigate abnormal
deterioration, usage and other factors implying misuse.
8. Compare property insurance policies to significant assets covered,
investigating and correcting discrepancies. Verify that coverage is
adequate.
9. If applicable, independently compute depreciation and compare
to books.
10. Check to ensure property is being used. Note any unused or
underused property.
11. Obtain significant outstanding requisitions and purchase orders.
Review for necessity and proposed use.
12. Correct property and accounting records as necessary.
13. Notify the justice of any differences or discrepancies found.
14. List any improvements that can be made in this area of the justice
office operations.
15. Have the justice sign an updated office property inventory. Give
the justice a copy of the inventory.

General Review Audits

1. Review legislation and other information affecting justice of the

peace offices. Compare information with current operations,
noting any differences.
2. Examine accounting records and docket books for unusual or
unexplained transactions or entries. Investigate any findings.
3. Examine docket books for dismissed cases and the reasons for
dismissal. Based on professional judgment, obtain written
confirmation that cases were actually dismissed without payments
were made.
4. Compare current period audit results and operations with prior
periods, noting any trends and fluctuations (for example, a sharp
increase in the number or percentage of dismissed cases or a
decrease in fines assessed in certain types of cases). Determine
the reason(s) for significant trends and fluctuations.
5. Review any complaints received about the justice or justice office
employees (for example, not getting a receipt for money paid).
Based on professional judgment, expand the scope of the audit.
6. Look for apparent increases in spending habits by the justice or
justice office employees. Based on professional judgment, expand
the scope of the audit.
7. Look for personality changes in the justice or justice office
employees that could be due to a severe drug, alcohol or financial
problem. Based on professional judgment, expand the scope of
the audit.
 8. List any recommendations for improvements that can be made in
the justice office operations.

Documenting and Evaluating Results

Results of the examination should be noted on the audit program
checklist itself and separate working papers, and cross-referenced to the
relevant procedure number. Special comments, unusual situations, items
requiring follow-up and other pertinent observations may be noted in a
special Memo To File.

If the results of a sample audit are satisfactory, the internal auditor may
conclude that the rest of the records also are satisfactory. If too many
material errors are found, however, further testing may be necessary.

What constitutes "satisfactory," "too many" or "material," of course, is a

matter for professional judgment. It is simply impossible to be assured
of a 100 percent accurate accounting function. However, the internal
auditor does need to establish that the accounting in county offices is as
free of material error as possible.

Expectations should be used as guidelines. For example, if an internal

auditor judges that an error rate of one in 50 transactions is acceptable
in a certain office, an audit sample of 800 transactions that results in 8
errors (0.5 in 50) would be judged as acceptable, while a sample
showing 25 errors (1.5 in 50) would not. By implication, the error rate
in the sample is representative of the error rate in the entire group from
which the sample is taken.

There are no strict mathematical rules in judgment sampling. As in all

other areas of auditing, the internal auditor must use sound professional
judgment for the final evaluation.

Writing the Audit Report

The results of any audit should be communicated in writing to the
official audited. This helps avoid later misunderstandings about what
was done and what results were obtained.

The letter should be brief; it need not go into detail about the
procedures used and the exact records examined. The letter should
contain:

dates of examination;
kind and general scope of examination;
significant exceptions found;
 positive findings during examination
recommendations for improvement; and
overall evaluation.

The internal auditor also should discuss any significant matters with the
justice of the peace or a designated staff member. The results of such
conferences should be documented, preferably with a follow-up letter to
the official.

An example of an internal audit report letter is shown in Exhibit 20.

Endnotes

[220] Vernon's Ann. C.C.P. art. 103.011.

[221] V.T.C.A., Local Government Code, §115.001.
[222] V.T.C.A., Local Government Code, §115.002.
[223] Vernon's Ann. C.C.P. art. 103.011.
[224] V.T.C.A., Local Government Code, §115.901.
[225] V.T.C.A., Local Government Code, §115.0035.
[226] Government Accounting, Auditing and Financial Reporting. Government Finance
Officers Association, 1994.

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