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AICPA National Not-for-Profit Industry Conference

Management vs. Auditor Responsibilities

Whose Financial Statements are They Anyway?
Nancy E. Shelmon, CPA Partner, PricewaterhouseCoopers, Los Angeles, CA Douglas K. Risser, CPA Global Controller, World Vision, Federal Way, WA


1. Background leading to this discussion

2. Impact of SAS 112 on managements responsibilities 3. Use of Estimates 4. Closing the Books 5. Other Tools Available 6. Role of Audit Committee 7. Questions

Top Ten Auditor Frustrations

10. The auditors room is like being in solitary confinement. 9. The client likens auditors to the Bermuda Triangle anything lost, the auditor did it. 8. Last years adjustments were never made. 7. Each year, the auditors become the temporary bookkeepers. 6. The Accounting department is told only to give name, rank, and serial number to any questions asked.

Top Ten Auditor Frustrations, Contd.

5. The audit is a great time to schedule vacations. 4. The client contact is like Sergeant Shultz on Hogans Heroes I know nothing. 3. Typical response to management letter Well consider it next year. 2. Standard reconciling item unexplained difference. 1. Clients perspective of fixed fees means I can cause unto you delays, inefficiencies, etc., but you cannot increase billings unto me.

Top Ten Client Frustrations

10. Your Accountants definition of GAAP is a place where you buy jeans. 9. The temporary employee filed the A/P invoices using the Russian alphabet. 8. Auditor leaves the conference room looking like the streets of New Orleans the day after Mardi Gras. 7. You exceed the FDIC insurance cash limit one day during the entire year and it happens on the last day of the year.

6. Auditor wont accept plug as an explanation for a journal entry.

Top Ten Client Frustrations, Contd.

5. The auditors definition of lead time for requesting information can be measured with the second hand of your watch. 4. Audit assistants materiality is based on their average college checkbook balance. 3. Auditors definition of divisible is the parting of the Red Sea. 2. Audit Assistant appears younger than your teenage son who just entered high school. 1. That same audit assistant drives a nicer car than you do.

Internal Controls and SAS 112

What is the most valuable asset of any organization?

Internal Controls and SAS 112

What is the most valuable asset of any organization?

The typical response is people, staff, or employees. This is not correct, at least not totally correct.

Internal Controls and SAS 112

The most valuable asset of any organization is Knowledge Capital.

However, Knowledge Capital is always invested in our people, and maintained by our people.

Internal Controls and SAS 112

Therefore, we find that in order to maximize Knowledge Capital we must:

Continually develop and invest in our people, and Document and maintain processes and procedures.

Take the opportunity we have in readying for SAS 112 to create and/or enhance our documentation of Internal Controls.

Internal Controls and SAS 112

What will change as a result of SAS 112:

More control deficiencies will be considered severe. The auditor must consider the potential magnitude of a control deficiency rather than the actual magnitude as follows:

Does a control deficiencyor a combination of deficienciesconstitute a significant deficiency or a material weakness?

Internal Controls and SAS 112

Would prudent officials with knowledge of the facts and circumstances agree with the auditors assessment?
Are effective compensating or complementary controls in place? What is material to the financial statements from a quantitative and qualitative perspective?

Internal Controls and SAS 112

In summary, under SAS 12:

More control deficiencies will likely be considered significant and/or material and will be communicated more broadly to stakeholders. The auditor has less judgment and will require more evidence and documentation from management to support his conclusions about the effectiveness of internal controls.

Internal Controls and SAS 112

See SAS 112 internal controls readiness: a PwC perspective published by PricewaterhouseCoopers LLP
www.pwc.com/extweb/pwcpublications.nsf/docid/0D 87C5D88D5E10D5852571E6005A3E92

Internal Controls and SAS 112

Internal Control Maturity Framework

Monitored Informal Standardized Standardized Optimized Control Control Integrated controls with activities activities Internal periodic are designed are designed, controls with testing for and in place, in place real time effective but are not and are monitoring by design and adequately adequately operation with management documented documented and continuous reporting to improvement management

Unreliable Unpredictable environment where control activities are not designed or in place

Under SAS 112, controls must be documented in order for auditors to rely on them. Moving to the right on the maturity framework will take on greater urgency in the new environment.

Internal Controls and SAS 112

What should you do to prepare for the implementation of SAS 112?

Educate your board. Inventory the significant accounts, disclosures, and components as well as the processes and cycles. Year One: Consider documenting IT controls, Payroll Controls and Preparation of Financial Statements

Internal Controls and SAS 112

Information technology (IT) controls over significant systems

Are controls automated or manual? Are controls documented?

Controls over program security, program access, program changes?

Monitoring or mitigating controls at the process level might compensate for weaknesses in IT controls.

Audit trail evidence that controls were executed.

Internal Controls and SAS 112

Payroll (including for government grants)

What controls are in place? Are controls automated or manual? Are controls documented?

Are periodic reconciliations performed?

Is the review and approval evidenced? Review written policies and procedures for pre-award and post-award grants and contracts.

Effort reporting.

Internal Controls and SAS 112

1. Preparation of Financial Statements

What controls are in place? Who reviews estimates? What documentation exists? What adjustments does the auditor propose as a result of the annual independent audit? Review adjustments and unadjusted differences proposed over the last three to five years.

Internal Controls and SAS 112

Preparation of Financial Statements (cont)

Consider developing a financial statement binder.

Work papers that support the financial statements Accounting and disclosure checklists Proof of the accuracy and completeness of release of restrictions transfer, etc.

Internal Controls and SAS 112

In the second year, consider reviewing controls over other areas, such as:

Contributions and fund-raising

Revenue recognition Cut-off UBTI assessment Board approval Spending formulas Honoring donor restrictions


Internal Controls and SAS 112

In the second year, consider reviewing controls over other areas, such as (cont):

Property, plant and equipment

Capitalization of expenditures Evidence of compliance Capitalized interest, other borrowing-related activities

Internal Controls and SAS 112

As you review the controls, consider the following questions:

How do you know your controls are effective? Is there adequate segregation of duties? Are reviews documented?

Internal Controls and SAS 112

As you review the controls, consider the following questions (cont):

Are spreadsheet controls in place for key management reports?

What constitutes good documentation?

Are the estimates that management has made documented?

Does the documentation accurately depict what happens on a daily basis?

Internal Controls and SAS 112

As you review the controls, consider the following questions (cont):

Are all SAS 70 reports of outside service organizations reviewed and documented? Is the level of communication among management, internal and external auditors, and the audit committee adequate?

Internal Controls and SAS 112

Time is rapidly passing since SAS 112 became effective for December 31, 2006 year-end audits and will be effective for all June 30, 2007 year ends

Use of Estimates

Where are the estimates in the financial statements of most organizations?

Collectibility of pledges and/or accounts receivable Discount rate on pledges Estimated useful lives of fixed assets Fair value of other assets Allocation of joint costs Functional allocation of expenses

Use of Estimates

Auditors role with Estimates: Discuss with management the method of determining balance;

Evaluate whether the assumptions used are consistent with each other, the prior year, supporting data, relevant historical data, and industry data; Determine whether accounting estimates are in compliance with GAAP;

Closing the Books

Closing the books is the process that an organization uses to reconcile, consolidate, and report financial information on a periodic basis. Each organization defines the process a little differently; not all organizations complete the same list of tasks to close their books. Among the tasks that organizations may include in the process are the following:

Ensuring validity and consistency in the company's charts of accounts

Closing the Books

Among the tasks that organizations may include in the process are the following (cont):

Completing journal entries. Consolidating data from outlying business units. Preparing trial balances Correcting errors

Reconciling and analyzing accounts

Calculating taxes

Closing the Books

Among the tasks that organizations may include in the process are the following (cont): Preparing and distributing reports Supervising closing tasks and reviewing key accounts and reports An investigation of the process of closing the books usually reveals opportunities to improve speed and accuracy.

Closing the Books

A fast, accurate close-the-books process provides multiple benefits for the finance function and for the organization.
Utilize a monthly and annual closing checklist to document assignments, control points as well as approvals

Closing the Books

Sample checklist provided in your book

Other tools may be found in the AICPA Not-for-Profit Toolkit

Audit Committee Toolkit

Actionable tools (matrices, questionnaires, RFPs, evaluations, how-to, etc.)

Distributed in print

Audit Committee Toolkit

Tools are available on website

www.aicpa.org/Audcomm ctr/toolkitsnpo/homepage .htm

Audit Committee Toolkit

Administrative Tools Audit Committee Charter Matrix* Financial Expertise* Sample RFP for CPA Services Independence and Related Issues* Peer Review of CPA Firms Evaluating the Auditors Engagement Letter Hiring the Chief Audit Executive Hiring External Experts

Audit Committee Toolkit

Audit Process Tools Internal Control Fraud and the Audit Committee* Whistleblower Tracking Report* Conducting an Audit Committee Executive Session* Issues Report From Management Discussions With the Independent Auditors*

Audit Committee Responsibilities As Related to Financial Statements 13. Inquire of the executive director and CFO regarding the sources of support and revenue of the organization from a subjective as well as an objective standpoint. 14. Review with the independent auditors and the CAE: The adequacy of the organizations internal controls,

Any related significant findings and recommendations

Audit Committee Responsibilities As Related to Financial Statements, Contd.

17. Review with each public accounting firm that performs an audit: All critical accounting policies and practices used by the organization.
All alternative treatments of financial information 18. Review all material written communications between the independent auditors and management, such as any management letter or schedule of unadjusted differences.

Audit Committee Responsibilities As Related to Financial Statements, Contd.

19. Review with management and the independent auditors: annual financial statements and related footnotes independent auditors audit of the financial statements and their report thereon judgments about the quality, not just the acceptability, of the organizations accounting principles as applied in its financial reporting Any significant changes required in the independent auditors audit plan Any serious difficulties or disputes with management

Audit Committee Responsibilities As Related to Financial Statements, Contd. 20. Review with the general counsel and the CAE, legal and regulatory matters that, in the opinion of management, may have a material impact on the financial statements, related organization compliance policies, and programs and reports received from regulators.

Client Expectations

Qualified Staff Minimal Turnover Knowledgeable About Business Flexibility of Audit Schedule Formats More Value Out of Audit Keep Informed on Current Events Training of Client Personnel Effective and Timely Communication

Auditor Expectations

Take Ownership of Financial Statements

Adhere to Deadlines Early Identification and Communication of Accounting/Audit Issues Proactive View of Internal Controls Optimize Audit Process

Responsive to Auditors Concerns and Comments