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©2012 CliftonLarsonAllen LLP Educating Governance on the Audit Jackie Eckman, CPA Partner CliftonLarsonAllen LLP
©2012 CliftonLarsonAllen LLP 2 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
©2012 CliftonLarsonAllen LLP 3 The Role of Governance Establish the Strategic Direction and Mission of your Organization through Policy Making
©2012 CliftonLarsonAllen LLP 4 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
©2012 CliftonLarsonAllen LLP 5 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
©2012 CliftonLarsonAllen LLP 6 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
©2012 CliftonLarsonAllen LLP 7 What is the Reporting Package? So governance has their reporting package, now what?
©2012 CliftonLarsonAllen LLP 8 Outline for a Board Presentation I Audit Process. II Highlight Successes. III Findings and Recommendations. IV Benchmarking and Analysis.
©2012 CliftonLarsonAllen LLP 9 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.
©2012 CliftonLarsonAllen LLP 10 What is the result of an audit? Reasonable, but not absolute, assurance. An opinion.Findings and recommendations.
©2012 CliftonLarsonAllen LLP 11 Why is an audit required? Grant requirements. Single Audits Federal laws and regulations.Debt covenants. Charter School Board Requirements State laws and regulations.
©2012 CliftonLarsonAllen LLP 12 Why choose to have an audit? Donors Board of Directors Members/Constituents Fiduciary responsibility to stakeholders. Honest feedback. Independent examination.
©2012 CliftonLarsonAllen LLP 13 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.
©2012 CliftonLarsonAllen LLP 14 Common Risk Factors for Account Balances Balance. Frequency of transactions. Manual or automated. Frequency of reconciliation. Personnel and oversight.
©2012 CliftonLarsonAllen LLP 15 Common Risk Factors for Federal Programs Size. Audited in past 2 years. Prior year findings. ARRA funding. Changes in processes or personnel.
©2012 CliftonLarsonAllen LLP 16 Audit Process Engage with an audit firm.Audit planning by firm. Audit preparation by management.
©2012 CliftonLarsonAllen LLP 17 Audit Process Audit communication with governance and management. Audit examination.Communication of results.
©2012 CliftonLarsonAllen LLP 18 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.
©2012 CliftonLarsonAllen LLP 19 Audit Findings Deficiency Significant Deficiency Material Weakness
©2012 CliftonLarsonAllen LLP 20 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
©2012 CliftonLarsonAllen LLP 21 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
©2012 CliftonLarsonAllen LLP 22 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
©2012 CliftonLarsonAllen LLP 23 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
©2012 CliftonLarsonAllen LLP 24 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
©2012 CliftonLarsonAllen LLP 25 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
©2012 CliftonLarsonAllen LLP 26 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.”
©2012 CliftonLarsonAllen LLP 27 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.”
©2012 CliftonLarsonAllen LLP 28 Benchmarking and Analysis Benchmarking is using measurements for comparison and judgment. Adds value by adding an emphasis.Provides focus.
©2012 CliftonLarsonAllen LLP 29 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:
©2012 CliftonLarsonAllen LLP 30 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 age Are we collecting our receivables?
©2012 CliftonLarsonAllen LLP 31 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?
©2012 CliftonLarsonAllen LLP 32 Common Ratios:
©2012 CliftonLarsonAllen LLP 33 Brainstorming
©2012 CliftonLarsonAllen LLP 34 Educating Governance Impact and Value Audit Process Highlight Success FindingsBenchmarking
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