Auditor Relationships – What you can do to make them as painless as possible Presented by Matthew Lenton, C.P.A. M AYER H OFFMAN M C C ANN P.C Dupont Drive, Suite 200 Irvine, California 92612

Relationship with your Independent Auditors Open communication Trust and confidence Independent Auditors vs. Internal Accountant 2

Being prepared before the audit Have a plan Make a list of everything Consider prior year AJE’s as a part of the year end close process Assign each task to a specific person Establish dates (milestones and deadlines) for each task Follow up 3

Be Prepared for Planning Meeting Go through minutes for the fiscal year Keep a file for “the auditors should know about this” Identify for auditor unusual or difficult transactions recorded during the year and areas where internal control might be weak 4

Being prepared during the audit Client’s audit liaison person should have weekly meetings with client finance personnel that are supporting the audit process Keep Finance Director informed Consider obtaining approval from Finance Director to re- arrange priorities as appropriate Keep auditors informed (they may have an alternative way to satisfy themselves for a particular account balance) 5

Year end entries All year end entries need to be posted before the audit starts Hard to audit a moving target Look over adjustments posted last year by finance Look over adjustments detected by auditor last year Once audit starts, agree to not keep on posting entries unless material (agree on amount) 6

Supporting schedules Need to be prepared by start of audit This is a part of properly maintained accounting records Agree year end balance to detail of what that balance is composed of Proper internal control—what have you done to insure that the year end balance of significant assets and liabilities is composed only of appropriately determined year end amounts 7

Supporting schedules Make sure that the supporting schedules agree with the final balances for significant assets and liabilities 8

Call auditor if not ready If you might not be ready, call the auditor Don’t wait until two days before the audit team is scheduled to start their audit This might be “good news” for the auditor Auditor might be able to accommodate your request Provides opportunity for “cleaner” records Maybe the assigned audit personnel needs more time to wrap up other assignments Key is giving enough notice and being flexible 9

Analysis During the Year Reconciliation of general ledger cash balances Review of significant revenue and expense balances with significant variances (from prior year amounts or from budget) Capital asset records 10

Communication Emphasis of Risk Assessment standards It is a sign of good internal control to know when to call the auditors for help Inform auditors if you didn’t have time to get to something Identify for auditors issues that might warrant special audit consideration You want the auditors (not the press) to help you deal with potential “problem areas” 11

Take Ownership of Financial Statements Perform a meaningful review Don’t need to ascertain make-up of every number But should question and look into amounts that “don’t look right” You know the financial activity of your organization better than the auditors Required by new auditing standards Obtain and review disclosure checklist prepared by auditors (or prepare for them) Understand audit adjustments and GASB 34 entries 12

Take Ownership of Financial Statements Client’s review must be sufficient to detect misstatements that are “more than inconsequential” Obtain and review disclosure checklist prepared by auditors (or prepare for them) Understand audit adjustments and GASB 34 entries “Let go” of insignificant changes 13

Be Communicative Keep the auditors in the loop Call the auditors with questions during year Ask for help with difficult or unusual transactions Identify areas where need training 14

Be Responsive to Variances Detected by Audit Use auditor’s analytical review inquiries to identify potential misstatements (“things that don’t look right”) Read the representation letter that you sign (use as checklist of “things that I should be telling the auditors about” 15

Internal Control Understand that role of auditor’s internal control “feed back” has changed All matters communicated (unless clearly inconsequential) 16

Internal Control Implement appropriate recommendations It’s OK to disagree (but let auditors do their job and make their recommendation) In response explain why recommended changes are not being made (cost vs. benefit, etc.) This is part of the process 17

Internal Control Keep auditors “honest” during discussion “What is the fraud scenario that your recommendation is designed to correct” Alternative controls may be in place 18

Risk Assessment auditing standards Basic principle: client (not auditor) is responsible for establishing proper internal controls Be able to demonstrate strongly supported ethical culture Ethics/fraud policies Known protocol for reporting unethical conduct Monitoring controls Internal risk assessments 19

SAS 114 Communications with those charged with governance (financial reporting oversight): –Audit adjustments (both booked and waived) –Disagreements with management –Difficulties in performing the audit –Major misstatement risks addressed by the audit –Significant estimates inherent in the financial reporting process –Roles and responsibilities of management and auditor 20

SAS 114 –Audit committees are not required –Timing and form of communication depend on the circumstances –Auditor must be able to effectiveness of two way communication –The more serious the issues communicated, the more important to communicate them in person –More routine communications can be done in writing 21

Be aware of upcoming GASB standards GASB 53 — Accounting and Financial Reporting for Derivative Instruments GASB 54 — Fund Balance Reporting and Governmental Fund Type Definitions Proposed GASB Changes Affecting the Inclusion of Component Units in the Reporting Entity (GASB 14) 22

Significant Auditing Issues Recovery Act – Significant impact on OMB Circular A-133 Single Audits –Significant increase in grant funding –High level of reporting requirements –Additional compliance requirements Buy American Provisions –Increased Federal oversight Financial distress –State and local government budget issues and revenue decreases 23