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Financial Audit Workshop

Financial Audit Workshop. May 2019. Today’s plan. 9:00-9:05 Introduction and Overall Review. 9:06 – 9:31 Preliminary Audit Procedures. 9:32 – 10:00 Field Work. 10:01 – 10:25 Statements, Letters and Wrap-Up. 10:26 – 11:00 Question and Answer Discussion. Edward H. Rueter – CPA.

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Financial Audit Workshop

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  1. Financial Audit Workshop May 2019

  2. Today’s plan 9:00-9:05 Introduction and Overall Review 9:06 – 9:31 Preliminary Audit Procedures 9:32 – 10:00 Field Work 10:01 – 10:25 Statements, Letters and Wrap-Up 10:26 – 11:00 Question and Answer Discussion

  3. Edward H. Rueter – CPA -Client serving professional for CliftonLarsonAllen -Specialized in Non-Profits (niche Schools) -Member of the Wisconsin School Choice Auditor Advisory Committee -Member of the Choice Schools Quality Committee -Masters in Accounting -Licensed and Former High School Teacher

  4. Lori Saqer -Director of Business Operations of Messmer Catholic Schools Inc. -Member of Choice Schools Quality Committee -Former School and School Choice auditor

  5. Jason Wrasse, CPA Partner at Reilly Penner & Benton LLPHas worked with Choice Schools since 2000

  6. Preliminary Work

  7. Preparation You’ve been prepping for the audit all year by managing and recording the finances of the school and having a system to do so One of the first items that your auditor will request will be a completed internal control questionnaire See Item #1

  8. Internal Control Document • Designed to give your auditor an understanding of the system used at your school to make financial decisions, budget, safeguard assets that include cash, communicate to employees the expectations that the school has for them surrounding tracking of finances, payroll and the accounting software used to track all school financial activity

  9. Internal Controls • The auditor will be gaining an understanding of your school’s system to maintain and track the finances and then objectively testing the system to determine if the system is designed and working to provide financial statements and associated disclosures that provide a credible picture of the school’s financial health.

  10. Provided by Client List (PBC) • The auditor will provide extensive lists that tell you what to provide to them both before they arrive and when they arrive • See Item #2 • The auditor will also ask for items during fieldwork based upon their analysis of what they have seen as they begin their work

  11. Confirmations • Bank account balances (Item #3) • Investment account balances (Item #4) • Debt balances (Item #5) • Accounts receivable balances • Pledge receivable balances (Item #6) • Contribution amounts (Item #6)

  12. Permanent File • Permanent File Items-requested during the first year of audit and anytime a change occurs

  13. Permanent File Items • IRS determination letter • Debt/line of credit agreements • Leases • Bylaw amendments • Accounting Policies and Procedures, including the eligible expense policy, capitalization policy and the electronic funds transfer policy

  14. Basics • Plan ample comfortable space for the auditors to work • WiFi access • Plan your time to be available during the preliminary audit work to answer questions and/or work through any questions • May be on site for 2-3 days (sometimes this is done at final fieldwork)

  15. Ask Away • Don’t be afraid to ask questions on the plans and items needed at final fieldwork

  16. Fieldwork

  17. My goal is to change your thoughts that this is your auditor! You’re all wrong!

  18. To this – How can I help???

  19. The basics • Your audit will be June 30, 2019 • Your auditor’s focus will be on determining if your balances properly represent that date in time

  20. The basics • To get that balance correct your auditor will look at the whole year and possibly earlier to ensure that balance is right

  21. Fieldwork • You may get a separate PBC list for this time period • It will occur between July and October • I would expect the team to be on site about a week • There will be around 2 – 3 individuals on site from the audit team

  22. What the auditors will need • Wi-Fi access • A room to work in • Copies of certain documents (most firms prefer PDF since they are paperless)

  23. Materiality – What value is important • Calculated off the size of your revenues or assets • Used to evaluate a balance either as an individual item or as a group of accounts

  24. What is material to you? I consider $100 material I consider anything under 5$ Immaterial or doesn’t matter

  25. What about a billionaire? A Billionaire might consider $10,000 to be material While to a Billionaire, $1000 might be immaterial

  26. Audits are based on risk • Higher the risk the more testing or focus will be made • The Firm will assess what are your higher risk areas • The Firm will assess your controls

  27. Controls • Typically schools have Segregation of Duties issues • They lack levels of review and staff to break up processes • This increases the risk for the school and is often an area your auditor will examine and inquire on

  28. Auditors test controls by doing walkthroughs • Walkthroughs are going through the process to ensure controls are good and working properly • Used to Identify risks

  29. Walkthrough example! Is there a segregation of duties issue in the following situation?

  30. Roles Bob is the Principal of the School Ed is the hard working and smart bookkeeper Beth is the new English teacher who was just hired

  31. Bob informs Ed, the bookkeeper, that the school has hired a new employee Ed enters the hours and rate in the payroll system Bob provides the contract with pay rate to bookkeeper (Ed) for the new employee Ed prints off a paper copy of the payroll and shows it to Bob Ed submits the payroll for payment from payroll company Ed adds the new staff and rate to the payroll New Employee receives a direct deposit Bob provides the time card for new employee to Ed

  32. How are our segregation of duties?

  33. What can Ed all do? Can he add or remove people from Payroll? Does Ed submit payroll for payment? Does Ed have to follow the contract? What about Bob’s review? Does Bob’s Paper copy review Matter?

  34. Ed could… Add someone to the payroll after Bob’s review Change his rate of pay after Bob’s review Even with Bob’s review he may not even notice an extra employee or rate change

  35. Some typical high risk areas for a school Cash Contributions Debt Payroll PPE Related Party Transactions

  36. High risk areas • To gain comfort with the balances, firms will test or confirm balances to determine the value as of 6/30/XX • Typically confirmed • Cash • Debt • Pledges

  37. High risk areas – Sampling • Typically tested through sampling • Contributions • Payables • Journal Entries • Payroll • Property, Plant and Equipment Additions or Removals • Release of Donor Restricted Net Assets

  38. Analytics will be performed on lower risk areas • Comparing balances of accounts year over year • For example • Office Supplies account (relatively low risk)

  39. Accrual vs Cash accounting • Cash = you record when you pay or are paid • Accrual = Based on when the obligation occurs DPI requires your statements are Accrual Based

  40. Example • You order and pay $1200 by ACH for a full year subscription for IT service on June 28th that starts on July 1st

  41. Cash accounting What do you record on June 28th? • Debit to Subscription Expense $1,200 $1,200 • Credit to Cash What do you record on July 1st? Nothing

  42. Accrual accounting – based on when the obligation to pay for the service is incurred When would that full $1200 of expense be recorded? A. June 28th B. July 1st C. Neither of the above

  43. Correct answer? The expense would be recorded at a rate of $100 a month over the 12 months of the subscription. Fully recorded at the end of June 2020

  44. Accrual accounting entries What do you record on June 28th? • Debit Prepaid $1,200 $1,200 • Credit to Cash What do you record on July 30th? $100 • Debit IT Expense • Credit to Prepaid $100

  45. Firms will test subsequent payments to check accruals • Firms will test various payments that you have made after year-end to ensure accruals are accurate and properly record expenses to the right year

  46. IT testing • Firms will test IT access • IT rights • IT removals of termed employees

  47. Legal issues • Review legal invoices to ensure no legal obligations due to law suits Leases • They will look into leases to track amounts owned and check on their design

  48. If you have assets with donor restrictions • The firm will test the release (use) of those assets to ensure they meet donor requirements • Typically done through sampling

  49. Things you can control • Staff turnover – you can discuss with the audit team leader if you like or don’t like a specific auditor (low turnover in audit teams makes your life easier) • Their on site hours – control the time spent on site (remember though the more time you give them the quicker they can be done and your world returned to normal)

  50. Statements, Letters and Wrap-Up

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