Audit Findings and Effective Responses - GFOASC

WEALTHADVISORY|OUTSOURCING |AUDIT,TAX,ANDCONSULTING

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AuditFindingsandEffectiveResponsesOctober3,2017

©2015CliftonLarsonA

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AboutCliftonLarsonAllen

• Aprofessionalservicesfirmwiththreedistinctbusinesslines– WealthAdvisory– Outsourcing– Audit,Tax,andConsulting

• Morethan5,000employees• Officescoasttocoast

InvestmentadvisoryservicesareofferedthroughCliftonLarsonAllenWealthAdvisors,LLC.

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SpeakerIntroductions

ChristopherJ.Kessler,CPAManager,StateandLocalGovernmentChris has over 9 years of experience with providing auditing and accounting servicesto state and local government entities throughout the country. Chris serves a widerange of governmental clients, and specializes in State governments andmunicipalities and as a result, Chris has managed some of CLA’s largest state andlocal government clients throughout his career.

Credentialsandexperiencerelevanttothistopic:• Frequent speaker and subject matter expert on financial and

single audits for AICPA, GFOA, and AGA• Engagement manager on 3 statewide financial statement

audits and single audits• Engagement manager on multiple municipal government

financial statement audits and single audits• Frequently engaged with Federal Inspector Generals• AICPA Peer Reviewer

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LearningObjectives

• Attheendofthissession,youwillbeableto:– Discusstheelementsofthefindingsandhowauditorsusetheirjudgementtoclassifyandreportfindings.

– Developmanagementresponsestofindingsthatareconciseandeffective.

– Applycontexttofindingstobettercommunicate“thestory”ofthefinding.

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WhatDoWeNeedtoUnderstandaboutAuditFindings?• Thevarioustypesoffindings.• Attitudesandperspectivesformvariousviews.• Theprocessoffindings


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TypesofAuditFindings

• Financialstatementfindings– SASNo.115,CommunicatingInternalControlRelatedMattersIdentifiedinanAudit

– GAO’sGovernmentAuditingStandards(YellowBook)

• Singleauditfindings– Federalgrantprograms– OMB’sUniformGuidance

• Managementlettercomments– Thosechargedwithgovernance– “Othercomment”


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FinancialStatementFindings

• Findingsininternalcontroloffinancialreporting• Background–

– Basedonauditorriskassessmentofmaterialmisstatements.

◊ Drivesthesignificanceofthefinding

– Oftenfoundduringtestofinternalcontroldesignoreffectiveness.

– Requirement:Understandinternalcontroloveraccountbalancesandclassoftransactionswithariskofmaterialmisstatement.


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SingleAuditFindings

• Findingsininternalcontrolovercompliance• Findingsovercompliance

– Noncompliance

• Background–– Basedonauditorriskassessmentofmaterialnoncompliance.

◊ Drivesthesignificanceofthefinding

– Oftenfoundduringtestofinternalcontroldesignoreffectivenesstestingandcompliancetesting

– Requirement:Auditorsarerequiredtotestinternalcontrolsovercompliancetoachievelowcontrolrisk


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FindingThresholdsinSingleAudit

• Internalcontrol– Significantdeficienciesandmaterialweaknesses

• Materialnoncompliance• Knownor likelyquestionedcostsgreaterthan$25,000

• Knownorlikelyfraud• Misrepresentationofstatusofprioryearfindings


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RuleofThumbandFederalExpectation

• Ifnoncompliance,internalcontrolswerenotworkingproperly.– Sousually,ifyouhaveanoncompliancefindingyouwillhaveaninternalcontrolfinding.


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ManagementLetterComments

• Notrequired,butoftendesired• Businessadvice• Itemsthatdonotmeettheclassificationofsignificantdeficiencyormaterialweakness

(i.e.controldeficiency)

• Often,usedtocaptureconversationsaroundlowerlevelissues


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AttitudesandPerspectives

• Auditor’sviews– Duty

• Management'sviews– Gettingbetter(helpful)– Judgement(negativefeelings)

• Federalagencyviews– Monitoringinternalcontrols

• “Political”views– Misunderstood,lossofperspective– Notconcerned?

Who’sLens?

Auditor

Management

FederalAgencyorother

Government

Governance/Political


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Independence

• InFact– Nopersonalinterestandpersonalgain.– Professionalskepticism

• InMind– Itisnotpersonal.– Itisfactbased.

• It’ssomeone’sjobtomakethesejudgments


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TheFindingProcess

Understandingtherulesand

criteria

Notinganexception(makingcomment)

Verificationoffacts

Compositionand

classification

Management’sviewsandcorrectiveaction

Auditor’sfinalreview Reporting

Auditor=BlueManagement=Red


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NotinganExceptionandMakingComment

• Oftenthemostdifficultprocessinanaudit.– Elevationtoappropriatepeople

◊ Managementteam◊ Auditor’steam

– Uncertaintyofclassification withoutadditionalfactfinding– Over-reaction– Impatience withprocess


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FindingClassifications

• Controldeficiencies– “Thoseformanagement”– Significantdeficiencies– Materialweaknesses

• Noncompliance– Material

• “Qualifying”findings– findingoranaccumulationoffindingsthatqualifiesanauditors’opinion.


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MaterialWeakness• Adeficiency,oracombinationofdeficiencies,ininternalcontrolover

financialreporting,suchthatthereisareasonablepossibilitythatamaterialmisstatementoftheentity'sfinancialstatementswillnotbeprevented,ordetected andcorrected,onatimelybasis.Areasonablypossibilityexistswhenthelikelihoodofaneventoccurringiseitherreasonablypossibleorprobablyasdefinedasfollows:– Reasonablypossible. Thechanceofthefutureeventoreventsoccurringismorethan

remotebutlessthanlikely.– Probable. Thefutureeventoreventsarelikelytooccur.

• Ifithappeneditis…– Bothreasonablypossibleandprobable


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SignificantDeficiencies

• Adeficiency,oracombinationofdeficiencies,ininternalcontroloverfinancialreportingthatislessseverethanamaterialweakness yetimportantenoughtomeritattentionbythosechargedwithgovernance.

Controldeficiency Lessthan

remote

Significantdeficiency Morethan

remote

Materialw

eakness Reasonably

possible

Probable

Notrequired Required Required

ReportedtoGovernance


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AuditorJudgement

• Materiality(financialstatementfindings)– Qualitativeandquantitative

• Directandmaterial(singleauditfindings)• Significanceandpervasiveness• History

• Judgementistrumpedbyactualresults– Materialmisstatements– Materialnoncompliance

• Keypoint:Identificationandcorrectioninthesameyeardoesnotavoidfinding.


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Example- Hypothetical

• Thedepartmentidentifiesa$60milliondollarrestatement toaccruedsicktime.– Materialtotheopinionunit– Comptroller’sdepartmentidentifiedinDecemberandmadethe

adjustmentinFebruaryofthefiscalcurrentyear.– Result:Materialweaknessininternalcontroloverfinancialreporting


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Example– Hypothetical2

• ThedepartmentpassesFederalfundingthroughtoseveralothergovernmentalentities(i.esubreceipents).Thedepartment’ssubreceipentmonitoringproceduresdonottimelyreviewthesubrecipent’ssingleauditsuntil5yearsafterthefundsarereimbursed.75%oftheFederalexpendituresaresubrecipentpaymentsfortheprogramtested.– Directandmaterialtothecompliancerequirement– Result:Materialweaknessininternalcontrolandmaterial

noncompliancelikelyopinionmodificationforsubreciepentmonitoring.


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RespondingtoAuditFindings


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WhatifIsay“No”?

• Iftheauditedentityrefusestoprovidecommentsorisunabletoprovidecommentswithinareasonableperiodoftime,theauditorsmayissuethereportwithoutreceivingcommentsfromtheauditedentity.Insuchcases,theauditorsshouldindicateinthereportthattheauditedentitydidnotprovidecomments.(4.39GAGAS)


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IDisagreewiththeFinding• Whentheauditedentity’scommentsareinconsistentorinconflictwith

thefindings,conclusions,orrecommendationsinthedraftreport,orwhenplannedcorrectiveactionsdonotadequatelyaddresstheauditors’recommendations,theauditorsshouldevaluatethevalidityoftheauditedentity’scomments.– Idisagreeisinconsistentorinconflict

• Iftheauditorsdisagreewiththecomments,theyshouldexplaininthereporttheirreasonsfordisagreement.Conversely,theauditorsshouldmodifytheirreportasnecessaryiftheyfindthecommentsvalidandsupportedwithsufficient,appropriateevidence.(4.38GAGAS)– Thisisthemostcommonissuewhenindisagreement.

◊ Baddocumentation,noaudittrail,oraltestimony,etc.


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DisagreementisGenerallyNot Good

• Auditeesandauditorsneedtoworktogethertogetgoodqualityfindingsandhonortheauditprocess.

• Auditorsmustbeskepticalandoperatebasedonevidence.

• Managementneedstomaintainevidencetoprovecomplianceatthepointdecisionsaremade.


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The“Power”ofAgree

• Ownership,stewardship,responsibility• Ifwecannotsay,“Agree”itsignifies–

– Somebodyiswrong,thetwosomebodiesare:◊ Theindependentauditorwhoisoperatingskepticallyandlookingatevidence.

◊ Theauditeewhoisentrustedtooperatetheprogramandadherethemountainsofregulations.

– Auditorsandauditeeswhoarenotreconciled,areaskingforFEDERALATTENTIONANDREVIEW.


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PurposeofaFinding

• Auditfindingsmustbepresentedinsufficientdetailandclarityfortheauditeetoprepareacorrectiveactionplanandtakecorrectiveaction,andforFederalagenciesandpass-throughentitiestoarriveatamanagementdecision.(UG200.516(a)7b)


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ElementsofFinding– SingleAudit• FederalprogramandspecificFederalawardidentification• Criteriaorspecificrequirement• Conditionfound–What?

– Context– How?Howmanyvs.population?• Statementofcause-Why• Possibleassertedeffect–Whydowecare,sowhat?• Questionedcosts• Recommendations• Viewsofresponsibleofficials


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ElementsofFinding– GAGAS• Criteria• Condition• Cause• Possibleassertedeffect• Recommendations• Viewsofresponsibleofficials

• Noquestionedcosts


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Example:Management’sViews• Recommendation: Werecommendthedepartment'smanagement

ensurepoliciesandproceduresareinplacetoensurethatallchangestoeligibilitystatusarepromptlyrecordedinthesysteminordertopreventunallowablepaymentsfrombeingmadeonbehalfofclientswhoarenolongereligiblefortheprogram.Additionally,thedepartmentshouldensureadequatedocumentationisobtainedwhichsupportstheallowabilityofpaymentsandthisdocumentationisretainedintheindividual’scasefile.Finally,thedepartmentshouldensurethatunallowablefederalpaymentsarerecovered.

• Management’sviews: Agreewithfinding.InJanuary2017,wehaveincorporatedandcommunicatedchangestoourpolicyandprocedurestoensureclientfilesareupdatedtimelyandappropriatedocumentationismaintained.Forunallowablepayment,wehavebeguntheprocessofrecoveringpayments.


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CorrectiveActionPlan• Atthecompletionoftheaudit,theauditeemustprepare,inadocumentseparate

fromtheauditor'sfindingsdescribedin§200.516Auditfindings,acorrectiveactionplantoaddresseachauditfindingincludedinthecurrentyearauditor'sreports.

• Thecorrectiveactionplanmustprovide:– thename(s)ofthecontactperson(s)responsibleforcorrectiveaction– thecorrectiveactionplanned– theanticipatedcompletiondate.

• Iftheauditeedoesnotagreewiththeauditfindingsorbelievescorrectiveactionisnotrequired,thenthecorrectiveactionplanmustincludeanexplanationandspecificreasons.(UG200.511(c))


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Management’sViewsandCorrectiveActionPlanned• Shouldbesimilarifnotthesame.• Suggestedcontent–

– Agreewithfinding.– Restatetherecommendationinyourwordsor suggestanotherremedytoensuretheconditionwouldbecorrected.


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TranslatedintoaCorrectiveActionPlan

• Given–Management’sviews: Agreewithfinding.InJanuary2017,wehaveincorporatedandcommunicatedchangestoourpolicyandprocedurestoensureclientfilesareupdatedtimelyandappropriatedocumentationismaintained.Forunallowablepayment,wehavebeguntheprocessofrecoveringpayments.

• CorrectiveActionPlan–

Finding2016-005,LackofEligibilityDocumentationContactPerson: BettyRoss,LeadCaseManagerInJanuary2017,wehaveincorporatedandcommunicatedchangestoourpolicyandprocedurestoensureclientfilesareupdatedtimelyandappropriatedocumentationismaintained.Forunallowablepayment,wehavebeguntheprocessofrecoveringpayments.CompletionDate: April1,2017.


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ManagementDecision

• CorrectiveActionPlan

Finding2016-005,LackofEligibilityDocumentationContactPerson: BettyRoss,LeadCaseManagerInJanuary2017,wehaveincorporatedandcommunicatedchangestoourpolicyandprocedurestoensureclientfilesareupdatedtimelyandappropriatedocumentationismaintained.Forunallowablepayment,wehavebeguntheprocessofrecoveringpayments.CompletionDate: April1,2017.

• Likelyresponsefromgrantingagency?– Lookingforwardtonextyear– Whatisthemessagebeingsent?


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NextYear– FirstThingisFirst

• Auditorsarerequiredtofollow-uponcorrectiveactionsandprioryearfindings.

• Auditorswanttoseeyourmanagementdecisionletters.

• Closesthecycleandrestartstheprocess.


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IntendedTake-Aways

• Findingsareaboutimprovement notjudgement• Auditorshavealotofrulesandexpectations andfindingsarenotfunforthemeither

• Auditorsandauditeesneedtoworktowardagreement onfindings

• Responsesshouldbebriefandshowownershipandresponsibilityforgettingtheinternalcontrolsandcomplianceright


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Questions?

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Thankyou!

ChrisKessler,CPAManagerCliftonLarsonAllenChris.Kessler@CLAconnect.comConnectwithChrisonLinkedIn

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Audit Findings and Effective Responses - GFOASC