Best Practices Show
Governments should craft and effective strategy for minimizing any potential negative effect resulting from the communication of internal control related matters identified in an audit.The Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) has issued guidance on communicating matters related to a governments internal control over financial reporting identified in an audit of financial statements. This guidance is applicable whenever an auditor expresses or disclaims an opinion on financial statements. These standards require auditors to report any material weaknesses [1] or significant deficiencies [2] identified in conjunction with the financial statement audit. This guidance indicates that it is not sufficient that the independent auditor determine that the financial statements under audit are, in fact, fairly presented in accordance with generally accepted accounting principles (GAAP). Generally accepted auditing standards (GAAS) also require that the financial statements be the product of a financial reporting system that offers reasonable assurance that management is able to produce financial statements that comply with GAAP. Independent auditors often assist clients with the preparation of their financial statements. Such assistance poses no problem if it is provided merely as a matter of convenience (i.e., management could produce the financial statements, but chooses not to). However, such assistance will constitute either a significant deficiency or a material weakness if it is provided as a matter of necessity rather than of convenience (i.e., management does not have the skills needed to prepare GAAP financial statements). If management does not possess the skills to prepare GAAP financial statements on its own, the government could always choose to engage the services of someone other than the independent auditor to provide the needed assistance. Because such contractors would work for management (unlike the independent auditors) they would qualify as part of the governments financial reporting system, thus avoiding an automatic finding of a significant deficiency or material weakness. The guidance also makes it clear that material auditor-identified audit adjustments typically will require that a significant deficiency or material weakness be reported. GFOA recommends that governments take into account the following considerations in crafting a strategy [3] for minimizing any potential negative effect resulting from the communication of internal control related matters identified in an audit.
Special care also should be taken to ensure the timely and effective implementation of new accounting standards.[7] Accordingly, ongoing training should be provided to ensure that appropriate staff remains current on the authoritative guidance as it evolves.[8] Every attempt should be made to ensure that such training is provided consistently even when the government experiences fiscal stress or tough economic times.
GFOA does not recommend that governments engage the services of a second accounting firm to assist in preparing its financial statements solely to avoid having a significant deficiency or material weakness reported. It is by no means assured that the benefits of engaging a second firm would outweigh the costs. Moreover, a significant deficiency or material weakness might still be reported as the result of some other weakness in the financial reporting system (e.g., auditor-discovered audit adjustment), which could defeat the purpose of hiring the second firm. If management decides that the costs of remedying a significant deficiency or material weakness in its financial reporting system cannot be justified by the benefits to be obtained, it should take care to alert the governing body as early as possible to explain its conclusion. In that case, governments subject to a Single Audit should explore the possibility of obtaining a waiver pursuant to paragraph 530c of U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, so as not to jeopardize the auditees low risk status. Notes: 1 A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility (the likelihood of the event is either reasonably possible or probable as those terms are defined in the Financial Accounting Standards Board Accounting Standards Codification glossary) that a material misstatement of the governments financial statements will not be prevented, or detected and corrected on a timely basis. 2 A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 3 While this strategy will help the government to avoid, limit, or eliminate findings related to its internal control over financial reporting, ultimately, it is the independent auditors responsibility to make the judgment about what findings to report. 4 See GFOA's Best Practice, Policies and Procedures Documentation, 2007. 5 The guidance offered in this report is discussed and applied specifically to local governments in the GFOA publication Evaluating Internal Controls: A Local Manager's Guide. 6 See GFOA's Best Practice, Timely Financial Reporting, 2008. 7 See GFOA's Best Practice, Timely Financial Reporting, 2008. 8 While governments are encouraged to document their considerations in determining whether the person responsible for the accounting and reporting function has the knowledge and skills to appropriately apply generally accepted accounting principles in that capacity, ultimately, it is the responsibility of the independent auditor to make that judgment about the governments management. This best practice was previously titled Practical Steps to Avoid, Limit, of Eliminate Internal Control Deficiencies Identified in an Audit.
How do you know if a deficiency is significant?An example of a significant deficiency, as stated by the SEC, would be if a company's accounting function reviews significant or unusual modifications to the sales contract terms but does not review changes in the standard shipping terms.
How do you evaluate control deficiencies?How Do You Evaluate Internal Controls Deficiencies?. Assess the Control Environment. ... . Evaluate Risk Assessment. ... . Investigate Control Activities. ... . Examine Information and Communication Systems. ... . Analyze Monitoring Activities. ... . Index Existing Controls. ... . Understand which Controls Are Relevant to the Audit.. What does significantly deficient mean?Copy. Significantly deficient means to be unsafe or not functioning as designed or intended.
How do you identify internal control deficiency?Here are the steps to help you identify internal control weaknesses:. Catalog internal control procedures.. Conduct a risk assessment.. Conduct an internal audit.. Train and educate staff.. Conduct regular inspections.. Look at the feedback from customers and stakeholders.. Examine departmental reports.. |