In our previous “Audit Preparation Series: How to Prepare for Your Audit” article, we discussed the necessary steps to prepare for your audit and what happens during the audit fieldwork. Now that audit fieldwork is over, we move into the stages of wrapping up the audit process and issuing final reports. This article will focus on what to expect during this stage.
At the end of your audit week, I highly recommend that you sit down with your auditor and have a discussion on fieldwork. How did fieldwork go? Is there anything we (both the auditor and auditee) can improve on to make the process better? Were there any significant issues encountered? How many items are still pending? When do pending items need to be received by the auditor in order to meet deadlines? Other items to follow up on are any confirmations yet to be received (i.e. debt confirmations, accounts receivable confirmations, attorney letters, etc.) If these items are still outstanding, final reports cannot be issued by the auditor.
Once all pending items are available, a timeline of when the draft can be expected should be discussed. It is ideal to work backwards when it comes to deadlines. You should allow yourself an adequate amount of time to review the final reports, and, if need be, schedule any necessary presentations (i.e. board of director meeting). For entities subject to the South Dakota Department of Legislative Audit’s (DLA) review of final reports, you will also need to factor in the time DLA will need to review and approve of any reports. During the review process, items may be encountered or requested to be changed on the final reports. Again, additional time will be needed for the auditor to make these changes. In summary, plan ahead and for adequate time between the end of the audit fieldwork, and the issuance of final reports.
Before a draft of the final reports are received, it is wise to discuss any new or different items which might be presented on the financial statements. It would also be wise to review new disclosure requirements. While in many cases an auditor prepares the financial statements, the financial statements in and of themselves are actually the responsibility of the auditee. If you do not have an understanding of an item presented, it is critical to ask your auditors in order to receive proper education on such items.
Along with the financial statements, additional reports can be issued in conjunction with the audit. The first report is a management letter. Management letters represent communication from auditors to key users of the financials (management, board of directors, etc.) regarding internal control deficiencies encountered in the audit along with the severity of the finding (a material weakness or significant deficiency). Management letters are not issued to outside users and are only for internal use. Organizations who have these letters issued have the option of including a response or corrective action plan, but these items are not included as the letters are simply to inform key individuals of internal control deficiencies found, the cause and effect of the deficiencies and recommendations from the auditors on how to correct the deficiencies.
If you are a governmental organization or subject to a single audit requirement, a form of the management letter discussed above is included in the financial statements and titled as the “Independent Auditor’s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards”. You might hear this referred to as the GAO report. Organizations subject to a single audit will also have an additional letter included in the financial statements titled as the “Independent Auditor’s Report on Compliance for Each Major Program and on Internal Control Over Compliance Required by the Uniform Guidance”. You might hear this referred to as the Uniform Guidance report. The Uniform Guidance report addresses internal control deficiencies and compliance issues encountered specifically in regards to the single audit and major programs being audited. There are a few key points to the GAO letter and the Uniform Guidance report. 1.) These letters are included in the financial statements. 2.) These letters require a response and corrective action plan, written by the organization being audited, to be included in the audit. 3.) These letters lists the party responsible for the findings occurring (this could be the name of a specific member of management). Careful thought must go into addressing these items and written responses will need to be given to the auditor in order for the financial statements to be updated.
If audit reports are subject to board of director meeting approval, also strive to have drafts of audit reports issued to board members in advance so they can ask questions during that meeting. If a management letter, GAO letter, or Uniform Guidance letter is issued in conjunction with your audit, it is also wise for the board of directors to discuss the findings in detail and review any required responses and corrective action plans for approval.
Once the final drafts have been approved, there are a few final requirements before reports can be issued.
- Your auditor will need to go through inquiries regarding any significant changes occurring after year end. If attorney letters were needed to be sent, follow up will need to take place between the auditor and your attorney, to ensure there are no changes. If applicable, the latest board of director minutes will need to be provided to your auditor. If anything significant is encountered, these items may need to be addressed in further audit procedures or as additional disclosures in the final reports.
- A signed and dated representation letter will need to be provided to your auditor.
Of the two aforementioned items, the most confusion is generally on the representation letter. A representation letter is a letter drafted from you to your auditor verifying certain steps have been taken in order for us to have arrived at our audit conclusion. While this letter is technically from you to the auditors, we typically provide a draft of this to you for convenience purposes. Representations listed in this letter range from having provided all necessary information, certifying there were no undisclosed instances of fraud or noncompliance with laws and regulations, and that to the best of your knowledge, there were no significant items not properly accounted for. Along with the audit, is also a copy of the final audited trial balance, list of audit adjustments, list of unadjusted items, and any significant non-audit schedules we prepared for you, such as depreciation schedules. This letter should be carefully reviewed by you and must be both signed and dated by key individuals overseeing the audit in order for final reports to be issued.
After the final representation letter is received from the auditor, final reports can be issued. One important item to note on this: once your auditor has received the signed representation letter, we are under the assumption that no changes or additional adjustments are necessary. Before you sign and return the representation letter, be absolutely positive you are comfortable with the draft copies of reports issued to you. Once an auditor has issued a final report, we can not simply go back. Reissuance of an audit report is not as simple as changing the date and giving you new copies. Our professional standards dictate certain processes be taken in order to ensure previously issued reports are returned and end users are notified as to the reissuance of those reports. New drafts will need to be issued and the approval process, including the signed representation letter, will need to be performed again.
Final signed reports indicate the end of your audit. For organizations receiving federal grant dollars subject to a single audit, please keep in mind the submission of the data collection form to the federal clearinghouse are 30 days after the reports are received.
This is the last article in our audit preparation series. Hopefully you now have a better understanding of what an audit is, what assurance level you are obtaining in your audit, how to prepare for an audit and how to finish the process and receive your final end product- the final reports. We hope you have enjoyed these articles. Please contact our audit team to answer any questions you may have in the audit process.