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0:01
>> Alright. Welcome everyone. The Community Action Partnership has a grant from the Office of Community Services to develop and manage the National Risk Mitigation and Quality Improvement T/TA Center, more simply known as the National Training Center. In addition to developing an online resource center in conjunction with NASCSP, we also create and promote tools and webinars on topics of critical interest to the CSBG network. Audit Essentials is part of our second year of webinars.
0:29
All previous recordings and copies of presentations are available on the T/TA website through the resource center. There is a couple of different ways you can access the T/TA website through the partnership's website, communityactionpartnership.com. And click on National Training Center. Or, nascsp.org, and click on CSBG Clearing House. If you have not already registered and have a username, then there is a short registration process, well worth it to explore the resource bank,
0:57
consultant bank, discussion forum, calendar or to submit a request for T/TA. So, to start off today's webinar, we are going to cover a little bit of technical information. You should be able to hear me out of your computer's speakers. If you have any audio issues, you should be able to restart the audio feed by going to the communicate menu at the top of your screen, and join audio conference. If you have any technical issues, please contact me using the private chat feature
1:24
on the right-side panel. Or, by emailing me at cyiu@communityactionpartnership.com. I will put that in the chat window momentarily. And I do check email periodically during the webinar. If you were to lose your internet connection, you may still call in to the conference using the telephone number in your confirmation email. There are a couple of poll questions that will appear in that right-hand panel, and we appreciate your participation in these.
1:52
If you lose track of any of your features, you can use the tabs across the top to find them again. You may submit questions using the Q and A on the right-side panel. We have an hour and 15 minutes today, to allow time for questions and feedback. And we will stop at a couple of different points in the webinar to address questions that have come in already. So, you are encouraged to put them in whenever it's convenient.
2:16
This session is being recorded and will be posted in the resource bank of the T/TA website, as well as on the partnership's website. The guide referred to in this webinar is already posted as well as the slides from the November 2012 webinar, which is also an introduction to the same toolkit. So, now, to introduce today's speaker. We have Kevin Myren with us today. He is a Certified Public Accountant. He currently serves as the Chief Financial Officer and Vice President of Administration
2:46
at CommonBond Communities, the largest nonprofit provider of affordable housing in the Midwest in St. Paul, Minnesota. He is on the board of quite a number of organizations. And is a great friend of community action. You probably have seen his name in several of our events, as well as with NASDAQ. So, with that we are going to send it over to Mr. Myren to get us started for the day. Kevin. [ Pause ] >> Wonderful. Thank you, for that kind introduction, Cassian [assumed spelling]
3:20
and welcome everyone to Audit Essentials. This is an encore presentation, I believe, of an earlier webinar that we did for Audit Essentials. And basically, this is geared toward board members, but anyone else who might be interested in this topic is certainly encouraged to participate, as well. We did a presentation before the kind of the end of the calendar year. And now we're doing one again after the end of the calendar year.
3:51
As, as we assume a number of people are starting to, to do their audits and get their audits finalized and finished. And this might be a great technical assistance aspect to help board members kind of realize what they have. And what does this big packet of information that gets dumped on their board tables, actually mean for them. So, with that, let's go ahead and begin. The agenda for today, we're really going to try to accomplish three major feats in a very short period of time.
4:24
And I would encourage you to consult with the document that Cassian referred to earlier, that is available on the website through either NSCSP or through Community Action Partnership. It is a document, it's a resource that you can use. It's something that as you're reading through your financial statements that you receive from the auditor, you can actually have it as a companion document on your desktop to, to look through. And use to kind of help explain what's there.
4:52
Accountants are not attorneys. Although, some of them are. And some of them like to pretend to be. I think with some of the language that, that we've used over time and that, that has grown up has become a sort of a language unto itself. And we want to make sure that we make the documents as usable and user friendly for, for you as board members, as possible. So, first of all, we want to talk about what is an audit? And really kind of look at what's the definition of that term.
5:20
What's the term mean? What's my role as a board member? And how can I get the most out of this document? And then, what do all those reports mean? And statements, as well. And hopefully, by the time we get done you will be able to answer these questions. So, first of all, let's dive right in. what is an audit? And audit is a professional opinion. It is not a fact, rather it is a judgment made by a certified public accountant.
5:55
A certified public accountant, or CPA, is a professional charged with developing this type of opinion on behalf of the public's good. And it states that the financial statements are fairly presented. And the key here, and we'll talk about it in a number of points through the conversation this afternoon, is that auditing is not an exact science. Rather it's an art form. And never will the accountant say that the financial statements are exactly correct.
6:27
Rather, they'll say that they are fairly presented, or that they are materially correct. In other words, a number of estimates are used in the preparation of financial statements. And the auditor would never say that it is exactly correct, because they don't look at every single transaction and redo every transaction for the year. But rather, they look at a sample of transactions to make their judgment. And finally, this is all within the broader context of what are referred to as,
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generally accepted accounting principles, or GAAP. And GAAP is a set of rules and definitions, a common set of rules and definitions that all accountants use. So, that the financial statements from a community action agency in Wyoming, will look very similar to a community action agency in the state of New York. The numbers may be different, but the format, definition and terminology should be roughly the same. So, if that's what an audit is, let's look at the flipside of that.
7:30
What is an, what isn't, what an audit is not. And first of all, an audit is most definitely for sure, not a guarantee. As we mentioned before, an audit opinion is just that. It is an opinion of a certain CPA, that the financial statements are materially correct. Following that, is it is not an insurance policy. There is nothing that says in these, the statements that I guarantee as the CPA that this is exactly correct forever and ever and ever. Rather, once again, it is merely an opinion.
8:05
And third, it is not a statement that the agency made good financial decisions. Rather, that the financial statements are truthfully disclosed and valued. It is up to the reader, or the user of those financial statements to determine whether the financial state, whether the financial decisions made by the organization were quote unquote good. Similar to that, it also is not a statement that the agency is in good financial condition.
8:38
The audit report would merely say that the numbers are accurate. It is up to reader or the user to interpret the health and financial condition of the organization that has been audited.
8:51
With that being said, there are really three types of audits. The first audit is a financial statement audit. This is what most of us think of and probably what most people who are not in the nonprofit arena, see when they see audits. If you're an investor, you may see an audit report from General Electric or General Motors. And this is for audits of for profit businesses. And also for some smaller nonprofit organizations.
9:23
A more specialized version is what is referred to as the ''Yellow Book Audits''. These are for nonprofit organizations who receive significant federal and/or state financial resources grant resources. And do not quite hit the single audit threshold. And finally, the single audit, the topic that most of us are most familiar with, that as community action agencies, we typically receive enough federal and/or state funding that requires to have single audit. This is under the auspices of
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the Office of Management and Budget. The OMB circular A133. If you've heard of that, it is the definition and clarification of what makes up a single audit. And really, the Venn diagram here shows that a single audit is everything that would be included in a yellow book audit, and also, in a financial statement audit. So, a single audit is kind of the most involved level of audit that there is.
10:29
So, what is an audit? What are the procedures that are incorporated in an audit? Well, if we break it into its most basic four concepts, the first step in an audit is to plan the engagement. In this phase of the process, the auditor reviews the environment in which the organization operates. It is a requirement of the auditor that they understand, not only auditing, but the general economic environment with which that, in which that organization operates.
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And the general rules of that organization. So, someone who specializes in the audits of retail enterprises may not be qualified to do an audit of a federally funded community action agency. Because they do not fully understand the environment of that type of organization. The second phase is to review the internal controls. In a single audit, as well as the financial statement audit, and a yellow book audit, the first step that the auditor must do, is review the policies and procedures that are
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in place that make up the internal controls of that organization. And we'll talk a little bit more about internal controls in just a minute, in terms of what that is. But the auditor must be able to form a judgment that if the policies and procedures that are done by the organization and are followed as stated; would those procedures meet the requirement of solid internal controls for the organization? And the third part of the audit process is to actually conduct tests.
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This is tests of transactions, this is looking at invoices, reviewing payroll journals, etc. So, this is the phase where the auditor reviews how the organization is actually applying or is operating those controls, that were designed and tested in the second phase of the process. And then, finally, the auditor must conclude and report. In this phase of the engagement, the auditor would summarize all the information that has been accumulated to date in the process.
12:51
And would evaluate the conclusion and be able to try to then base their opinion on conclusions that they were able to make. So, they would weigh the evidence that was collected. So, that's what the auditor's role is in the audit process. You may be saying, ''Geez, what's my role as a board member?'' Well, the board member at this phase, really has three major points of engagement in the audit process. The first is, even before the audit begins, is to select the auditor.
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It is important to point out that the relationship for the audit is between the auditor and the board of governance. The relationship should not include the staff of the organization. The staff of the organization are there to make the audit possible. But the relationship, the legal relationship is actually between the board of the organization and the auditor. Now, many organizations utilize what is called and Audit Committee to have that primary contact with the auditors.
14:06
This may be so that the board, who may not have all of its members have financial expertise, can really utilize and leverage the expertise of the financial expert or experts on the board. And then report back to the full board. Also, it's just a more practical way of having that relationship, instead of having nine or 15 or 12 members talking to the auditors. Having an audit committee of three, four or five people just makes the process a little easier.
14:37
Auditors are typically selected through and RFP, or a request for proposal process. Typically, this RFP process is not based only on cost, but is based on experience and references that, that auditor has with other similar type organizations. And the decision on hiring the auditor, as I've mentioned previously, really should rest with the board or the audit committee.
15:04
The next point that the board member would have interface with the auditors, is during the planning phase of the audit. During the planning phase of the audit, the auditor is required to communicate with the audit committee, or the full board if there is no audit committee, on specific areas of concern. So, it may come to the board members' attention during the year that there is a concern about a particular aspect or control.
15:33
And a particular question on whether that control is functioning as designed. And it is the responsibility of the board or the audit committee to alert the auditor to where that may be. That's a special area of interest or focus. Can change from year to year. Doesn't have to be the same thing. And it's also possible that there are no special areas of interest. A second point that is required communication between the governance board
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or the audit committee and the auditors, is to have a conversation about fraud risk. Fraud is very prevalent in organizations. And previously, auditors did not have to specifically affirmatively look for fraud. Now, auditors are required to specifically form their tests to address the potentiality that fraud is a very real concern in organizations. And should be looked for. Not just noticed if it boinks them on the nose in the process. This is a change from a number of years ago.
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Then the auditor would go off and work with the agency staff and conduct the audit. Do the tests, review the internal controls and arrive at their conclusions. And then they would come back at the conclusion of the audit process, and report to the board or the audit committee, the results of their tests, and what their conclusions are, and how they are going to report their findings for the year. Another piece of the final phase of this audit engagement, is the follow-up stage.
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Assuming that there are findings or finding that the auditor has made, it really is the role of the board to make sure that, that finding get addressed and corrected. So, as an old auditor, I don't, can't even tell you how many times I would report a finding to a board. And the board would nod their head and talk about how tragic that was and how bad that was for the organization. And you'd come back the next year and exactly the same circumstance would, would exist.
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And first of all, of course, that is a problem for staff not addressing it. But it really is a challenge and a problem for the board to not have addressed something that has come up to their attention. So, the board is actively required to be a participant in the audit process. Not to actually go look at checks and pull invoices. But there's clearly a role for the board in the conduct of an audit. And with that, we have our first polling question.
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If we can go ahead and put that first polling question up, that would be great. I would just tell you that the responses to this, we have no way of tracking who's responding to what answer. It's merely an informative inquiry. So, does your organization have an audit committee? Letter A) No we do not. B) Yes we have a separate audit committee and separate, I mean, separate from the board of directors. C) Our finance committee serves as our audit committee. And letter D) I don't know. [ Pause ]
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>> Alright. Thanks everyone. You have about 15 seconds left to try to get an answer in. And then we will be able to display the results to just get a idea of the mix that we have on today's calls. [ Pause ] >> Okay. It looks like the poll is closed. Can we go ahead and see the results of that poll? Just to see how many people have audit committees or have finance committees that serve as audit committees?
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>> We can do so momentarily. [ Pause ] There we are.
19:51
>> Excellent. So, it looks like really, in the folks that are listening today, the majority of our organizations have the finance committee serving the role of an audit committee. Which is totally fine and certainly, if we add up answers B and C, more than the majority have either a separate audit committee or a finance committee that serves in that capacity. So, thank you for that results. For those results. Let' go ahead then, and talk more about the specific audit report.
20:28
So, I am referring now to the document that you probably get at the conclusion of the audit. The auditor either brings it to a board meeting. It' received by you in the mail. And the, it looks pretty voluminous when you, when you get it. And it's huge, right? So, let's just take it, take it apart and see what the, the pieces to that document really are.
20:56
The first piece of that document is an auditor's opinion on the financial statements. This is a, in a letter format. And we'll go through this in a little bit to take a deeper dive into what that looks like.
21:11
The most important part of this document really is the financial statements. And there are three statements that are required for that to be considered a full set of financial statements. The Statement of Financial Position. This is kind of thought of as the balance sheet for those of you who might be more familiar with the for-profit terminology. A Statement of Activities. The statement of activities might be considered an operating statement or an income statement
21:37
or a profit and loss statement, for those of you in, that are not from the nonprofit organizations. And then, the Statement of Cash Flows. These three statements are all required. You can't do two out of three. You can't pick your favorite one and report it. All three statements are required for the financial statements to be considered complete. And the fourth piece that's required for the financial statements to be considered complete, are what are referred to as footnotes.
22:07
The footnotes provide additional in-depth information on various aspects. Not each line item on a financial statement gets a footnote. But there are certain things that the profession has determined are so essential that the user have a deeper knowledge of, that additional information is required, but required in the footnotes.
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The remaining pieces of the audit report are a Schedule of Federal Financial Expenditures. This is required for A133 or single audits. The auditor's report on internal controls and the auditor's report on compliance. These last three reports, you would only see in a single audit or in a yellow book audit.
22:56
So, let's dive into that first bullet that was on there. The auditor's opinion on financial statements. Now, if you are listening to this presentation or this webinar, and have previously listened to it, this will be a change from when we had that original conversation back in November of 2012. For audit reports that have, that are issued in 2013 and beyond, there is a new format to the audit opinion. So, just very briefly, this is the old opinion, the old version of the opinion
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that you would have seen if you received your audit report in December of 2012 and before. We're not going to go into much depth on this. Because this really has changed and the format is significantly different than, than what it is. Than what it is now. So, with that, let's go ahead and look at the new version of this statement.
24:05
This is the new version. And first of all, I would just say that the meaning of the statement is the same. The intent is to clarify to the user and make it more user friendly, what the, what the statement says. So, let's take a look at this. First of all, this, this opinion will be right in the front of the financial statements. And it sits over the top of the financial statements. You should see the phraseology, ''Independent Auditor's Report'' on the top as a heading to this statement.
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Of course, you would not see the words, New Version on that. You will notice that the financial statements are addressed to the Board of Directors of the organization. It is not addressed to staff, management or the Executive Director.
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The first paragraph of this statement gives you the scope of the audit. It lays out what statements and what time frame the financial statements that are being reported on were reviewed from. The first bullet heading is Auditor's Responsibility. This next section, these three paragraphs, really delineate who's responsible for what role. So, in the first paragraph the role of the auditor is laid out. And you will notice in the last sentence of that paragraph, those standards require that I plan
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and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. So, that is the legal verbiage for some of the information that we had just talked about previously. The next paragraph talks about risk assessment. And the crux of this whole paragraph is to basically say that the auditor is not only allowed, but is required to use their judgment to determine which procedures to perform on the engagement.
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It's up to them to come up to determine a reasonableness. And to evaluate those results. And the final sentence in that section is a conclusion, ''I, as the auditor, believe that the audit evidence I obtained is sufficient and appropriate to write a basis for my audit opinions''. The next section is the actual opinion. So, this is where the auditor then, uses the information and the risk assessment, that was described above, to come up with a conclusion or an opinion
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on whether the financial statements are materially correct or not. So, the auditor says, ''In my opinion, not as a matter of fact, but in my opinion, the financial statements referred to above present fairly in all material respects the financial position of the organization for the respective dates. And the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.'' The next piece
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of this opinion is the Report on Supplementary Information. So, this whole paragraph talks about the procedures that were performed on any types of additional schedules, combining schedules, additional information that might be presented in the audit report that is not part of one of those basic three financial statements. There is additional information that's required for single audit. Remember the Schedule of Financial Assistance is not a basic financial statement.
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But it is a statement that is required for a complete single audit. And this talks about the procedures performed on that. The final paragraph is a reference to the Reports Issued in Accordance with Government Auditing Standards. So, this is referring to the report on internal control and compliance. Internal control and compliance opinions are not received on a regular financial statement audit. But they are a required component of a single audit.
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And this provides the additional information on what roles and responsibilities the auditor takes on that. And then, finally, the auditor would sign and date this letter. This letter or opinion provides the auditor's highest level opinion on the financial statements. And is their conclusion on whether the financial statements are considered correct or not. At this point, let's go ahead and do our second polling question.
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And as that question is getting put up, the question is, ''How often does your agency review or change auditors?'' Letter A) I don't remember us ever changing. Letter B) We review, but don't necessarily change our auditor, every three years. Letter C) We review, but don't necessarily change our auditor, every five years. Letter D) We rotate partners, but don't switch firms, every few years. [ Pause ] Once again, your answers to these questions are completely anonymous.
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And no one is going to try to get back to you in terms of trying to figure out who, who said what. [ Pause ] >> Thank you, everyone. You have about ten more seconds with those, to get those answers in. And then we will take a look at the bulk numbers, here. [ Pause ] Alright. Thank you. We are closed. If you were in the process, it's trying to capture anybody that was in the process of entering those in. And here we are. >> Well, excellent.
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So, significant number of people are saying that, that they have reviewed, even if they don't necessarily change auditors every three years. Three years or five years, once again, if we added answers B and C together, we would have a majority of the respondents. And I think that's very good practice. You know, in what's required, if you're a, a registered organization on the stock exchange, is that you rotate partners or change firms every three years.
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That is not a requirement for us, as nonprofits. But I think looking at and reviewing auditors is, is a very good practice. Also at this point, I would like to ask if there's any immediate questions or questions that we should get to before we move on. So, have we received any questions, Cassian? >> I have not seen that many questions coming in. Though you are, of course, encouraged to put them into the Q and A box at any time. Most of what I have seen has been, yes, we are recording this.
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Slides will be posted on the T/TA resource center pretty much as soon as we get done with today's webinar. Recording will go up tomorrow. And the slides for the November iteration of this very similar webinar are already there, if you would like to download those. So, other than that I think we can just keep moving on. >> Excellent. Well, let's keep going then. So, that opinion that we just looked at is what is called an unqualified opinion. It's the highest level of opinion.
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Also, referred to as a 'clean audit opinion'. This basically says that the financial statements are in accordance with generally accepted accounting principles and are materially correct. And that the auditor basically does not have any issues with the information that's presented in the financial statements or the disclosure. That's really kind of the goal that everyone tries to attain. I always think that the term unqualified is a bit confusing.
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Because unqualified, if you're an unqualified for your position, that's a bad thing. But if you're opinion, you audit opinion is unqualified, that is actually a good thing. So, a lot of people just refer to them as clean opinions. Which is not language you'll find in the official legal documents. But it does kind of clearly, more clearly describe kind of what those are. There a number of other types of opinions, however. The first set of opinions are what are referred to as qualified opinions.
33:20
And there are really two subsets of qualified opinions. The first opinion that is qualified is what is referred to as the deviation from GAAP. And you'll remember that GAAP is generally accepted accounting principles. And these are the rules and regulations that all accountants use. So, this basically, this opinion would basically read that the statements are materially presented in all forms with generally accepted accounting principles, with the exception of.
33:52
So, there might be, the depreciation might not be used. So, it would be with the exception of the lack of depreciation being recorded. Or, some, some such item that would be listed. The second type of qualified opinion is a limitation of scope. And this is pretty rare for community action agencies. This means that the auditor did not perform a procedure that would be required for them to provide an opinion. And there are really two basic procedures that are always required.
34:31
And other than that, it really truly is left up to the auditor's professional judgment to get to that correct opinion. Those two required procedures are the confirmation of accounts receivable and the observation of inventory. Well, in the case of community action agencies, inventory is not typically a very large component of our organizations. So, that usually does not cause this type of limitation. And confirmation of accounts receivable is usually pretty,
35:03
simple to do with our large funding sources or to use alternative procedures to, to gain that ability. So, qualifications, although they do exist in audit opinions, are not very common in nonprofit or in our type of nonprofit organizations. A third type of audit opinion is an adverse opinion. And this says that the financial statements are not in accordance with generally accepted accounting principles. So, it is kind of the opposite of a clean or unqualified opinion.
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And this one says that the financial statements do not present fairly the information. And a final type of audit opinion is a disclaimer of opinion. And the disclaimer is the auditor saying they were unable to gather enough information, to either determine whether the opinion was unqualified or qualified. So, they're basically kind of the opinion is, there is no opinion. So, once again, this is, this is very, very, very, very rare in our types of organizations.
36:17
So, given those four main types of financial statement auditor opinions, we were interested to hear from you. So, polling question number three. If you can go ahead and put that up. What was the audit opinion on your last financial statement? And once again, don't worry. This is a completely anonymous poll. No one is tracking the information. Was your opinion unqualified or clean? Was it qualified? Either for a deviation from generally accepted accounting principles or a limitation of scope.
36:50
Was it an adverse opinion? A disclaimer? Or geez, I don't know. [ Pause ] >> Thanks, everyone, for your participation. I do see that there are several answers that are coming in. You have about 15 more seconds to get those answers in. [ Pause ] Alright. Our poll has closed. As usual, we have a couple of stragglers that were in the process of getting their answer in, so we'll try to capture those. And then we will be able to display in a moment. [ Pause ] And here we are. >> Excellent.
37:55
Well, the vast majority of, of people have received unqualified or clean opinions. Which is exactly what I would have expected. So, congratulations to staff and, and boards for those great opinions. I told you that we would be talking a little bit more about internal controls. And I'm sure you've been biting at the chomp to try to get to that part. So, now with no further ado, let's talk about internal controls and what's that, what that means.
38:23
So, first of all, just a definition so that we know what we're talking about when we talk about internal controls. Internal controls are the processes that are in place to ensure the accomplishments of an entity's goals or objectives. Well, that clearly sounds pretty aspirational. And let's take a look at some of the characteristics or some of the specifics behind that. So, this might mean that for a solid system of internal controls, your system would have all six of these criteria.
38:57
Or all six of these characteristics. The first is a way to verify existence. This means that the assets truly existed at a point and time. For example, if you had cash on the financial statement, the auditor is attesting and the internal controls are in place to ensure that you actually had cash. Or buildings. That you actually had buildings. That the buildings were actually there. That they actually existed. This is the most basic level of characteristic. A second is occurrence or cutoff.
39:36
This simply means that the activity that's recorded or reported happened during the fiscal period being reported. It didn't happen before and it didn't happen after. We use accrual accounting for the most part. So, this means, just because we didn't get the invoice by December 31st, if that's the end of our fiscal period, and we got that invoice on January 12th, it still occurred during that period. And we would accrue that transaction back into the fiscal period that's being audited.
40:12
Completeness. Completeness means that the financial statements reflect everything that occurred during that period in time. That it didn't omit half of the accounts payable. That all of the obligations and assets were included in the financial statements that were reviewed and audited. Valuation. Valuation means that items are appropriately valued. This may relate to investments, if you have investments. And if the market value of those investments at December 31st is $10,000 less than you paid
40:50
for them, you would have to value those assets at that market value. Not what you paid for them. Or not the higher number. Another major area for valuation is if your organization has significant accounts receivable or pledges receivable, for capital campaigns or the like. You have to offset the actual amount of the receivable that may exist by evaluation allowance. So, that the amount, that the net amount that's reflected on the financial statements is what you actually anticipate receiving.
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Not what you wish you could get. Number five. Rights and Obligations. This simply means that the agency owns the assets that it's listing on its financial statements. And it has an obligation for the liabilities. And finally, the sixth and final characteristic is Presentation and Disclosure. This means that for items requiring additional disclosure, for example, in the footnotes to the financial statements, that those disclosures are actually presented, and that they are accurate.
42:00
So, let's look at some examples, some practical examples of some basic internal controls. This list is not meant to be all inclusive. But is meant to be representative of some basic controls. One set of controls is referred to as segregation of duties. Simply put, this means that more than one set of eyes sees each and every transaction. This would mean that you have systems in place, basic internal controls in place,
42:30
where one person couldn't write a check to himself or herself and cash that check. Of course, logically, that would just mean that you would have no control over what happened. And someone could basically access all of the assets of the organization.
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Second example is authorization of transactions. This means that the appropriate person has the ability and the responsibility to approve the appropriate transactions. For example, you would not have a weatherization director approve the transactions of a CSBG department. You would have an appropriate person reviewing those transactions.
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Records retention. This means that the documents that support the transaction are maintained. A simple example would be that invoices that caused checks to be written are actually retained. And those invoices relate back to the checks that were written. Supervision. This control requires that knowledgeable persons oversee policies and procedures to which they have knowledge. For example, you may have a CPA running your finance department.
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A final example of a basic control is physical custody of assets. This means that the organization protects the assets of the organization from theft or loss. So, this may mean that you don't have $100,000 in cash sitting in the upper left-hand desk drawer of the bookkeeper. But, it also means that the buildings of the organization have insurance and are protected, as well.
44:33
So, the next opinion that we're looking at now, that's highlighted in green on your screen, is the independent auditor's report on internal control over financial reporting and on compliance and other matters based on audit of financial statements performed in accordance with government auditing standards. Wow. That is certainly a mouthful. You'd think that auditors are given some sort of premium for the number of words that they can put down on the financial statements, right?
45:02
This is not a part of the basic financial statements. Rather, this is a report that is required for a single audit. This is the opinion of the auditor on the overall organization for internal controls and compliance. So, let's look at this, section by section. Shall we? Once again, this document is addressed to the Board of Directors, just like the audit opinion was. The first paragraph in this document says that these procedures were done as part of a audit,
45:41
and were not done as a review of internal controls or compliance.
45:49
The next section breaks out the performance procedures done on the internal controls. And please note, this is internal controls over financial reporting, not over internal controls in its completeness. If you were a for-profit entity, subject to SEC rules and the Sarbanes-Oxley requirements, your 404 Section review on internal controls, would be much more inclusive than just the internal controls over financial reporting.
46:22
So, we cannot say that we are using the same procedures as a public company for review. This first paragraph, or the scope paragraph, says and discloses that this opinion on internal controls was done as part of an audit, and it is not, is not, an opinion on internal controls overall. The next paragraph defines what a deficiency is. And the final paragraph in this section is the opinion. And note that this opinion is what is referred to as negative assurance.
47:01
In other words, the auditor is saying, ''As part of our audit procedures we didn't notice anything that came to our attention that would be defined as deficiency'', from paragraph two, ''over the internal control over financial reporting.'' They are not giving an opinion on internal control overall. The next section of this opinion talks about compliance. And once again, this is presented as a negative assurance, saying that there were not things
47:34
that were disclosed that, that came up in the audit of the financial statements, that was a matter of compliance finding. If there were, those would be described here or referenced to where they were described. And in the final section of this, is just a restrictive use paragraph, so that this does not get circulated widely.
48:02
The last opinion that's presented in the financial statement for an A133 audit, is the independent auditor's report on compliance with requirements that could have a direct and material effect on each major program and internal control over compliance in accordance with OMB circular A133. Once again, a lot of words. The previous statement talked about compliance and internal control for the organization as a whole. The difference between that opinion and this opinion is,
48:35
that this opinion is simply limited to just the major programs. And remember major programs are the things that are decided by the auditor as having significant impact and are in accordance with those A133 requirements. Those programs can change from year to year. And there's a complicated method for determining which programs are considered major programs in any one particular year. And we're not going to go into that today. Again, this opinion is addressed to the Board.
49:10
The first section of this paragraph talks about compliance instead of internal controls. That first paragraph is simply the scope paragraph. The next paragraph talks about the procedures that are applied. And the opinion on compliance is presented in that third section. The difference here, is that this opinion is presented as positive assurance on compliance over major programs. So, instead of being negative assurance, it is rather, positive assurance.
49:46
Internal controls over compliance are then, described. The first paragraph in this section is the scope. Next paragraph defines deficiency. And that final paragraph in this section talks about the conclusion. And once again, the opinion. And this is given in negative assurance. And then, to conclude it we have the restrictive distribution and signatures. At this point I would like to open it back up for questions. If there are any questions at this point. >> Thanks.
50:21
As a reminder, you can put questions into the Q and A box at any time. And we do have one that has come in. What role should the board play if an audit opinion came as a disclaimer? Whose role is it to make sure that the audit firm gathers sufficient data to get the opinion? >> This is an absolutely awesome question. So, thank you, very much, for the question. The requirement or the burden to get an audit is the agency's.
50:55
So, a number of times, I have heard, when I was an auditor, the board saying, ''Well, that's not really our responsibility. That's just your responsibility as the auditor.'' And in reality, that is simply not the case. The person that has, the organization that has the relationship with the funding source, is not the auditor. It is rather, that organization or the community action agency. It is the responsibility of the community action agency and therefore, you as the board,
51:27
to make sure that you satisfy the requirements of that funding source. And that funding source typically requires you to receive an audit. So, the agency, the CAP agency, would have the responsibility of overseeing the deliverable from that auditor, which is the audit report. If the auditor issues a disclaimer of opinion, in my, my personal opinion, probably means that, that auditor was not pushed very hard. Because I just don't think that there's any way you can reach no conclusion.
52:03
Either the financial statements are or are not in accordance with generally accepted accounting principles. So, I would think that the board should first push hard on that particular auditor, and potentially not accept that audit opinion. Or, if that is the only audit opinion that, that auditor will give, they may need to go to a second auditor, to actually obtain a, a more thorough opinion. Very good question. Thank you, very much. Not seeing. >> Alright.
52:38
That is the only one we've seen in right now. So, I said put them in whenever you think of them. And we will keep moving along. >> Excellent. And there'll be another chance at the end certainly for any other questions. So, those are the basic opinions that are in the financial statements. I thought we'd spend just a very few seconds, minutes rather, just overviewing what the financial statements are that are presented.
52:59
And as I mentioned, there are three basic financial statements that are presented. The first is the Statement of Financial Position. This is a balance sheet, if you're in the for-profit world. It gives you a snapshot of the financial condition of the organization at a point in time. In our example, we're just going to say December 31st of 2012. The basic formula that's presented on a, a statement of financial position is assets minus liabilities equal net assets.
53:31
We don't have owner's equity or retained earnings in a not for profit organization. Because there's no stock. It is rather net assets. There are three main components of this. Assets. These are the things that are owned by the organization. These might be cash, grants receivable, accounts receivable or equipment. The next major category is Liabilities. These are things that are owed by the organization. They may be owed to employees or they may be owed to vendors.
54:04
And they would include such labels as accounts payable, long-term debt, short-term debt, lines of credit or accrued expenses. The final category is Net Assets. And net assets is the difference between asset and liabilities. But it is divided into three basic pieces. Net assets, or the equity in the organization, may be permanently restricted. Permanently restricted is not something that all community action agencies have.
54:35
For organizations that have an endowment, these are gifts that have been donated to the organization and given by a donor with the restriction that they can, that only the earnings can be used and the corpus can never be touched. The second category is temporarily restricted. These are items, resources rather, that have been donated by donors, but have outside restrictions. And then finally, unrestricted. This is basically the net assets that do not meet either of the two previous definitions.
55:14
This is the operating resources of the organization.
55:20
Let's look at a very brief example. In this case, Twin Cities Community Action Programs. And I will just tell you that this is not, there is no such actual organization as Twin Cities Community Agency. In this example, you will see first we have assets. Second major category, then, is liabilities and net assets. And you will notice that the total assets equal the total liabilities and net assets. That's where the terminology balance sheet comes from.
55:57
On this statement, and not every organization will have all of these categories, but there is a major heading for current assets. These are items that are owned by the organization, that either are cash or can be converted into cash within one year. Long term receivables. Or other financial assets. And then, land. Buildings and equipment and notice the less accumulated depreciation. Those items in this example all total $5,031,300. Those are offset by the liabilities.
56:34
And once again, we see the liabilities split into current and long-term. In this example, we have current liabilities, liabilities that are owed now or within one year. And then, long-term liabilities which include deferred loans and long-term debt. The difference between these two items generates net assets. Net assets in this case are only unrestricted. We don't have any of the other categories. [ Pause ] So, as a board member, what questions might you be able to answer from looking
57:11
at a statement of financial position? Well, one question might be, ''Is there adequate cash in the organization?'' Cash is king, of course. And you, as a board member, might want to know how many days of operating activity are left in cash. Second, how many months are in grants receivable? This is an indicator of how quick is the organization getting reimbursement on its grants. The other side of that is how old are accounts payable?
57:42
If accounts payable continue to grow and get bigger and bigger, this means that vendors are not getting paid. And with your position in your communities, is that okay? A fourth question. Are we paying employees timely? This is a big deal. If our employees are the ones that produce the results of our organization, and we're not paying them timely, that can cause problems. Fifth, are we paying our payroll taxes timely? This can actually be a board liability issue,
58:13
if our organizations are not appropriately paying their payroll taxes on time. And finally, is our unrestricted net assets large enough? Now, of course, this is a value question. And it's hard to tell. But the general rule of thumb is it would be nice to have ten to 25% of your annual expenditures in unrestricted net assets. The next major statement is the Statement of Activities, or the income statement. The operating statement.
58:43
This answers the basic question, ''How did we do this past year?'' This presents the operating results. The basic formula for this statement is, revenues minus expenses, give is our change in net assets, or our surplus or our profit, if you will. Revenues are the income that's earned. Expenses are the costs incurred. And net surplus or change in net assets, is the difference between those two.
59:11
An example of this statement for Twin Cities Community Action. You can see revenue here at the top. Followed by expenses. And you will notice that for nonprofit organizations, we break our expenses into programs, expenses, management in general. And then, if we have them, we would also have a category for fundraising expenses. This then, produces a net increase, or decrease in net assets. We add that to our net assets at the beginning of the year
59:49
to get us what our net assets at the end of the year are. Some of the basic questions that we might be able to answer from this statement. First, ''Is our grant revenue expanding or contracting? Is our organization getting bigger or is it getting smaller?'' Now of course, with the expiration of the ARRA funding, most of our organizations are probably getting smaller than they were a year ago. Second question. Do we have adequate revenue that is unrestricted?
1:00:21
So, you will notice from the previous statement, we had columns for the permanently restricted, temporarily restricted and unrestricted columns. If we don't have any unrestricted revenue or net resources or net assets, how can we cover any costs that are above those grant activities? Third. How much did we spend on management in general? We need to make sure that we control the amount of money that we are spending on our administrative structure.
1:00:52
If we have too much and have too big of a management structure, we will not be able to cover these costs. Because many grants have limitations on how much administrative costs. And finally, a basic question. Are we operating in the black or in the red?
1:01:10
The third and final financial statement, is the Statement of Cash Flows. This tells us the ins and outs of cash. This statement is not on the accrual basis of, of accounting. And rather, this statement just tells us the cold hard cash that came in during the year. This statement is divided into three major components. Net cash provided by operations, by investing and by financing. If we look at this statement, you will find those three components
1:01:44
where the orange arrows are on your screen, right now. And really, it's not so much the detail that's important here, as it is those subtotals. In other words, if we have a positive net cash provided by operating activities, it means that we're generating cash by conducting our operations. Having a negative for investing activities means that we're actually putting money back into our organization. We're investing in our organization, and can be considered a good thing.
1:02:22
And then, financing activities. If we're putting money back into our organization, we either have to generate it from the inside, which is our operating activities, or generate it from the outside, which might be debt.
1:02:38
An item, a report that is important, but is, and is part of the audit process, but is not found in the audit document or the financial statements, is the communication to those charged with governance. As a part of any audit, you as a board member, should receive a letter from the auditor. Typically, the auditors will prepare this letter and stick it inside the financial statements. Even though it's not bound inside the financial statements.
1:03:07
This is a letter to you as the board member, from the auditor. And it says, first of all, that there are some basic questions that get answered as doing part of an audit. Let's look at those. The first section is significant audit findings. If the auditor had significant findings, those findings would be disclosed in this section. The first paragraph of this statement says that management is responsible for the appropriate definition of accounting policies.
1:03:41
The second paragraph says that accounting uses estimates to prepare financial statements. This paragraph describes what those estimates are. And in this case, it's the allowance for promises to give, depreciation lives, valuation of donated materials and the allocation of expenses by function. The final sentence of this paragraph says, that the financial statements disclosure are neutral, consistent and clear.
1:04:11
If something was, needed to be brought to your attention, it would be delineated in this area. The next section on this report is difficulties encountered in performing the audit. If the auditor was unable to get receipts or invoices, didn't believe that the inquiries were getting answered truthfully, they would have to disclose that to you, on the board. And you would then, have an additional point of information about your organization's staff. Corrected or uncorrected misstatements.
1:04:47
If there were errors noted in the financial statements, they would be listed here. Disagreements with management. If the auditors disagreed with something that management had to say, they would list that here. Management representation. Management signs a letter that is to the auditors, basically saying that they provided them all the information truthfully. If there were consultations with other accountants, that would need to be described. The supplementary information is described.
1:05:20
And then, other audit findings or issues would also need to be described to the board members.
1:05:28
Another piece in most audits is a Schedule of Findings and Questioned Costs that summarize, I always think of this as giving kind of the executive summary of the audit, financial statements or audit, audited financial statements to the board. And this just provided a summary level, as well as the findings and questioned costs for the year. And then, this is a reference to the resource that we were talking about. The printed document can be found at this reference point.
1:06:03
And with that I would go ahead and open it up for questions. If there are any, if there are any final questions. >> Well, we appear to have a fairly, shy bunch today. Which is not usual with community action. But we will give people a moment to get any of those last-minute questions in. If, for some reason it comes to you in the middle of the night, you can no longer remember your questions, anything like that, do go ahead and email those to us.
1:06:34
And we will get them into the right place or you can put them on the forum of the T/TA resource center.
1:06:44
We will be recording this, like I said. And we will have the presentation. So, you will be able to find that later. As well as the guide book itself, that is referred to, here. And there will be an evaluation that will pop up at the end of the webinar. We do appreciate your participation in that. That gives you an opportunity to one, be able to tell us what you thought about today's webinar, the materials and that kind of thing. As well as give us suggestions for what else you would like to see.
1:07:13
Are there any follow-ups needed? Are there other topics that the resource center or the National Training Center should be addressing? Alright. I am not seeing other questions, at the moment. Like I said, you are welcome to continue to send those in after the webinar, as well. So, with that, any closing words?
1:07:37
>> Nothing from here. So, thank you, everyone for your attention. And please make use of the resources that are available. Both this resource and the other resources that are on the website. There's some great resources out there, for you. >> Alright. Well, thank you, everyone.
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