Module 5

The Role of External and

Internal Auditors

Convery 2013 1

• Distinguish among internal, external, federal auditors

• Describe types of audits • Determine when an external audit by a CPA is

required• Describe the benefits of an audit by an

external auditor• Describe the standards used by external

auditors • List schedules that are commonly prepared by

clients for auditors• Tips for working with auditors• Describe the role of a Board’s Audit Committee

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Internal auditors are employees of the organization (or contracted services) and they perform auditing tasks throughout the year on areas identified by management

External auditors are generally CPAs who are contracted to come in as independent professionals to “audit the books” and deliver an “opinion”

The GAO and each Federal agency has IGs (Inspectors General) who serve as external reviewers of NPOs and others that are recipients of federal financial assistance

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• Possibly members of the Institute of Internal Auditors (IIA) and hold a CIA Certified Internal Auditor (see www.theiia.org )

• Key purpose/role:–Gathers data, documents, and reports on

management control issues–Makes recommendations related to solving problems,

improving efficiency and effectiveness • Understands: –Management control–Operations management– Information technology– Financial accounting– Finance–Managerial accounting– Regulatory environment

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Could be CPAs in public accounting firms

Are “engaged” to conduct either a ◦ Compilation◦ Review◦ Audit (various types)

Engagement letters spell out the agreement between auditor and client, including fee structure

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Financial audit – to determine whether the financial statements “fairly present” the financial position and results of operations in accordance with GAAP

Performance audit – to determine whether the organization is “effectively” accomplishing its mission, and “efficiently” using its resources

Single Audit (or A-133 audit or Yellow Book audit) – done when the organization has expended more than $500,000 in federal financial assistance

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If the Board requires it (e.g., through the by-laws)

If the organization receives more than $250,000 of public support a year (a Michigan rule, see www.ag.state.mi.us and Part III of the “Application for a License to Solicit Donations”

If it agrees to as a condition of receiving a grant or gift

If it receives more than $500,000 of federal financial assistance a year

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• Provides the public with independent opinions on financial and other critical matters

• Delivers a “management recommendation letter” pointing out areas where internal controls could be strengthened, among other suggestions

• Delivers either:– an “unqualified (clean) opinion”–Qualified opinion (except for certain omissions or

other points)– Adverse opinion when statements include

material GAAP violations–Disclaimer – when the books are inadequate and

can’t be audited or management limits the scopeConvery 2013 8

Ensures that sufficient “disclosures” are included in the financial statement Notes to provide important information for decision makers

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Correspondence: attorney’s letters, bank confirmations, , grant and contract confirmations, contributions greater than $5,000

General Planning: trial balance, memos on internal controls, minutes of Board of Directors’ meetings, list of employees and job descriptions, comparative financial statements with comments on fluctuations from previous year

Subsequent events: journal entries, including cash receipts and disbursements for year after the audit

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Cash: bank reconciliation's Investments - list A/R support Schedule of A/P Payroll: reconciliation with payroll tax

returns Capital assets list, with depreciation

schedules Liabilities: copies of notes and leases Net Assets: changes reconciled to last year’s

balances Permanent file changes: incorporating

documents, retirement plans

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Don’t be intimidated Answer only what you know Clarify exactly what is needed Understand the purpose of the request Ask when the request is needed Maintain a control log of records released to

the auditors Keep prior year records accessible Lock up confidential records, such as payroll

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A boards may adopt a bylaw or resolution that defines an audit committee’s purpose and responsibilities, particularly if federal grants are involved

Members should be directors who are not employees of the organization and who have no significant financial relationship with management

Responsibilities include:◦ Reviewing the organization’s system of internal controls◦ Appointing internal auditors and reviewing their work◦ Recommending an independent auditing firm to the board◦ Reviewing the audit engagement◦ Reviewing the annual financial statements, opinion rendered,

and any management recommendations from the auditors

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• General Standards– Competent– Independent–Due Professional Care

• Field Work Standards– Adequate Planning– Understanding of Internal Controls– Sufficient evidential matter is collected

• Reporting Standards– State whether GAAP was followed– Compare current period to past– Informative disclosures– Render an opinion

Convery 2013 14