Understanding your Audit Results: Interpreting Typical Audit Findings to Determine Reasonable Board Responses

Washington Monument
March, 2012, Andrew E. Young, Manager, Renner and Company, CPA, P.C.
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Audit

 



The very sound of the word can make the hair stand on the back of your neck.   While some may cringe at the prospect of an annual appointment with trusted audit professionals, the results of the audit often surprisingly provide great benefits to an organization, especially when Board members develop appropriate corrective actions.  Though not every Board member is financially oriented, all should attain a workable understanding of an audit finding’s implications on the organization.  While this may seem intimidating to those who are not “financially-inclined,” approaches to both interpreting typical audit findings and applying appropriate corrective actions can often be easily implemented. 

First the basics. Audit findings are developed from three specific areas; the design and structure of internal controls, the examination of transactions, and proposed adjusting journal entries.  While many believe there are no such things as insignificant findings, some do deserve more attention than others. 

Findings related to the organization’s internal control structure are the ones that deserve the most attention.  Common control findings include lack of review procedures, lack of appropriate segregation of duties, and lack of proper authorization.  While such findings would not necessarily indicate that fraud is occurring, they do indicate flaws within the accounting function in which assets could be diverted without prevention or detection. Some control weaknesses may seem unavoidable when the organization employs a small staff.  However, management and Board members can implement various procedures to offset potential weaknesses.  A Board member should communicate directly with the auditor to determine the severity of the condition presented, and assess what could potentially “go wrong” should weaknesses be exploited.  From this assessment, Board members could suggest that an individual on the finance committee or an outside accountant fill in any procedural gaps to strengthen controls.  At a minimum, Board members should give high priority to correcting these findings, and insist that management make every effort to develop and apply effective procedures.  

Additionally, the auditors may present transactional findings, typically related to missing supporting documentation.  While, ideally, every transaction should be supported with appropriate verification, Board members should not necessarily lose sleep over trivial transactional matters.  Prior history of the organization would serve as a good benchmark for this assessment.  To illustrate, if the organization receives an audit comment involving a significant lack of supporting receipts for three consecutive years, corrective action would likely need to be developed to serve the best interests of the organization.  However, if documentation for only a few transactions totaling $50 were not located in an isolated year, significant concerns may not be warranted.  Board members should focus on any findings that denote expenditures or payroll items of a personal nature or those that appear to be misaligned with typical organizational costs.  The presence of such findings could present deeper concerns from a control perspective.

Auditors may also report findings relating to proposed recordkeeping adjustments.  Similar to transactional findings, Board members can use judgment when determining their severity.  Board members should especially note the net effect of adjustments upon internal financial statements and the context in which adjustments are proposed.  A presence of multiple large adjustments relating to operational activities such as unrecorded receivables, unreconciled bank accounts, or revenue overstatements would indicate that internal recordkeeping is likely to be unreliable for decision-making purposes.  Such findings should signal to governance members that the organization may need some outside accounting assistance.  On the other hand, the presence of proposed entries related to the finer points of generally accepted accounting principles may not generate urgent concern from a Board perspective.  While management should strive to maintain the financial records of the organization in accordance with generally accepted accounting principles, it is possible that such entries would not greatly influence the operational integrity of internal reports. 

In summary, audit findings often do not represent the end of the story.  A reported weakness that leaves the organization’s assets exposed to fraud warrants a more urgent response than a weakness related to applying the more complex areas of generally accepted accounting principles.  By understanding the primary sources of audit findings, Board members can develop appropriate responses that provide great benefit to the organizations they service.  Opportunities to implement corrective action plans could tremendously enhance the viability of the organization.  Now that “audit” word doesn’t sound so bad after all.

 ©2012 Renner and Company, CPA, P.C., all rights reserved.