Who
prepares your organization’s financial statements for submission to the Federal
Audit Clearinghouse? Often, it seems
that the answer is “the auditors.” That
can be problematic with respect to auditor independence, as discussed in this
AICPA Q&A regarding SAS 112:
It
is clear that the client must be able to prepare the financial statements, or
at least review them effectively. As the
client-side reviewer, I have always taken that to mean that I need to tie out
the financial statements to the adjusted trial balance. That process yields benefits but also requires
a map. First, the benefits:
- The client detects all
mis-statements, but especially ones that are material.
- The client
understands how the auditors interpret the financial operating structure
and can correct their understanding.
- The client
demonstrates the ability to understand and evaluate the work performed by
the auditor.
- Ultimately, the
client can confidently sign the management representation letter with
respect to the preparation and fair presentation of the financial
statements.
Now
for the map. Auditors slice and dice the
trial balance in several ways to meet the reporting requirements of various
financial statements. Each account is
coded with attributes that enables balances to be rolled up into the correct
rows and columns. The attributes
include:
- Classifications
(e.g., asset, liability)
- Leads (e.g., cash,
fund balance)
- Major funds (e.g.,
general fund, capital projects fund, major special revenue funds)
- Functions (e.g.,
general government, public safety)
- Natural or IDC
class (e.g., governmental revenues, wages & fringes, contract
services)
- Funds (e.g., funds
that make up the major health or housing funds)
At
a minimum, the client needs a basic understanding of the map to perform the
tie-out. I recommend that the client
work with the auditors to take the next step, which is to take over the mapping. There are a couple of ways to go about it.
Some
accounting systems have fields for account attributes. If these can be imported on an ad-hoc basis
and programmed to be created automatically when accounts are added, this may be
the best approach. However, its accuracy
depends on account segments being used consistently across the organization.
Often
(if not usually), the map will be created and maintained in Excel. Programmed properly, the client will be able
to draft the financial statements directly from the coded trial balance. This may seem an impossibly tedious task but
effective use of tables, filtering and other Excel tools will make it quicker
and more efficient.
There
is a “kicker” that I have not discussed, which is the linkage between the optional
combining statements and the indirect cost proposal. That is a topic for a future article.
As
you can see, I am a proponent of the client “owning” the audited financial
statements. Does it matter to you? Is it worth the effort? What do you think?
