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HomeMy WebLinkAboutAudit ApproachSection With an unwavering commitment to accuracy, our audit process is based on a thorough initial planning process, open and honest lines of communication throughout the year, and a specific methodology of analysis and quality review that will ensure a successful audit, as well as a successful relationship with the City and its professionals year after year. We have developed this successful methodology and are recognized for the quality and thoroughness of our audit process. Underwriters, financial advisers and rating agencies alike recognize the M&P brand and are keenly aware of the quality of our work. Our audit approach is focused on listening to and understanding you and your organization, not only the flow of transactions and internal controls, but also your strategies and business risks. This enables us to identify key audit components and tailor our procedures to the unique aspects of the City's business. We hire the most competent people and invest heavily in systems that ensure consistency, objectivity and accountability — for results in strict compliance with professional standards. We also rely on experience. Our senior people are extensively involved in the audit process and will seek active dialogue with the City's leadership. The benefit to the City is an effective, cost- efficient, independent audit performed within your time requirements by experienced professionals. Our audit process is continuous, whereby we address and resolve issues, new accounting standards and changes in your business, etc. throughout the year, not just at year end. A "no -surprises" audit is always our goal. As part of our commitment to you, we have developed a business advisory approach to audit services, which looks beyond accounting entries to underlying transactions and business systems. We place substantial emphasis on understanding your operations and fundamental business strategies. We don't view your audit as a commodity. Instead, we see it as a tool that you can use to improve your business. We contribute recommendations about your internal controls, operating and accounting procedures and other important matters. These are communicated both orally and in a written management letter. In summary, development of the specific audit plan is accomplished through: ❑ Meeting with City management to obtain an understanding of your business concerns and challenges. ❑ Thoroughly understanding and documenting the accounting and information systems. ❑ Evaluating economic and industry factors affecting operations. ❑ Identifying major areas of audit risk. ❑ Coordinating the audit process with the accounting and finance personnel. ❑ Performing testing on interim balances to minimize the amount of year end testing. Our process for the City's audit is diagrammed below: friAgif lirlfrg eia 0200 11�/,Nfil��/ ® 0 ffi 10 rrit / P71 i Jlf//%//%. ( 'fly,. fa, 9 Wm r;fatield ` r ors r Ir0�Fittf 1 1pIlitOttoii Planning Phase The first step of the audit is preplanning, which involves meeting with the City management to clearly identify the lines of communication, perform a risk analysis, discuss audit scopes and alternatives, discuss any concerns and set expectations. We will also establish a preliminary timetable to ensure a smooth audit process. A thorough understanding of your organization and its operating environment is essential for the development of an audit plan for an efficient, cost effective audit. During this phase, we will meet with appropriate personnel to update and document our understanding of your operations including business concems and challenges and, at the same time, give you the opportunity to express your expectations with respect to the services that we will provide. Our work effort will be coordinated so that there will be minimal disruption to your staff. During this phase we will perform the following activities: ❑ Review the regulatory and statutory compliance requirements within which the City operates. This will include a review of applicable federal laws, state statutes, ordinances, resolutions, debt instruments, contracts, other agreements, and minutes of meetings of the City management and various committees. ❑ Review major sources of information such as the City's budgets, organization charts, procedures manuals, financial systems, and management information systems. ❑ Update our understanding of the City's internal control processes. ❑ Update our understanding of the accounting and information systems. ❑ Consider the methods that the City uses to process accounting information which influence the design of the internal control. This understanding includes knowledge about the design of relevant policies, procedures, and records, and whether they have been placed in operation by the City. ❑ Identify and resolve accounting, auditing and reporting matters noted during planning. Internal Control Evaluation M&P will evaluate the City's system of internal control to assess the extent it can be relied upon to ensure accurate information, to ensure compliance with laws and regulations, and to provide for efficient and effective operations. Our evaluation will include: 1. Review of the system, which is primarily the process of obtaining information about the organization and the procedures prescribed and is intended to serve as the basis for tests of compliance and for evaluation of the system. 2. Tests of compliance, which are made to provide reasonable assurance that the accounting control procedures are being applied as prescribed. 3. Data Processing Review. A review is to be made to compare the calculating operations of the computer with the desired results by tests of transactions. A review of controls used in the computer center to assure protection of files and prevention of processing errors and a review of the data processing operation shall also be made. Risk Assessment The development of our audit plan is dependent on our understanding of your operations and our assessment of current risk factors. This approach requires the careful exercise of professional judgment developed through extensive experience with audits and is based on our assessment of risk of error in the financial statement line items and for the City as a whole. As a result, we will focus our audit effort in the important, high risk areas and minimize our time in the low risk areas ensuring you of a cost effective and efficient audit. Fieldwork Phase Fieldwork is the largest part of the audit process and includes both substantive audit tests, such as confirmation work, and analytical review, such as variance examination. Interim fieldwork includes many planning activities mentioned earlier including detailed risk assessments, interviews of key employees and systems documentation. Interim testwork includes testing of controls and preliminary testing on compliance and other areas. Computer Audit Assistance M&P provides computer audit assistance through its National Information Technology Group whose members have extensive experience and training as EDP auditors. These computer audit specialists, together with the audit team will identify the EDP controls which need to be evaluated and the opportunities to implement computer assisted audit techniques. Computer -Assisted Audit Techniques During this phase, we will determine the extent to which we can efficiently utilize computer -assisted audit techniques ("CAATS") which are M&P audit procedures performed with the aid of EDP equipment. CAATS may involve the use of audit software which M&P developed for general use on various clients or may be developed for a specific engagement. CAATS can be used to perform a variety of time consuming detail testing such as: footing files; testing for incomplete data; and sorting files in any order for certain analytical procedures. CAATS can also be used to perform a variety of tests of controls to evaluate either the design or the operating effectiveness of controls, such as: selecting a sample for re -performance or inspection procedures; testing access to critical programs or files and testing programmed application controls. Effect of Preliminary Analytical Procedures on the Selection and Execution of Audit Strategies Comparison of balances, ratios or relationships that result in significant unexplained variances from our preliminary expectations must be considered in selecting appropriate audit strategies for the account balances and/or classes of major transactions involved. Unexplained variances may also cause us to apply planned procedures closer to the balance sheet date. For example, holding other considerations equal, unexplained variances may cause the auditor to: a) Use an audit strategy which involves testing the details of the account balance or class of major transactions with respect to the audit assertions affected by the unexplained variances. b) Reduce the scope used for selecting items for testing. c) Increase the extent of sampling. We will be satisfied that all such variances have been adequately investigated and evaluated at the conclusion of the audit. Substantive Audit Procedures At this point, we will have performed our risk assessment, developed a preliminary audit plan, gained a thorough understanding of the accounting system, and evaluated, and, if determined to be cost -justified, compliance tested the system of internal accounting control. Based upon the preceding work, we will perform substantive audit procedures tailored to your specific accounts to the extent determined by the results of our evaluation and testing of internal accounting controls. The objectives of the substantive audit procedures and the specific procedures to achieve those objectives, by significant audit area, are as follows: Approach to Determine Laws and Regulations to be Tested A governmental accounting system must make it possible to determine and demonstrate compliance with finance related legal and contractual provisions. Governmental financial operations, like other aspects of their operations and even their very existence, evolve from and are regulated by various legal provisions. Our approach to determining the laws and regulations to be tested as part of the compliance audit includes the following procedures: ❑ Review past compliance findings. ❑ Obtain any federal or state agency monitoring reports received by the City during the year and the City's evaluation of pending reports. ❑ Communication with the cognizant agency. ❑ Request confirmation of Equal Employment Opportunity Council violations. ❑ Review state laws relative to financial, accounting and purchasing matters. ❑ Review the financial and personnel policies of the City. ❑ Determine the major federal programs and state projects of the City. ❑ Review accounting and administrative control systems, including general and specific requirements, and design tests of these controls. ❑ For each major program, complete the M&P audit program and the Compliance Supplement, issued by the Office of Management and Budget. ❑ For non -major federal and state transactions examined in the course of the audit, review each transaction against a list of specific compliance requirements required of all federal and state financial assistance programs. Engagement Reviews Our approach to the audit would include, at a minimum, the following reviews of the financial statements, audit reports and workpaper files: Review Nature of Review Engagement Performance and Administration Review, Work of all assistants in detail, including workpapers, done by in -charge financial statements, audit report, compliance reports and management letter Fairness Review, done by engagement partner and/or All workpaper files, financial statements, audit report, manager compliance reports and management letter Partner Review, done by engagement partner Financial statements, audit report, compliance reports, management letter, workpaper files for significant and critical areas, concurrence with conclusions of engagement team Report Review, done by audit and Financial statements, audit report, compliance reports, accounting/governmental report review partner management letter and portions of the workpaper files Reporting Phase At the conclusion of the audit process, we will issue the required opinions as described in our understanding of the audit services requirements at the start of this section. Our management letters will discuss internal control recommendations and weaknesses we identified as part of the audit. The letter will also include observations about accounting methods and procedures, business and industry practices or issues, operational ideas and suggestions to further enhance the City's operations. We will advise you of any new accounting pronouncements that have been or may be issued and indicate their potential impact on you. The following chart depicts our proposed audit timeline for each fiscal year except for the audit year ended September 30, 2007, which may be modified based on discussion with City staff during our audit planning meetings. July Aug Sept Oct Nov Dec Jan Feb Pre -audit meeting Planning and planning updates Issue and discuss audit plan Interim audit activities Final audit activities Final adjustments and corrections to final statements Draft management letter Issue auditors' report Issue management letter Issue single audit reports Exit conference - presentation of audit reports and management letter to City Commission ' M&P offer the City an experienced local team backed by extensive national resources. Our team has audited dozens of local govemments in Florida and you can have confidence in our skill, knowledge, and experience. Beyond our 0 local commitment, we can call upon the vast resources of M&P's national practice to address emerging issues and intricate regulatory topics. Such depth of knowledge and resources can help ensure that your financial reports are accurate and can be relied upon with confidence. M&P will perform an audit of the City's financial statements for the fiscal years ending September 30 2007 with the option to renew for two (2) additional one (1) year periods. Our examination will be to the extent necessary for M&P to express an opinion on the fairness with which the basic financial statements present the financial position, results 0 of operations and changes in financial position in conformity with accounting principles generally accepted in the United States of America. 0 The audit of the financial statements of the City will be performed in compliance with the requirements of: II , ♦ Section 218.39, Florida Statutes, and any other applicable Florida Statutes; • Regulations of the Florida Department of Financial Services; II ♦ Rules of the Auditor General, State of Florida, Chapter 10.550; II ♦ Audits of State and Local Governmental Units, issued by the American Institute of Certified Public Accountants; II ♦ Circular A-133, Audits of States, Local Govemments, and Non -Profit Organizations, Office of Management II and Budget; II ♦ Federal Single Audit Act of 1984 and Federal Single Audit Act Amendments of 1996; • Florida Single Audit Act, Section 215.977, Florida Statutes; II ♦ Auditing Standards Generally Accepted in the United States of America (GAAS); II ♦ Govemment Auditing Standards, issued by the Comptroller General of the United States; IP ♦ State of Florida Auditor General Selection Guidelines, 2007, as prepared by the Auditor Selection Task Force; ♦ Any other applicable federal, state, local regulations or professional guidance not specifically listed above, as well as any additional requirements which may be adopted by these organizations in the future. • Upon completion of the audit, M&P will prepare the following: II II ♦ A report on the fair presentation of the basic financial statements in conformity with accounting principles II generally accepted in the United States of America; • An "in -relation -to" opinion on the combining and individual fund statements; II ♦ A report on the internal control structure of the City included in the report on intemal control over financial II reporting and on compliance based on an audit of financial statements performed in accordance with Government Auditing Standards; II ♦ A Single Audit in accordance with the Federal and State Single Audit Acts and will provide any required III letters and schedules as related to this audit; . ♦ An opinion letter on the financial statements taken as a whole as well as any additional letters required by the United State or State of Florida Single Audit Act which will be prepared and delivered to the City no later II than March 1st following the end of the fiscal year audit; III ♦ A management letter in accordance with the rules of the Auditor General of the State of Florida which, will . be issued no later than March 15th following the end of the fiscal year under audit. We will communicate any reportable conditions found during the audit. Reportable conditions that are also material weaknesses will be identified in the report on internal controls. Nonreportable conditions discovered will be reported in the management letter. We will make an immediate, written report of any irregularities or illegal acts of which we might be made aware and will report such findings immediately to the City's Finance Director and the City Manager. We will provide the City with: Assistance in the preparation of the CAFR to the extent that it does not violate independence standards. • Technical assistance as required to ensure the City meets the requirements of the Certificate of Achievement for Excellence in Financial Reporting Program. We will submit, as part of the peer review process, at the expense of the City, a copy of the City's financial statements from the second year of the contract term with the City. • The partner and director assigned to the City's engagement will communicate with the City Manager or designee, the Audit Advisory Committee, or the City Commission as necessary. • If the City issues any official statements in connection with the sale of debt securities during the contract period, M&P will issue upon request, a "consent and citation of expertise" as the auditor and any necessary "comfort letters" and other documents as necessary in connection with the sale of debt securities. e A copy of each peer review conducted during the engagement period with the City. We will notify the City: • Regarding any audit adjustments required to give the City adequate opportunity to respond. 4 If any regulatory or other government agency requests a review of the audit workpapers concerning the City or any other government client audited by M&P • If any disciplinary actions or complaints are filed with any regulatory bodies against M&P or any employees of M&P. Audit Sampling Approach / Statistical Sampling M&P uses statistical sampling in selecting items for testing by compliance and/or substantive tests where it is determined to be cost beneficial to sample the population. To assist in the selection and evaluation of the samples, IDEA, a statistical sampling microcomputer software package developed by us for use on audits, will be employed to ensure the most efficient sampling techniques are used. Our Firm has an Audit Methodology Manual which contains procedures for the control and evaluation of sampling risk, selection of samples and evaluation of sample results. Audit sampling will normally be used in audits of governmental units to perform four kinds of tests: o Compliance tests of internal accounting control procedures that we plan to rely on to reduce the scope of planned substantive tests. ❑ Substantive tests as part of the audit of the governmental unit's basic financial statements. o Compliance tests to provide reasonable assurance that internal control (accounting and administrative) procedures used in administering federal and state financial assistance programs, if any, are being applied as prescribed. o Substantive tests of compliance with laws and regulations as part of the audit of the basic financial statements and for the purpose of reporting on compliance with laws and regulations as they relate to the schedule of federal and state financial assistance, if applicable. For the audit of the City's financial statements, we anticipate that statistical sampling will be used to determine sample sizes for tests of payroll expenditures and non -payroll expenditures. Although the Single Audit Act does not require statistical sampling, it does require that a representative number of transactions be selected from each major federal financial assistance program, if applicable. We will use professional judgment in determining the methods, and extent, of sample selection. Use of Analytical Procedures Our audit approach requires the use of analytical procedures to assist in planning the nature, timing and extent of other auditing procedures. The primary focus of analytical procedures employed at the planning stage is the identification of specific risks or errors in the financial statements or of compliance violations. By considering unusual or unexpected balances or relationships, analytical procedures help to direct our attention to areas with the highest potential for material misstatement. Preliminary analytical procedures may also identify unfavorable trends or other matters. Analytical procedures will be performed at both the government -wide and fund level and will include the following, where applicable: a) Comparison of original budget (revenue sources and appropriations) to actual amounts. b) Comparison of major balance sheet balances to: (1) Preliminary expectations based on budgets and forecasts. (2) Prior year's amounts. c) Consideration, to the extent applicable, of the certain key financial relationships in relation to preliminary expectations to determine if there are unusual or unexpected balances or unexpected relationships.