How To Make Your Audit Work For You

Posted on May 27, 2021 by Oozle Media

Many schools move from one audit almost straight into the next, which can leave little time to actually reflect on what the results are telling you. Your audit report should not be something reviewed once and filed away. Before you put it in a drawer, review with your team what the audit is telling you and discuss with your auditor what problems came up along the way, from a financial standpoint and a compliance standpoint alike. Lightheart, Sanders and Associates works with schools to turn the audit process itself into a tool for improving how the school runs.

Why should you review your audit results instead of filing them away?

Many schools and CPA firms move from one audit almost straight into the next, which can leave many schools with little time to consider the results of an audit before starting on the next one. Schools need time to think about how to effectively use their audit to improve their systems and respond to deficiencies.

Your audit should not be something put in a desk drawer and forgotten about. Before you put it away, review with your team exactly what your audit is telling you. Discuss with your auditor what problems arose during the audit. This post covers several areas where schools commonly use their audits to improve, on both the compliance and financial sides.

What can a financial audit tell you about your school’s systems?

A financial audit involves the auditor obtaining sufficient evidence to support that the amounts your school is presenting are accurate. In other words, the steps the auditor takes are meant to show the balances are free from material (significant or large) misstatement. It does not provide a fraud investigation or an in-depth analysis of the school’s results from an industry perspective, but the results can still give a school insight into how it is doing. We encourage schools to consider:

• Did the financial audit include any findings?
• Did the audit identify any problems with your accounting system?
• What did the results of your financials tell you?

What are audit findings, and how should you respond to them?

Auditors are required to report any major findings as they review the financial records of a school. These are listed as part of the financial statements and outline the potential issues, the problems they pose, and what the school should do to address them. When an issue is elevated to a finding, the auditor is reporting that the problem could affect either the audit process or the risk of issues within the system, after reviewing the significance of the issue and determining that a user of the financial statement should know about it.

If you have findings, you should discuss with your auditor what those findings are and how the school can change its system to address them. We encourage every school to respond to its findings as the real warning sign they are.

Even if a school did not receive a finding in the financial statement, that does not mean there were no issues in the system. It only means the issues were not considered significant enough to warrant a formal finding. When thinking about your accounting system, it is worth having a conversation with your auditor about any potential problems, since you will miss a real opportunity for improvement otherwise.

• Start by looking at the adjustments the auditor made from your financials to the final financial statements.
• Determine what caused those adjustments.
• Make a plan to adjust your system to avoid the adjustments going forward.
• Talk to your auditor about any problems they had determining, obtaining, or reconciling supporting documentation to your accounting records.

What are the three types of adjusting journal entries (AJEs), and what do they tell you?

Adjusting journal entries (AJEs) can be grouped into three types, and each tells you something different about where your system needs work.

• Balances do not match: an adjustment to the books because the balance on the school’s books does not match the supporting documentation. This most often happens because the school is not comparing its balances to the supporting documentation the auditor uses during the audit. A common example is accounts receivable or deferred tuition. Pulling the same report your auditor uses on a regular basis (weekly or monthly) and adjusting your accounts to match it will make your interim financials more accurate and reduce the work performed during the audit.
• Maintaining records for the client: this happens when the auditor adjusts the books because they are maintaining certain records on the client’s behalf. For example, schools often do not have accounting software to handle fixed assets and depreciation, and the auditor may find assets that were incorrectly recorded as an expense, adjusting depreciation expense to the calculated balance once those items are discovered. If you are not maintaining your own fixed asset and depreciation schedule, get an estimated schedule from your auditor so you can record a monthly adjustment, and discuss any significant asset purchases with your auditor to get an updated schedule. An estimate is enough; you do not need the final depreciation number before submitting your financials.
• Closeouts and reclassifications: entries the auditor makes to clean up accounts or move balances between classes, most commonly adjustments to equity accounts and long-term liabilities. These may not be critical to interim work, but they reflect an understanding of accounting principles related to the financial statements, and reducing them can affect the cost of your audit since it saves your auditor time.

The most important takeaway on AJEs is to make sure you are reviewing and adopting them. The first step is to review the equity section and confirm it matches the prior year’s audit. You should receive a trial balance showing the amount of each account based on your original information, the adjustments made during the audit, and the balances that tie to the audit report. When you receive that report, confirm your year-end balances match your audit report balances, since this ensures your information stays correct going forward.

What should the results of your financials tell you?

The end of your fiscal year is a good opportunity to review and assess your school’s financial results, compared with previous years, to reflect on the direction the school is heading and to inform budget and financial decisions for the upcoming year. Even if your audit is just wrapping up, it is worth understanding the story behind the numbers.

Your audit report should not just be something stuffed in a cabinet drawer in case someone requests a copy. Many schools cannot afford to have the same knowledge, skills, and expertise on staff that an auditor brings, and if they do, much of what could be learned from the audit process is probably already in place. If you do not have those skills on staff, reviewing the audit results and discussing them with your auditor can provide real insight into what to watch for during the following year.

The completion of the audit is a natural trigger to reflect on your school’s accounting policies and processes, but we often see schools fail to adopt any change from the audit. Each year can otherwise be a wild ride of adjustment swings, scrambling to obtain documents, and stressful hours worrying about the results. It does not need to be that way. No matter its size, a school can feel confident about the accounting records it submits to its auditors, without needing a CPA on staff, if it works with its auditor to understand the process for matching supporting documentation to the audit.

What can a compliance audit tell you about your school?

Many of the things you can learn from the financial side of the audit can also be learned on the compliance side. A school should consider:

• Did the compliance report contain any findings?
• How did the audit process go?
• What weaknesses or issues were exposed during the audit?

What are compliance findings, and how should you evaluate them?

Just like financial audit findings, findings in the compliance report are issues identified during the compliance audit. The first question to ask about a finding is whether it represents an isolated instance or a system problem.

It is extremely difficult to go through a year of financial aid administration without making a mistake, and those odds drop further as volume increases, systems are not automated, or controls are less effective. We always encourage schools to ask “how did this happen?” If the answer is that it was a fluke, you can move on. If it represents a hole in the process where it can happen again, you need to figure out what steps will prevent it from recurring.

How did the audit process go, and what does that tell you?

Reviewing how the audit process itself went can help a school identify areas that can be strengthened. Compliance and financial audits work similarly: the auditor gathers evidence to support the assertion that the school complied with specific rules and regulations, and the documents the auditor requests are the evidence used to show that compliance.

If you had to scramble to find certain documents, or your auditor had to dig through a mountain of paperwork to find what was needed, that is worth addressing in either your filing methodology or your internal controls.

A useful exercise is to ask your auditor to share a blank student file workpaper with you. This shows you the items your auditor is looking for in a file and can help your school focus on the critical elements of documentation, which saves your auditor time (and saves you money) and can help identify or eliminate potential findings in the future. This is not about reviewing your entire student population; it is about considering whether your school handles student information consistently and appropriately.

The same idea applies to other information gathered during the audit: reviewing it can help confirm your school is doing what it should, when it should, and can help you recognize what documentation to keep on hand for easy access. A good example is the campus security report: keep the documentation you used to support it, and if it was hard to find during the audit, adjust your process so it is not an issue the following year. There are many items auditors are required to obtain by the audit guide, so it is worth working with your auditor to make sure you are maintaining what they need to reach the correct determination in your audit.

What should you do if the audit exposed a weakness?

It is natural to feel some nervousness about having someone come into your school to check for compliance. Reflecting on your confidence in your school’s systems and processes can help ease that. Review the areas where you spent the most time on your audit and which areas concerned you most, then use that to make changes so you can feel confident going forward.

We encourage schools to talk to their auditor about an honest assessment of the school’s systems, which can be a great learning tool for minimizing future issues. This is not about changing things to be the way your auditor wants; auditors are prevented from getting involved in your school’s decision-making. But they can help you grade the quality of your systems and identify ways you could improve them.

Every school should reflect on how well it navigated the audit process. If it was a struggle, have an honest conversation with your team and your auditor, and make a plan to resolve the pain points. Taking the time this year to make the changes needed will help next year go smoother, and your school will run more efficiently as a result.

Want to know how Lightheart, Sanders and Associates can help with your upcoming audit? We want to get to know you and your school.

Next step: Reach out to us to talk through what your last audit is telling you and how to prepare for the next one.

Frequently asked questions

Why shouldn’t you just file away your audit report once it’s done?

An audit surfaces real signals about your school’s financial and compliance systems, including findings, adjusting entries, and process weaknesses. Reviewing it with your team and auditor before moving on lets you actually use those signals to improve, rather than repeating the same issues next year.

What does it mean when an auditor reports a “finding”?

A finding is an issue the auditor determined was significant enough that a user of the financial statements should know about it. Not having a finding does not mean there were no issues; it may just mean the issues were not considered significant enough to formally report.

What are the three types of adjusting journal entries (AJEs)?

Adjustments made because balances do not match supporting documentation, adjustments made because the auditor is maintaining certain records on the school’s behalf (such as depreciation), and closeout or reclassification entries that clean up accounts like equity or long-term liabilities.

How can a school reduce findings in future audits?

Reviewing the adjustments made in the prior audit, determining what caused them, and changing internal processes to prevent them; asking your auditor for a blank student file workpaper to understand what documentation they look for; and discussing with your auditor whether any issues found were isolated instances or signs of a system-wide problem.

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