How To Make Your Audit Work For You

Posted on May 27, 2021 by Oozle Media

Many schools and CPA firms are wrapping up what has felt like an 18 to 24-month audit process. The six-month extension last year left many schools in a strange situation. They were either wrapping up one audit while either working on the next or starting the next soon after. This left little time to consider the results of your audit. Schools need time to think about how to effectively use their audit to better their systems and respond to deficiencies.

That’s right! Your audit should not be something put in a desk drawer and forgotten about! Before you put it away, you should review with your team exactly what your audit is telling you. Further, you should discuss with your auditor what problems arose during the audit.

In this blog, we will cover several areas where many schools use their audits to improve their school. We will discuss both compliance and financial aspects.

Financial Lessons from the Audit

Let us review exactly what a financial audit is and what it can tell you about your current system and approach. The general financial audit process involves the auditor obtaining sufficient evidence to support the amounts your company is presenting are accurate.

In other words, the steps the auditor takes are to prove the balances are free from material (significant or large) adjustments. It does not provide fraud investigation or in-depth analysis of the results of the company from an industry perspective. The results of the audit can give a school insight into how it is doing. We encourage schools to consider the following questions:

• 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?

Let’s begin with discussing identified findings. Auditors are required to report any major findings as they review the financial records of a company. These are listed as part of the financial statements. They 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 have an impact on either the audit process or the risk of issues within the system. An auditor should review the significance of the issue and report on those they determine a user of the financial statement should know about.
If you have findings, you should have discussions with your auditor about what those findings are, and how the school can change its system to address those findings. We encourage every school to respond to its findings as the threat that they truly are. A finding is a warning sign when it comes to finances.

Even if a school did not receive a finding in the financial statement, it does not mean there were no issues in your system. It only means that the issues were not considered significant enough to warrant a formal finding. When thinking about your accounting system, consider your auditor’s expertise and skills. You will miss a huge opportunity for improvement if you do not have a conversation with them about any potential problems.

To help with this, take the following steps:

• Start by looking at the adjustments the auditor made from your financials to the end 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 with determining, obtaining, or reconciling supporting documentation to your accounting records.

Adjustments (AJE’s) can be categorized into three different types.

1. Balances Do Not Match

The first type of AJE is an adjustment to the books because the balance on the entities’ books does not match the supporting documentation. This most often occurs because the school is not comparing the balances to the supporting documentation the auditor uses during the audit.

A great example of this would be the balances of accounts receivable or deferred tuition. A school should pull the same report the auditor uses regularly (weekly, or monthly) and adjust the accounts to the report. This will not only make your interim financials more accurate but also reduce the work performed during the audit.

Consider the supporting documentation your auditor will need when performing the year-end audit. This is a great tool to use in determining if your system is in line with the end-of-the-year process.

2. Maintaining Records For Client

The second type of AJE is when an auditor adjusts the books because they maintain certain records on behalf of the client. For example, schools often do not have accounting software to handle fixed assets and depreciation. Further, there are times during the audit when the auditor may find assets that were incorrectly recorded as an expense. The auditor would adjust depreciation expense to the calculated balance after those items were discovered.

If you are not maintaining your fixed asset and depreciation schedule, you should obtain an estimated schedule from your auditor. This will help you record a monthly adjustment to depreciation. If you have any significant asset purchases, you should discuss them with your auditor to get an updated schedule. As long as you have made an estimate, it is not needed to get the final depreciation number before submitting your financials.

These types of adjustments are important to identify so you can minimize them at the end of the year. Doing so not only prevents findings related to your financials but also gives you better information throughout the year. This helps with planning, composite calculations, and other key interim period work.

3. Closeouts and Reclassifications

The last types of AJE we want to cover are closeouts and other reclassification entries. The auditor makes these types of entries to “clean up” accounts and/or move balances between classes. The most common are adjustments to equity accounts and long-term liabilities.

While these might not be critical to interim work, they do represent an understanding of accounting principles related to financial statements. Implementing these entries often correlate with the completion and accuracy of the financials. They can affect the cost of your audit because it saves your auditor time.

The most important takeaway from AJE’s is to make sure you are reviewing and adopting them. The first step in the financial audit is to review the equity section and make sure it matches the prior year’s audit. You should receive a trial balance showing the amount of each of your accounts based upon your original information, the adjustments made during the audit, and the balances that tie to the audit report.

When you receive that report, you should make sure your year-end balances match your audit report balances. This ensures that your information is correct going forward since the prior information reflects the reported amount on your audit.

What Did the Results of Your Financials Tell You?

The end of your fiscal year is a great opportunity to review and assess the financial results of your school. It should be compared to previous years to reflect on the direction the school is heading. It also should be used to implement budget and financial decisions for the upcoming year. Even if your audit is just wrapping up, you should understand the story behind the numbers.

Your audit report should not just be a report that is stuffed into a cabinet drawer in case someone requests a copy. While some schools may have accounting skills, many schools cannot afford the knowledge, skills, and expertise an auditor can provide. If they do, then many of the things that could be learned from the audit process are probably already implemented.

If you don’t have someone with those skills on staff, reviewing the results of the audit and discussing those results with your auditor can provide great insight into what you should be aware of during the following year.

Over time, we develop natural tendencies to perform certain things at certain times. At the beginning of a new year, our thoughts gravitate towards goals. The completion of the audit should trigger your school to reflect on its accounting policies and processes. Unfortunately, we often see schools fail to adopt any change from the audit.

Each year, it can be a wild ride to complete the audit with crazy swings in adjustments, time spent scrambling to obtain documents, and stressful hours worrying about the results of the audit. It does not need to be that way. No matter the size, a school can feel confident about the accounting records it submits to its auditors. You do not have to be a CPA or have one on staff to achieve a reduction in adjustments between your records and the final audit report. An auditor can help you understand the process to match the supporting documentation of the audit.

Compliance Lessons from the Audit

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

• 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?

Just like financial audit findings, the findings in the compliance report are issues identified during the compliance audit. The first question that should be asked about the findings is if they represent isolated instances or if they represent system problems.

It is extremely difficult to go through a year of financial aid and not make a mistake. With all of the steps, the odds of a school’s financial aid department making it through the year without a mistake is low. These odds are reduced even more when volume increases, systems are not automated, or controls are less effective.

Therefore, the first question step is to determine if the findings represent a hole in your process or if they were an isolated instance. We always encourage schools to ask “How did this happen?” If the answer was that it was just a fluke, then we can move on. If it represents a hole in the process where it can occur again, we need to figure out what steps can be taken to prevent it from occurring in the future.

How Did the Audit Process Go?

Reviewing how things went during the audit process can help a school to identify areas that can be strengthened. Consider that the approaches of compliance and financial audits are similar. The auditor is gathering evidence to support the assertion that the school complied with specific rules and regulations. The items the auditor requests to support those assertions are evidence to show compliance.

If you had to scramble to find certain documents or if your auditor had to dig through a mountain of paperwork to find the documentation needed, then you probably should consider adjusting either your file methodology or your internal controls.

A great learning experience is to ask your auditor to share a blank student file work paper with you. This can help you see the items your auditor is looking for in the file. This can help your school hone in on the critical elements of documentation. If you understand what your auditor is looking for, you can prepare your information in a manner that helps them.

This not only saves your auditor time (and saves you money) but also can help identify or eliminate potential audit findings in the future. We are not suggesting you perform a student file review on your entire student population. We are suggesting you consider how your school handles student information to determine if it is being filed consistently and appropriately.

For other information gathered during the audit process, reviewing it can help you make sure your school is doing what it should when it should. It can help you recognize the documentation you need to keep on hand for easy access.

A great example is the campus security report. When you create this report, remember to keep the documentation you used to support the report. If you had problems finding it during the audit process, adjust whatever it is you are doing so it’s not an issue next year. There are many items auditors are required to obtain by the audit guide. Work with your auditor to make sure you are maintaining the information your auditor needs to make the correct determination in your audit.

Did You Discover any Weaknesses?

Our final thought about compliance audits relates to any weaknesses that were exposed during the audit. You or your staff may be nervous about having someone come into your school and check to see if you were compliant. We will do everything we can to reduce that worry. It is a natural feeling.

You can do things to help ease your mind. Take time to reflect on your confidence in your school’s systems and processes. You should review the areas you spent the most time on your audit. Which areas were you most concerned about? Once you have identified them, you can make changes so you can feel confident in those areas going forward.

We highly encourage you to talk to your auditor about honestly assessing their feelings about your school. It can be a great learning tool to minimize future issues. This is not about changing things to be the way your auditor wants them to be. Auditors are prevented from getting involved in your school’s decision-making process. However, they can help you grade the quality of your systems and identify ways you could improve them.

Every school should consider the audit process and how well your school navigated it. If it was a struggle, have an honest conversation with your team and your auditor. Make a plan to resolve the pain points. Take the time this year to make the changes needed to help next year go smoother. Not only will your auditor thank you, but also your school will run more efficiently and be better prepared for the coming year.

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