what are your auditors doing? - acuia.org

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What Are Your Auditors Doing? PresentedbyCarrieKennedy,PartnerTravisSmith,PartnerMossAdamsLLP

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MOSS ADAMS AT A GLANCE

• FullservicenationalCPAfirmprovidingassurance,tax,andconsultingservices

• OneofthelargestaccountingfirmsinthenationandlargestheadquarteredintheWest

• Over100yearsinbusiness

• Over2,000professionalsand258partners

• 27officesinCalifornia,Arizona,NewMexico,Oregon,Washington,Kansas,andTexas

• GlobalreachandresourcesthroughPraxityAISBL

• Industryfocusedstrategy

• 4th largestfirmservicingcreditunionsinthenation(basedonassets)

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IS A FINANCIAL STATEMENT AUDIT REQUIRED?

• Yes,ifyourcreditunionisfederallyinsuredwithassetsof$500millionormore

• Ifyourcreditunionisfederallycharteredwithassetsofmorethan$10millionbutlessthan$500million,youhavefouroptions:o Asstatedabove.o Anopinionauditonthecreditunion’sbalancesheetperformedbyanindependentaccountantlicensedbythestateorjurisdictioninwhichtheauditisconducted.

o Anexaminationofinternalcontrolsovercallreportingconductedbyanindependentaccountantlicensedbythestateorjurisdictioninwhichtheauditisconducted.

o Asupervisorycommitteeauditthatmeetstheminimumrequirementsofthis.

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SUPERVISORY COMMITTEE RESPONSIBILITIES

• Whatisanopinionaudit?

o CanonlybedonebyalicensedCPAo ResultsinCPAexpressinganopiniononfairnessofthecreditunion’sfinancialstatements

o Placesresponsibilityontheauditortofollowgenerallyacceptedauditingstandards(GAAS)

oHighestlevelauditengagementpossible

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NON-OPINION EXAM

• Whatisanon‐opinionexam?o WorkcanbedonebyaCPAorsomeoneelseo Engagementlettershouldbeissuedoutliningtheprocedurestobecompleted

o ProceduresmustbesufficienttomeettheminimumrequirementsoftheNCUA

o Thereisnoopinionexpressedonthefinancialstatementsorconformitytogenerallyacceptedaccountingprincipals(GAAP)

o Areportisissuedthatdescribesproceduresperformedandobservationsandrecommendations

o Lessexpensivethananopinionaudito Mostappropriateforsmallercreditunionswithcleanandbasicoperations

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SUPERVISORY COMMITTEE RESPONSIBILITIES WITH OPINION AUDIT

• Relationshipwiththeindependentauditoro UnderstandingtheCPAfirm’squalitycontrolsystemo MakingitclearwhotheCPAfirmisworkingforo CommunicationwiththeCPAfirm Attheauditplanningstage Atthefieldworkcompletionstage Whentheauditreportshavebeenfinalized

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ENGAGEMENT LETTERS ARE REQUIRED

• Chapter5oftheSCGuidestatesthatengagementlettersmustcontainthefollowing:

o Specifytheterms,conditions,andobjectivesoftheengagement.o Identifythebasisofaccountingtobeused(examples:GAAPvs.regulatoryaccountingpractices(RAP)).

o Specifytherateof,ortotal,compensationtobepaidfortheaudit.o Uponcompletionoftheengagement,theauditorwilldeliverawrittenauditreporttothesupervisorycommittee.

o Noticeinwriting,eitherwithintheauditreportoraseparatereport,ofanyinternalcontrolreportableconditionsand/orirregularitiesorillegalactsthatcometotheauditor’sattentionduringthenormalcourseoftheaudit.

o Specifyatargetdateofdeliveryofthewrittenreports.

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WHAT IS AN AUDIT?

• TheauditorisresponsibleforperformingtheauditinaccordancewithGAASandthattheauditisdesignedtoobtainreasonable,ratherthanabsolute,assurance…

• Whatdoes“reasonableassurance”mean???

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WHAT IS AN AUDIT?

• TheauditorisresponsibleforperformingtheauditinaccordancewithGAASandtheauditisdesignedtoobtainreasonable,ratherthanabsolute,assurance….aboutwhetherthefinancialstatementsasawholearefreefrommaterialmisstatement.

• Whatdoes“freefrommaterialmisstatement”mean???

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AUDIT PLAN: WHERE TO FOCUS AND UTILIZE RESOURCES?Risk‐basedauditapproach• Wherearetherisks?

o LOANSo SIGNIFICANTESTIMATES ALLL Impairedloans OREO Investments

o Internalcontrolsoverfinancialreporting

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AUDIT PLAN: WHERE TO FOCUS AND UTILIZE RESOURCES?Youknowwhattotest,butHOWdoauditorstest?• Internalcontrolreliance

o Systemrelianceon3rd partypayrollprocessoro Testingsampleoforiginatedloanstoensureproperapproval,underwriting,disbursement,andboardingintotheloansub‐ledger

• Substantiveanalyticalreviewprocedureso TestinginterestexpensethroughdevelopinganindependentexpectationofcostoffundsusingpeeryieldsandactualaveragedepositbalancesoftheCU

• Testsofdetailso Sendingconfirmationsforcashbalancestocorrespondentinstitutions

o VouchingproceedsforsalesofOREOproperties

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INTERNAL CONTROL CONSIDERATIONS IN AN AUDIT

“Doyoutestinternalcontrols?”o Yesandno!

Fact:Auditingstandardsdonotrequirethetestofinternalcontrols.

Theauditorisrequiredtoobtainanunderstandingofinternalcontrolrelevanttotheauditwhenidentifyingandassessingtherisksofmaterialmisstatement.

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INTERNAL CONTROL CONSIDERATIONS IN AN AUDIT

Deficiencyininternalcontrol.Adeficiencyininternalcontrolexistswhenthedesignoroperationofacontroldoesnotallowmanagementoremployees,inthenormalcourseofperformingtheirassignedfunctions,toprevent,ordetectandcorrect,misstatementsonatimelybasis.

Arealldeficienciesofthesameseverity?

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INTERNAL CONTROL CONSIDERATIONS IN AN AUDIT• Materialweakness.Adeficiency,oracombinationofdeficiencies,ininternalcontrol,suchthatthereisareasonablepossibilitythatamaterialmisstatementoftheentity’sfinancialstatementswillnotbeprevented,ordetectedandcorrected,onatimelybasis.

• Significantdeficiency.Adeficiency,oracombinationofdeficiencies,ininternalcontrolthatislessseverethanamaterialweaknessyetimportantenoughtomeritattentionbythosechargedwithgovernance.

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INTERNAL CONTROL WEAKNESS INDICATORS

Thefollowingaretypicalsituationsthatmaybeinternalcontrolwarningsigns:

• Complexbusinessarrangementsthatyoucan’tunderstand

• Last‐minutetransactionsthatresultinimprovementinfinancialperformance

• Changeinestimatesthatarehardtounderstand

• Frequentdifferencesbetweenmanagementandtheauditors

• Managementnotreceptiveorresponsivetoauditororregulatorfindings

• Failuretoenforcethecreditunion’scodeofconduct

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INTERNAL CONTROL WEAKNESS INDICATORS

• Failurebymanagementtodisplayandcommunicateanappropriateattituderegardinginternalcontrol

• Highturnoverofseniormanagement

• Rapidchangesintheindustry

• Unusuallyrapidgrowthorprofitabilitycomparedwithothercreditunions

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COMMON INTERNAL CONTROL AUDIT FINDINGS• Employeeaccountsandrelatedaccountsnotreviewed

• Personperformingreconciliationshouldbelookingforunusualitems—notjustwantingtomakeitbalance

• Investmentaccountreconciliationspreparedbysameindividualwhoauthorizesorinitiatestransactions

• Samepersoncanbothproduceacheckandmakejournalentries

• Notallsuspenseandclearingaccountsarereconciledandreviewed

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COMMON INTERNAL CONTROL AUDIT FINDINGS

• Personreviewsextensions,butdoesn’thavefullpopulation

• Personreviewsloans,butdoesn’tselectfromfullpopulation

• Payrolldutiesconcentratedinoneindividual,whoreceivesandfilesthepayrolljournals

• Policiesinplacebutnotbeingfollowed• Networkadministratoraccountsharedbyseveralemployees

• Noreviewofsystemaccesslevels

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SUBSTANTIVE ANALYTIC PROCEDURES

• Threestepprocess

o Developindependentexpectationofwhataccountbalanceshouldbe

o Establishsignificantdifferencethreshold

o Investigatesignificantdifferences

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TESTS OF DETAILS

• Substantivetestsoftransactions

• Testsofdetailsofbalanceso Non‐statisticalsamplingo MonetaryUnitsamplingo Variablessampling

• Evaluateresults

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WHAT ABOUT FRAUD?

• Auditingstandardsrequiretheconsiderationoffraudduringafinancialstatementaudit.

• Duringtheplanningphase,auditingstandardsrequireadiscussionamongtheauditteamtodetermine:• Howmayfraudoccur?• Whereinthefinancialstatementsisthereariskforfraud?

• Howcouldmanagementperpetrateandconcealfraudulentfinancialreporting?

• Howcouldassetsoftheentitybemisappropriated?

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WHAT ABOUT FRAUD?

• Requiredauditprocedures• Brainstormingdiscussion• InquiriesofmanagementandotherswithintheCU• Unpredictableprocedurestotestforfraud:

• Testlowmaterialityriskaccountsortransactions• Usedifferentsamplingmethodstoidentifyitemsnotnormally

selected• Adjusttimingofauditproceduresfromnormal• Performauditproceduresatdifferentlocations

• Testjournalentries:• Understandbusinesspurpose,timing,underlyingcontrols,and

CUpersonnelsurroundingtheentries.

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WHAT ABOUT FRAUD?

• TheAssociationofCertifiedFraudExaminers(ACFE)completesareporteverytwoyearssummarizingthekeycharacteristicsoffraud.

• Themostrecentreportisfrom2014.

• Thefollowingareexcerptsfromthatsummary(totalof1,483cases,worldwide)

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MOST COMMON FRAUD - FREQUENCY

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Initial Detection of Occupational FraudsTip: 42.2%

Management Review: 16.0%• Internal Audit: 14.1%

By Accident: 6.8%Account Reconciliation: 6.6%Document Examination: 4.2%

External Audit: 3.0%IT Controls: 1.1%

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SOURCE OF FRAUD TIPS

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MEETWITHYOURAUDITORS!

Questionstheindependentauditorsshouldanswer:o Whatarethesignificantaccountingpolicies?o Didthecreditunionselecttheaccountingpoliciesthatweremostappropriate,giventheoptions?

o Whataremanagement’sjudgmentsandestimatesthataffectthefinancialstatements?Anybiasnoted?

o Didyouhavetopostanysignificantauditadjustments?o Werethereanywaivedadjustments?o Didyouhaveanydisagreementswithmanagement?

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Questionstoconsideraskingtheexternalauditfirm:

o Whatdidyouperformasunpredictableproceduresaspartoftheauditthisyear?

o Arethereanypotentialinternalcontrolissuesdiscussedwithmanagementthatdidn’tendupinyourwrittenreport?

o Didyouissueaseparatecommentslettertomanagementthatwasnotprovidedtothesupervisorycommittee?

o Didyourotateanystaffontheauditjobfromtheyearbefore?

o Howdoyouensureafreshlookeachyear?o Ifyouhadtomentiononethingthatcouldimprovetheeffectivenessoftheaudit,whatwoulditbe?

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Why is this important? 

• Inrecentyears:magnitudeofregulationsandagenciestargetingconsumerprotection

• Theever‐increasingwaysinwhichfraudstersuncoverandexploitvulnerabilities

• Creditunionsasawholehavehadtobecomemoresophisticated

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THINK ABOUT YOUR INTERNAL AUDIT PLAN

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Keepuptodateonchangesinyourcreditunion:• Newproductsandservicesbeingofferedtomembership

• Creditqualitytrendswithintheloanportfolio• Changesinfieldofmembership• ImportantissuesbeingdiscussedbyBoard• Mergers,keypersonnelchanges,newinvestments• Technologychanges• Askexternalauditorshowtheyhaveaddressedanyresultingnewrisksfromthesechangesintheirauditplans

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FINAL THOUGHTS

• Takethetimetobetterunderstandtheexternalauditprocess.

• Knowtheriskareasandhowtorespond.

• Exerciseprofessionalskepticism!31

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DON’T ALWAYS BELIEVE SOMETHING BECAUSE SOMEONE SAYS SO!

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QUESTIONS?