Common Mistakes in Financial Statements: Identifying and Avoiding Errors in Audits, Lecture notes of Accounting

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National Community Action Partnership

2021 Management & Leadership Training Conference (Virtual) Advancing Equity, Building Resilience, Sustaining Hope Common Mistakes in Financial Statements

Agenda

• Identify and review common errors that auditors find during

annual audits and how to avoid them or prepare a response

to them

• Explore the difference between a significant deficiency and

a material weakness

• Discuss how to respond to audit findings

What is an Internal Control Deficiency? Control Deficiency Exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. Significant Deficiency Deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Material Weakness Deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis. A reasonable possibility exists when the likelihood of the event is either reasonably possible or probable.

Deficiencies in Internal Control— What are they?

• A deficiency in design exists

when:

• A control necessary to meet the control objective is missing; or
• An existing control is not properly designed so that, even if it operates as designed, the control objective is not always met. ▪ A deficiency in operation exists when: - A properly designed control does not operate as designed; or - When the person performing the control does not possess the necessary authority or qualifications to perform the control effectively.

Common Financial Statement Errors

• Financial Statements Errors
  • Financial statement amounts are not supported by general ledger amounts
  • Statement of Financial Position Improperly classifying assets and liabilities Net assets not agreeing between statements Statement not balancing Footing and cross- footing the totals Missing necessary information Debt issuance costs not shown net of debt Net asset classification

Common Financial Statement Errors

• Financial Statements Errors (cont.) Statement of Activities
• Improper presentation
• No functional expense breakdown
• Failure to show activity based on net asset restrictions
• Failure to recognize releases from restriction
• Improper classification of expenses Functional Expenses
• Improper presentation in the financial statements
• Improper classification of expenses
• Management and General
• Program
• Fundraising
• Totals not agreeing to other financial statements

Common Financial Statement Errors

• Financial Statements Errors (cont.)

Statement of Cash

Flows

• Improper classifications
• Amounts presented do not match the rest of the report
• Missing supplemental disclosures

Footnote Errors

• Do not agree with financial statements
• Missing/applicable footnotes and/or information
• Outdated footnotes

Common Financial Statement Errors

• Supplemental Information Errors
  • Schedule of Expenditures of Federal Awards (SEFA) Expenditure amounts do not agree to underlying records or audited balances Incorrect program name and CFDA Number Missing necessary information Failure to identify clusters Missing or incorrect information in the notes to the SEFA

Findings OIG

OIG Report Findings

Ineffective controls and

accountability over its

assets

• Assets not adequately safeguarded – inventory issues
• Bank reconciliations not timely and duties not properly segregated
• Grant drawdowns not always supported
• Employees did not obtain approval for credit card purchases

Questionable methods

used to allocate shared

costs

• Some shared costs may have been incorrectly allocated – couldn’t explain method
• Vacation, holiday and sick pay incorrectly allocated – didn’t follow salary allocations, used predetermined percentages
• No method for allocating shared equipment costs – did not address method

OIG Report Findings

Unallowable

costs claimed/

Costs did not

benefit the

program

• Costs did not directly benefit the program
• Equipment did not benefit the program; sat idle for over a year
• Unallowable salaries and wages – wages for other programs charged to the HS program
• Unnecessary storage costs – storing obsolete and useless items and old files
• Costs not allocated in proportion to benefits received

OIG Report Findings Non-federal share was not always supported

• Non-federal share was not supported by documentation, therefore disallowed and subsequently did not have enough
• Non-federal share claimed was partially paid for by Federal funds
• Home activities were not specific, only said “home task” etc.
• Facility costs not supported
• Signatures missing Accounting records were not always supported by source documentation
• Invoices missing
• Valid approval signatures missing
• Proof of payment missing
• Incorrect account classification
• Incorrect invoice amounts were paid

Wipfli

Findings

Sample Findings

▪ MATERIAL ADJUSTMENTS

• During our audit, Wipfli LLP proposed multiple adjusting journal entries which we deem to be material in relation to the financial statements. These entries were subsequently recorded by management. Since The NPO’s internal controls did not detect and correct these adjustments prior to the audit, a material weakness exists in The NPO's controls over year-end close and financial statement preparation. Preventable? How?