In The Black

Brian Sims, OCA

Over the last few decades the internal audit world has progressively begun to embrace the notion of using computer aided auditing tools and techniques (CAATTs) as a means to gain efficiencies, greater coverage and ultimately greater assurances over specific transaction classes or areas of operation. Mostly, these are ad hoc tests which rely heavily on the audit software (i.e., ACL, IDEA, MS Access, etc.) and an auditor with an adequate knowledge of the audit software. However, there are some audit shops which have developed their CAATTs into a fully integrated and automated continuous auditing (CA) system. So what’s the difference? Both have the same goals in mind but only one has actually made the vision a reality. This post begins a series focusing on how to structure your audit department, interdepartmental relationships, systems and scripts to build an effective continuous auditing (CA) model. We will examine some of the “how to’s”, “what if’s” and “absolute do not’s” that inevitably happen along the way.

Most people I have encountered want to dive right in and start using the software to audit. However, it is my opinion that taking this approach will only get you as far as ad hoc testing. My best suggestion is to spend the time up front discussing and developing documentation and development standards. These standards should include things like:

- A clearly stated intent of the CA system
- How to properly document the objectives and assertions covered for a test
- How a test fits into the overall CA scheme
- Program or Script process flow documentation
- How and where the files will be saved
- Testing review and approval channels for new audit procedures
- Approvals and documentation around audit procedure retirement
- Dummy checks
- Audit team CA roles and responsibilities definitions

Other considerations include: contingency planning and error handling, data access and availability, version control and audit exception handling and resolution. (Most of this can be borrowed from programming industry best practices and the System Development Life Cycle.) Going through this exercise sounds boring and time consuming (and it is) but it will help avoid countless headaches and backtracking later. Once these are fully documented, however, do not just put this on a shelf and forget about it. These standards should be revisited regularly to examine what is working, what isn’t working and why. Then, fine tune as needed.

From here, I would suggest performing an S.K.E.A. (Skills, Knowledge, Experience, and Ambition) inventory of the Audit Staff. This inventory should tell you who your audit procedure developers probably will be, who needs training, and who is willing to train as a backup in case another auditor leaves. Changes of personnel in the audit department will impact operations less if all of this is in place.

This is by no means an exhaustive list and audit departments will inevitably come across situations not addressed here, but the keys to being successful are keeping your head in the game, having well trained staff that does the same and, when needed, contacting an experienced and knowledgeable professional for added support.

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Cara Bradley, CPA

As we put 2011 to bed and begin a new year, it is a good time to review the agreements your Employee Benefit Plan has in place with its service providers … if this has not taken place already. In fact Plan Sponsors, you have until April 1, 2012 to do so, according to the Department of Labor. Fees for employee benefit plans have hit the spotlight in recent years, as more Plan Sponsors shift expenses to the Plan. We have already seen the fees disclosed in more detail on the 5500. Now the Department of Labor is requiring the agreements with service providers to be written to allow Plan Sponsors to understand what services are provided and what these services cost, so they can determine compensation is reasonably paid. The key is that the agreements be in writing and that specific items be disclosed. It is important to note that if the April 1, 2012 deadline is missed, a prohibited transaction would occur and cannot be corrected retroactively.

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Chuck Yaple, CPA

Savvy school business officials have already cut school budgets to the bone. But these financial times are requiring more radical strategies for cost containment. Click here to hear Null-Lairson’s Chuck Yaple discuss radical cost-cutting plans and share his insights on today’s programs via ASBO Radio.

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Chuck Bucek, CPA, CVA

January is not only the month for ringing in the new year, but also the month that employers, banks, brokerage companies and other income providers are required to issue to you information forms reporting the amount of income paid to you during the previous year. Here is a suggestion! In order to minimize your time, purchase a folder (an accordion style folder works very well for this purpose) to help accumulate, organize and keep track of your tax records.

Each time that you receive one of these aforementioned forms, place it in the folder. You should have a separate section or pocket for each of these different types of income: wages, interest income, dividend income, proceeds from sales of mutual funds and stock shares, proceeds from sale of real estate, retirement distributions, business income, income from flow-through types of investment entities, social security income and other miscellaneous income.

Tax deductible expenses can also be organized by section. Include cancelled checks and receipts for the following items: retirement plan contributions, education expenses, business expenses, medical expenses, ad valorem taxes, mortgage and investment interest expenses, charitable contributions, and miscellaneous deductions such as investment management fees, tax preparation fees, safe deposit box rental fees and business and professional dues, subscriptions and licenses. It is very helpful to then summarize these expenses by category.

Other relevant sections in the folder include family specifics (births, deaths, marriages, change of address), payments of Federal and State estimated income taxes and documentation from purchases and sales of real estate, major improvements to a home and new business investments to name a few.

When you are ready to have your income tax return prepared, just give the folder to your tax return preparer. Organized and complete tax information allows the tax professional to focus on analyzing and strategizing to assist you in minimizing your income tax liability. Once the return has been prepared, put your copy in the folder with all of your documentation for safekeeping. If you are requested to provide a copy of that year’s tax return in the future, you won’t have to spend a lot of time trying to locate it.

Another tip! While you are at the store, why not purchase a 2nd folder to begin using for collecting and organizing tax data and documents for the year of 2012? This way, you can accumulate this information as you progress throughout the year, instead of having to back-track and locate a full year’s worth of information all at year end. This will definitely aid in lowering your stress level relating to your income tax filing requirements.

2011 Tax Return Due Date

Individual Federal income tax returns for the 2011 tax year are due Tuesday April 17, 2012 because of April 15th falling on a Sunday and because of April 16th being a Washington DC holiday. The extended due date of the 2011 individual income tax return will be October 15, 2012.

The above information is intended to be general in nature. Please let us know if you have questions regarding income tax return or quarterly income tax filing requirements or any other tax matters.

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Here are some useful QuickBooks tips for the New Year:

Processing Payroll

If you process your payroll through QuickBooks make sure to click on the payroll updates that appear regularly. It is especially important at the beginning of each new year, because that is usually when new Federal laws become effective.  The wage limit for Social Security deductions has increased at the start of 2012 and needs to be reflected in your payroll.

Creating a Budget in QuickBooks

At the beginning of each year creating a budget for your business is beneficial.  You can do this in QuickBooks:

1. From the “Company” menu, choose “Set up Budgets”.  Choose the fiscal year you are setting up in the “Budget for Fiscal Year” field by using the up and down arrows.

2. Choose the account you are setting up the budget for in the “Account Field”, by using the drop down list.

3. Enter the budget amount for the first month, and then fill in the remaining months.  Use the “Fill Down” button to speed up the amounts.  If you want to increase each month by a specific amount or percentage, click “Fill Down” then enter that percentage or amount and click OK.

4. Click “Save” when you are done filling in the budget amounts for the months in this particular account.

5. Go to the next account you are budgeting and repeat.  When you are finished entering the information for all the accounts you are budgeting, Click “OK”.

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Brian Sims, OCA

Accounting software is steadily becoming more and more sophisticated in the accounting operations they can handle automatically. From application controls such as automatically performing recurring journal entries, to full blown workflows where the software determines a full series of reviews and approvals based on predetermined criteria, these application controls have critical configurations which need to be managed and maintained by appropriate personnel to ensure the integrity of information. Keeping in-line with the COSO framework, this responsibility falls on management within the finance department and it is vital that finance departments fully understand how their accounting software system controls work with the manual controls as transactions are processed through the overall accounting system. Even more so, it is important for management to be aware of who has the rights to change the configurations of these controls and if anyone is monitoring changes. Under COBIT (the internal control framework for IT), these application controls cannot be relied upon to work unless the configurations management and monitoring general control is effective. To put this in practical terms, the configuration of a workflow’s business rules in SAP would need to be highly controlled as to who can change the rules and would need to be reviewed, checking for logic errors and approved by a management level individual within the finance department prior to implementation. I would also suggest that the change to a rule or new rule be tested in a test environment thoroughly to discover any logic errors that may cause accounting issues down the road. COBIT’s processes AI6, “Manage Changes” and DS9, “Manage the Configuration” discuss these concepts in greater detail and can be found in COBIT published by ISACA (Information Systems Audit Control Association).

MS Excel Tip: Data with dates in the format MM/DD/YYYY can easily be used to display the day of the week or month name using this function: =TEXT(8/21/2011,”dddd”) for the day of the week and =TEXT(8/21/2011, “mmmm”) for month name. Cell references can also be used in place of a hard keyed date within the formula.

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Leslie Wilks, CPA, CFE

School district officials know that Activity Funds are a great target for theft because 1) they involve receipts of cash 2) they tend to have insufficient oversight and 3) in many instances, they are not properly reconciled.  I wrote an article for the Winter 2011 edition of the TASBO Report which identifies fraud schemes related to activity funds, the associated risks, and what you can do to minimize these risks. You can read the article by clicking here. Fraud in activity funds is a serious problem and can be devastating to the reputation of a district; prevention and deterrence are the best ways to combat fraud in these types of funds.

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Cara Bradley, CPA

I recently attended the AIPCA Employee Benefits Plan Accounting, Auditing and Regulatory Update in Washington D.C. There were many topics covered from timely deposits, the new fee and expense disclosure rules and of course, fiduciary responsibility. It should not be news to anyone that fiduciary responsibility is a hot topic with the Department of Labor right now. I recently came across a post that in my opinion gives Plan Sponsors a good list of best practices regarding what they can do as a fiduciary to best protect plan participants and themselves. While we will have to wait to find out if and how the rules may change regarding the definition of a fiduciary, it is likely that the definition of a fiduciary will be broadened in an effort to better protect plan participants and their retirement assets. If nothing ends up changing, we will still live in a world where we outsource everything and one thing that cannot be outsourced is fiduciary responsibility. As we prepare for the start of a new Plan year, please take a moment to review the governance procedures in place to determine whether improvements can be made.

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Chuck Bucek, CPA, CVA

At this time of year most of us are thinking about a visit from Santa, mistletoe, and holiday parties. However, December provides individuals with a perfect opportunity to analyze and fine tune their income tax situation for the soon-to-be over tax year of 2011.  Action can still be taken before the end of the year to reduce the total tax due (as well as your stress level) come tax filing time in April of next year.  Below is my list (and I’ve checked it twice) of planning points to consider.

Standard Deduction or Itemized Deductions

The IRS allows a taxpayer to either deduct the standard deduction amount or the itemized deductions amount, whichever is higher in most circumstances, from adjusted gross income.  The standard deduction for 2011 is $11,600 for couples, $5,800 for singles and $8,500 for heads of households.  Itemized deductions include medical expenses in excess of 7.5% of adjusted gross income, ad valorem and state and local income and sales taxes, mortgage and investment interest expense, charitable contributions and miscellaneous expenses (such as safe deposit box rental, tax return preparation fees, union dues, investment management fees) in excess of 2% of adjusted gross income.

Ad valorem taxes must be paid on or before December 31, 2011 to be deductible.  The same is true for the payment of any charitable gifts being considered.  The January 2012 mortgage payment could be made in December 2011 to have an extra interest payment included in this year.  Decisions on elective medical procedures should be analyzed as well.  If your total medical expenses are greater than the 7.5% of adjusted gross income limit, then consider getting the procedure performed and paid for this year.  If your total medical expenses are well below the 7.5% limit, postponement until 2012 would be more beneficial.

If the taxpayer’s standard deduction and total itemized deductions are close in amount, then the timing of the payment of some of the expenses should be analyzed to provide the most benefit.  You might take the standard deduction in 2011 and defer payment of ad valorem taxes, charitable gifts and medical expenses until 2012 to allow for a higher deduction in 2012 when combined with your 2012 expenses.

Individual Retirement Accounts

Contributions to an Individual Retirement Account might also be tax deductible, depending on your participation in other types of retirement plans and on your level of adjusted gross income.  The deductible limit for 2011 is $5,000 if under age 50 or $6,000 if age 50 or older.     This contribution can be made by April 17, 2012 and still be allocated to 2011.

Investments

This is also a good time to review your investment account for potential stocks to sale that are in a loss position.  Taxpayers may deduct capital losses against capital gains plus an additional $3,000 against other income.  The appropriate stocks to sell at a loss are those that you don’t foresee turning around into a profit position any time soon.  However, if you have a loss stock that you really like, you can still sell that stock, take the loss, wait 30 days and then purchase shares in that stock again.  You must wait 30 days for the loss to be deductible.

Long-term (those held more than twelve months) gains are taxed at 15%.  Taking advantage of this low tax % is a viable option as well.

These are just a few of the items to consider.  Tax planning taking into account both 2011 and 2012 income and deductions in tandem is recommended.  If you should have any questions or would like to discuss year-end income tax projections and strategies, please contact us.

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Celina Miller, CPA

The State Funding calculations in the State of Texas are difficult and must be treated with care. While many districts are still grappling with ways to reduce costs, it is ever so important to make sure State Aid has been accounted for properly.

Many districts opt to use the Region XIII Template to calculate their state aid allotments. This is perfectly acceptable. The key is to ensure that critical factors such as refined average daily attendance (ADA), tax collections, etc are correct. It is also important to compare the Texas Education Agency’s (TEA)  Summary of Finances to the District’s calculations. (A side note: You may have noticed that TEA’s State Aid Reports look a little bit different now.) In addition the payment ledgers must be reviewed in conjunction with the Summary of Finances. The ledgers indicate whether TEA has underpaid or overpaid a District. It is important to note that overpayments aren’t necessarily a bad thing. They simply have to be managed properly. That is, overpayments should be recorded as payable to the State.

Average attendance is the main driving force for State Aid. Yes, I realize that there is an inverse relationship between tax collections and state aid, but incorrect ADA can skew a district’s state aid. With that said, it is important that proper internal controls are in place over ADA. This includes the following:

• Each six-week period the District should reconcile its Student Detail Reports to the Campus Summary Reports, which should then agree to the District summary Report (PEIMA Superintendent’s Attendance Report)
• The District’s PEIMS Coordinator or equivalent should ensure that the student membership from the teacher’s roster is reconciled to the attendance accounting records at the end of the first and fourth six-week reporting periods.  The reconciliation is designed to verify that all students reported as “no show” were purged from the attendance accounting system.
• Simple analytics can also be performed to ensure that membership for any full-day student does not exceed the number of days of instruction for the same reporting period for the same instructional track.
• Each six weeks the District should be reviewing the PEIMS reports for unusual fluctuations, which should be investigated promptly.
• Procedures at the campus level should be in place to prevent someone from altering attendance information already released by the teacher without proper documentation.
• Changes made to student’s attendance data after a teacher has submitted his/her attendance should be tracked by the software. Someone other than the attendance clerk should review this report. The PEIMS Coordinator should also consider running these reports and select a few dates and campuses and ensure that all changes are properly supported.

If there is any doubt that State Aid has not been properly recorded for fiscal year 2011, Districts should seek the advice of those proficient in State Aid calculations and accounting. There are many excellent consultants around the state that are willing to assist districts with these issues.

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