In The Black

Brian Sims, OCA

In my last posting, I discussed developing a strategy for your audit shop to follow complete with development standards which create your “commander’s intent” as to the direction of the Continuous Auditing System. Now that there is a structure to fit into, we move to define our audit universe and perform risk assessments over significant areas by obtaining an inventory listing of all systems implemented. This includes, but is not limited to, the network operating system and domain controller, all application programs, and the databases supporting those applications. This listing should be organized such that relationships between systems are clearly evident and systems are ranked by relevance to the audit objectives. This should look all too familiar and should tie back to systems which house the data for transactions, accounts, or operational data that are determined as material to the financial statements or other audit objectives. Something to always keep in mind and should probably be included in the CA Strategy is that the continuous auditing system is dependent upon the system it audits.
With our audit universe now defined we move into risk assessment. For me, risk assessment has multiple factors which give a comprehensive view of the risks identified. These factors include:

Likelihood – Potential for an adverse event to occur. Likelihood breaks down into these parts:

• Imminence – is a measure of how soon the event will happen from the date the risk was identified?
• Frequency – is how often it will occur once it does happen.
• Irregularity – is how consistent or predictable the event is?

Impact – which breaks down into these parts:

• Operational Impact – is the operations that will be affected and to what extent they will be affected.
• Financial Impact – is the estimated potential financial loss due to the identified event. I specifically listed this second to Operational Impact because the Operational Impact flows through and is often the source of Financial Impacts.

Using these factors, we perform upstream and downstream risk assessments of specific business processes. Using business processes allows us to see the entire transaction as it flows from department to department. Along the way, we identify application controls, the general controls that cover them, and the evidence that is available for audit which mitigate identified risks. I would suggest reviewing the system’s data dictionary (sometimes called “database schema”) as well as the user and administrator manuals to help identify where system controls exist and audit trails and control configurations are stored. This is where a good relationship with the IT department can really come in handy because they can usually take you right to the information you are looking for. For those more sophisticated systems, there may be a module like SAP’s GRC which identifies risk exposures like rights assigned to a single user that conflict with segregation of duties for you. If your systems do not have something like that, you need to expand scope and look at designing something similar into your continuous auditing system.

Always remember that risk assessment is an iterative process that needs to be revisited regularly to adjust to changes in the environment. I have seen CA systems which actually perform on going risk identification and assessments to monitor emerging issues and even make decisions as to which procedures to perform from those assessments. These systems took time to design and build but it can be done and usually pays off big time in the long run.

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Changing the default fonts and other settings for reports:

Go to Edit/Preferences/Reports & Graphs/Company Preferences and click the format button. Here, you can change the Header and Footer information, the default fonts, and the number display for most reports.

Find the exact Version and Release of QuickBooks that you are running:

Press F2 while in QuickBooks, and note the version name near the top of the window.

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Chuck Bucek, CPA, CVA

Many of us are busy gathering our tax documents as they arrive in the mail, summarizing expenses that were paid and locating receipts for deductions. All of this information will soon be sent to your tax return preparer to start the wheels in motion for the preparation of the 2011 income tax return filings. To those of you who are somewhere along in this process already, give yourself a pat on the back for not being a procrastinator. Your tax professional appreciates your diligence.

However, most of this information represents the numbers portion of the tax return. This year before you send that packet of information to be prepared, consider whether any of your nonnumeric information has changed. This information is important as well. Examples include change of address and change of occupation. Perhaps your marital status has changed due to marriage or divorce. How about the status of your dependents? Was there a new birth? Did your child graduate from college and enter into the workforce? Are you providing finances for an elderly parent? Who is the custodial parent if a divorce has occurred? If you are required to file a partnership or corporate income tax return, was there a change in the names or addresses of the partners or stockholders or shareholders? Were there any changes in ownership?

Another thing to contemplate is the manner in which you prefer to file your income tax return. The choices are to file a paper return or to submit an electronic transmission. If choosing to file electronically, do you want a direct deposit of your refund into your account or do you want to have the payment due taken directly from your account?

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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Celina Miller, CPA

Handling the Education Jobs funds (Edu Jobs) has seemed fairly simple relative to other federal programs. I guess there are those that beg to differ given the 27-page FAQ issued by the Texas Education Agency (TEA). Although it is clear that these funds should only be used for school-level employees, it is important to ensure that we understand what that means because there will be a test! TEA has begun its Edu Jobs desk reviews. The focus is on documentation, of course.
Supporting documentation should be maintained for all activity related to Edu Jobs from the time your district was awarded Edu Jobs until those funds are completely exhausted. At all times, your district should be able to provide a reconciliation of the amounts awarded, expended and paid by TEA. In addition, TEA is looking for supporting documents for all Edu Job expenditures and that those expenditures comply with the U.S. Department of Education and the Texas Education Agency requirements. Note, that this includes compliance with 1512 quarterly reporting requirement as was seen with the American Recovery and Reinvestment Act (ARRA) funds.
Your best bet is to read TEA’s FAQ, the OMB Circular A-133 compliance supplement under CFDA 84.410 and other USDE guidance to ensure full compliance.

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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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