Be prepared for a successful audit
Originally Published in Statewise Winter 2007
by Michael S. Roberts
Countless hours of work go into each Fiscal Management (FM) expenditure audit. Auditors know how busy you are and that your time is valuable, and they are always willing to help you prepare for an audit. With open communication and advance preparation, state agencies and institutions of higher education can move quickly through a successful audit.
It's a common adage that communication is a two-way street. Auditors are eager to clarify any mysteries in the audit process. Ask a question, and they will do what it takes to answer it. By the same token, auditors want to learn all they can about an agency's operations so that they can produce a helpful audit report. Open communication makes an audit go more smoothly.
"We appreciate the cooperation and assistance extended by the management and staff of the agencies we audit," says Joani Bishop, manager of FM's Claims Division.
Keeping it clean
Auditors and agencies share the same goal — to ensure all payments follow state laws and rules. An audit is a tool to help achieve this goal.
"The biggest misconception is that we're there to get you, that we love to find fault," Auditor Derik Montique says. Rather, auditors prefer a "clean audit" — one with relatively few findings. Clean audits take less staff time and travel money and allow auditors to review more agencies.
"Successful audits are a reflection of both dedicated staff at state agencies and effective assistance and training by FM staff," says Lisa Nance, director of the Expenditure Audit and Assistance section.
Each year, FM develops a plan to determine which agencies will be audited. Randy Taylor, an auditor in Nance's section, coordinates the post-payment audit plan with input from staff across the division. The plan involves extensive number crunching, but it boils down to just a two-step process — a risk assessment of all agencies followed by selection of which agencies to audit.
The risk assessment is based on a point system used to rate all agencies. Taylor and FM systems analysts draw information from the Uniform Statewide Accounting System and other sources to obtain the figures to plug into the risk assessment formula. Factors such as dollar amount and number of transactions, length of time since previous audit and number of bailment contract violations are assigned weighted values to arrive at risk assessment scores. Once the auditors determine the weights, the process is almost completely data driven.
When the risk assessment rankings are complete, Taylor selects the agencies that will be audited during the next fiscal year. But the preparation doesn't end there.
Before setting foot on an agency's premises, auditors research the agency thoroughly. They review the information that went into the risk assessment and other data reports in the audit period. They also ask the agency to complete a questionnaire.
On the questionnaire, the agency designates a primary contact person to work with the auditors. Ideally, this person has authority to answer questions and resolve issues the auditors raise. Sometimes, an agency appoints different individuals to work with auditors on different areas. For example, one person may handle issues related to payroll, while another deals with purchase and travel issues.
Auditors want to see copies of recent audits by oversight agencies or other auditors. They also want to see internal policy and procedure documents to gain a better understanding of an agency's operations. These procedures should be up to date so auditors can see them in practice.
How to make audits go faster
After doing most of the preliminary research, auditors schedule an entrance conference to give agency staff a chance to ask questions. Since audits typically include purchase, travel and payroll transactions, someone familiar with each of those areas should attend.
During or shortly after the entrance conference, the auditors give the contact person a "pull list" of transactions selected for audit. For all but the smallest agencies, the list represents random samples taken from each type of transaction. The agency literally pulls from its files the supporting documentation such as invoices for the selected transactions.
For a faster audit, agencies need to have all the documents ready when auditors arrive. "If you can hand us all the files when we get there, we can be out of your office in much less time,"" Bishop says.
Preparing the auditors' working area in advance allows them to start working as soon as they arrive, which also speeds up the audit. If the auditors need viewing access to electronic systems where documentation is stored, that can be done ahead of time too.
Communication is key
Communication is the key — not just between agency staff and auditors, but also among agency staff members. Relevant documentation is sometimes maintained in various places across an agency. For example, an agency may store contracts separately from purchase vouchers. But when a purchase voucher references a contract, auditors need to review the contract as well, to ensure that it is being followed. Payroll auditors may also need data stored in the human resources area.
"It is important for agencies to include their HR departments in preparation for the payroll portion of the audit," Nance says.
Auditors call reviewing documents at the agency "fieldwork." The most important thing for the agency to do during fieldwork is to maintain open communication with the auditors.
When they come across what may be an error, the auditors make a note and set the document aside. Intermittently, they show the potential findings to the agency contact person. With some explanation or more documentation, many potential findings can be resolved on the spot.
Establishing best practices
Auditors can issue either an audit letter or a full audit report. When an agency has no or relatively few or low-dollar findings, an audit letter is issued — a good reason for the agency to commend its staff.
The full audit report includes more significant findings. Before the report is issued, the agency receives a preliminary copy. At that time, the agency can respond to the findings. The final report will include the agency's comments.
The report includes only payment and documentation issues. Management and processing issues such as incorrect comptroller objects and interagency payments made with warrants are called to the agency's attention separately.
The agency must complete an action plan to remedy the findings in the audit report. The plan uses the audit results to establish best practices.
FM expenditure auditors reviewed 44 agencies in fiscal 2007. Auditors are exposed to the inner workings of many agencies and have the privilege of working with knowledgeable staff from across the state. When they visit your agency, use them as a resource. Working together, auditors and agencies can reach their common goal — ensuring that all payments follow state laws and rules.