Auditing 101Bill Harrison

Chief Internal AuditorOctober 10, 2012

Learning Outcomes Understand the internal and external audit environment

Key players Purpose and structure of the Office of Audit Services Audit process

Understand internal control concepts and standards

Understand practices/procedures to ensure a “clean” audit

Definition of Auditing An unbiased examination and evaluation of financial information,

operational processes, or compliance with laws and regulations in an organization. It can be done internally (by employees of the organization) or externally (by an outside firm).

An IRS examination of a taxpayer's return or other transactions.

Work performed in accordance with standards.

Source: Investopedia.com

What do Auditors Do? For the most part, audits are conducted by independent public

accounting firms, federal, state, and local government auditors, or internal auditors. In addition to financial statement audits, the professional literature describes other types of audits such as attestation engagements and performance audits

When complete, auditors generally issue a written report with a conclusion that confirms or denies management’s adherence to an existing set of criteria such as generally accepted accounting principles, government laws and regulations, or internal policies and procedures.

Audit Findings

Criteria Condition

Effect

Cause

Recommendation(s)

Audit OrganizationsGovernment Accountability Office – GAO

Offices of Inspector General – OIG

Vermont State Auditor

Internal Auditors – Office of Audit Services

Financial Statement/A-133 Auditors

Other Independent Auditors

Government Accountability Office

Offices of Inspector General

Tip #1Understand the environment:

Visit agency and OIG web sitesRead OIG semiannual reports/audit reports at

those agencies dealing with colleges and universities:NSF, HHS, DoED, DoD, NASA, USDA

Join a professional societyAttend UVM Audit Committee meetings

Read meeting minutes

Tip #2Read and understand UVM’s Government Reviews

Protocol, an official University Operating Procedure.

Always remember: there are a number of departments on campus to help you deal with external requests for information including Sponsored Project Administration, Audit Services, Compliance Services, and General Counsel.

Office of Audit ServicesOrganizational Structure

Audit Charter

Audit standards

Audit Selection, Planning, Reporting and Follow-up Processes

UVM Organization Chart

OrganizationChief Internal

Auditor

Deputy Internal Auditor

Senior Auditor

Senior Auditor

Senior Auditor

Office/Program Support Senior

Audit Services Home

Audit CharterThe Office of Audit Services is an independent and objective assurance and consulting activity within the University of Vermont (UVM) that provides the

Board of Trustees and management with observations, recommendations and advice

designed to add value and improve the effectiveness of the University's risk management,

control, and governance processes.

Audit Charter, cont…Provide a comprehensive audit program

Access to all university employees and records

Allocate resources, set frequencies, select subjects, determine scopes of all internal audits

Obtain assistance from UVM personnel

Audit Charter, cont…Can’t perform any operational duties for UVM

Initiate or approve any accounting transactions outside of the Office of Audit Services

Direct activities of any UVM employees

Audit Standards

The IIA Red Book provides standards for independence and ethical conduct, planning, reporting, and closing audit projects.

How are Audits Selected?Required audits

Annual risk-based audit plan

Management requests

EthicsPoint Investigations

The Audit ProcessPlanning and Risk Assessment

Fieldwork

Reporting

Follow-up

The Audit ProcessPlanning

Communication with managementInitial data requestPlanning

A detailed understanding of the organization is developed by reviewing relevant policies, procedures, and records and interviewing or surveying University employees

Follow-up Data Request

The Audit ProcessRisk Assessment

We can’t look at everything!Determines the scope of the audit

The Audit ProcessFieldwork

After finalizing the audit plan and risk assessment, the auditor begins the fieldwork phase. Fieldwork typically consists of testing transactions for conformity with applicable university policies and procedures, and assessing the adequacy of internal controls.

The Audit ProcessReporting

After the fieldwork is completed, the auditor prepares a report. The report generally consists of several sections and includes: the distribution list, background information, summary of results, detailed presentation of results and recommendations, management response, and the objectives, scope, and methodology followed.

Discussion Draft, Final Draft, Final Report

The Audit ProcessAudit Follow-up

The purpose of the follow-up is to verify that any agreed-upon corrective actions have been completed. The auditor will interview staff, reperform tests, or review new procedures to perform the verification.

How to Ensure a “Clean” Audit Opinion

COSO Internal Control Framework

Control Activities

COSO Internal Control Framework

Adopted by UVM Board of Trustees

Five Essential ElementsControl EnvironmentRisk AssessmentControl ActivitiesInformation and CommunicationMonitoring

Control EnvironmentThe control environment sets the tone of an organization. It is the foundation for all other components of internal control. Control environment factors include the integrity, ethical values, management's operating style, delegation of authority systems, as well as the processes for managing and developing people in the organization.

Source: Wikipedia

Risk AssessmentEvery entity faces a variety of risks from external and internal sources that must be assessed. Risk assessment is a prerequisite for determining how the risks should be managed.

The starting point is business objectives.

Source: Wikipedia

Risk Assessment-ExampleOccurrence — the transactions actually took placeCompleteness — all transactions that should have

been recorded have been recordedAccuracy — the transactions were recorded at the

appropriate amountsCutoff — the transactions have been recorded in

the correct accounting periodClassification — the transactions have been

recorded in the proper accounts

Control ActivitiesControl activities are the policies and procedures that help ensure management directives are carried out.

They include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets and segregation of duties.

Source: Wikipedia

Information and Communication

Information systems play a key role in internal control systems as they produce reports, including operational, financial and compliance-related information, that make it possible to run and control the business.

In a broader sense, effective communication must ensure information flows down, across and up the organization.

Source: Wikipedia

MonitoringInternal control systems need to be monitored. This means that there is a process that assesses the quality of the system's performance over time. This is accomplished through ongoing monitoring activities or separate evaluations.

Source: Wikipedia

Control Activities for a “Clean” Audit

Authorization

Preparation

Review and Approval

Segregation of Duties

Delegation of Authority

Recordkeeping

Training

Periodic Monitoring

Authorization

Prior to initiation, transactions should be authorized by a person with budget approval authority, knowledge of institutional policies and procedures, and a clear understanding of the business purpose of the proposed transaction.

PreparationAssistance in using systems or preparing forms should be provided by business or administrative professionals; however, all payment requests should be signed and dated by the individual who incurred the expense or received the service. All requests should include a detailed description of the business purpose underlying the transaction when it is not readily discernible from the supporting documentation.

Review and ApprovalRequests for reimbursement or payment should be reviewed and approved by the requestor’s supervisor. Review and approval of transactions by the supervisor generally provides for adequate segregation of incompatible activities and reinforces employee awareness of a sound control environment.

Separation of DutiesDuties (roles) are assigned to individuals in a manner so that no one individual can control a process from start to finish. Separation of duties provides a system of checks and balances by other individuals. It allows an opportunity for someone to catch an error before a transaction is fully executed and/or before a decision is made based on potentially erroneous data.

In addition, having adequate separation of duties reduces the ‘opportunity’ factor that might encourage an employee to commit fraud or to embezzle.

Delegation of AuthorityAuthority to approve expense transactions should only be delegated to those who have sufficient authority and responsibility over the initiator of the transactions. The specific delegation of authority should be documented.

RecordkeepingSufficient and appropriate records should be created and retained for each transaction to provide evidence of authorization and/or approval, business purpose, adherence to university policy and procedures, and external requirements.

Business purpose should be stated such that someone with no prior knowledge of the transaction could reasonably determine the benefit to the University.

Tip #3Read and understand our Record Retention

policySufficient, appropriate records as required by

University policy and external requirements.For the period required.

COSO Summary

Monitoring

Information and Communication

Control Activities

Risk Assessment

Control Environment

•Authorization•Preparation•Review and Approval•Separation of Duties•Delegation•Recordkeeping

Tip #4UVM promotes ethical values – Our Common

Ground, Statement of Commitment and Expectation in the Workplace, Code of Business Conduct.

There is no perfect system

Report questions or issues that may involve violations of our code of business conduct or other policy standards or legal requirements

The Bottom LineReally just common sense

Become familiar with University policies and any external requirements in your area of responsibility

If you think business practices may be too informal, talk with your unit management or contact us

Report incidents or situations that may involve violations of the University's Code of Business Conduct or other policy standards or legal requirements

If you’re contacted by an external auditor, follow the procedures described in our Government Reviews Protocol

ContactsOffice of Audit Services 6-3086

Bill Harrison 6-0568

John Copoulos 6-3318

Jennifer Sheridan 6-0005

Kyle Sowles 6-2617

Tom Leene 6-3415

Amy Vile 6-3086