Agenda - 10-18-2007-1 - Laserfiche WebLink

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Memorandum No. 1077 C..~ August 1, 2007 Page 3 of 7 understand that the auditor is presenting these findings concerning internal controls and is communicating them in writing as required by SAS No. 112. Management has a responsibility to respond to the findings but should understand that they are not a mandate to eliminate them at any cost. The LGC is encouraging independent auditors and the finance staff to educate the governing board and management of their governments to eliminate surprises at future board meetings if significant deficiencies or material weaknesses are presented as part of their annual audit. Units of government should understand that the auditor must be independent of their client's internal control. The auditor cannot be part of the client's internal control process over financial reporting by providing a compensating control (e.g., the government relies on the auditor to catch misstatements versus having in-house controls). Becoming part of the client's internal control impairs the auditor's independence. Therefore units of government, especially smaller governments, should evaluate the cost/benefit implications of improving their internal control, including training their personnel to be more knowledgeable. Appendix B lists several common control deficiencies to consider in the costlbenefit evaluation. The LGC also urges the auditors and their governmental clients to work together so that the audit can be submitted timely. At this time, the LGC does not plan to extend deadlines as a result of SAS No. 112. Common Concerns of SAS No. 112 This section provides discussion of common concerns as part of frequently asked questions to the AICPA in reference to SAS No. 112. Auditor prepared financial statements: For smaller units of governments or public authorities, auditors are questioning whether their preparation of draft fmancial statements should be considered a material weakness or at the very least a significant deficiency. The LGC's understanding is that the auditor can be contracted to assist management with the preparation and drafting of financial statements and related notes to the fmancial statement and not have either a significant deficiency or material weakness if in the professional 1udgment of the auditor the unit of government has adequate controls in place to take responsibility for the financial statements (i.e., controls exist to adequately prevent detect and correct misstatements in the fmancial statements). It also is our understanding that if the auditor prepares the fmancial statements for the unit as a matter of convenience only, there is no fmding if the unit has the ability to prepare the statements but simply chooses not to do so. In order for the auditor to assist in the preparation of the draft financial statements and notes, and maintain his/her independence, the unit of government must take responsibility for the statements and notes. The fact that the auditor is contracted to draft the fmancial statements may be an indication of a potential control deficiency. The auditor cannot be a control and remain independent. Therefore the unit of government must have someone that possesses the necessary accounting expertise to prevent, detect, and correct a potential misstatement in the financial statements or notes drafted by the auditor (i.e., to take responsibility for the internal controls related to the preparation of the financial statements). This may be someone employed within the unit of government, or