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

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Memorandum No. 1077 C August 1, 2007 -~ Page 4 of 7 outsourced, that the auditor concludes, in their professional judgment, is capable of preventing, detecting, and correcting a potential misstatement in the financial statements or notes. Small governments in North Carolina most likely have competent finance staff able to perform the day to day functions of the financial department but may not have staff with the technical ability to prevent, detect, and correct a potential misstatement in the financial statements and notes drafted by the auditor. Therefore, the auditor will carefully evaluate his/her independence and consider the need to report a significant deficiency or material weakness for inadequate design of internal control over the preparation of the financial statements being audited. The LGC has urged auditors to explain this to the government officials so they can understand the role of the auditor and the responsibility of management and their governing board. The LGC staff is aware that the governing boards of local governments may be willing to accept this deficiency, based on their cost/benefit analysis of eliminating this control deficiency. Our office plans to continue, as always, to evaluate the overall fiscal condition of the local government, not just the findings that may be presented by the independent auditor. An action the .unit's board and management may wish to consider to mitigate the control deficiency or material weakness discussed above is to outsource particular accounting-related tasks, including preparation of regular interim financial statements and a draft of the year end statements. Our office maintains a list on our website of accounting firms willing to perform various non-audit services, or the unit may pursue this service from other resources. The benefits of this type of arrangement are many: the unit obtains these services without hiring additional employees, the unit receives timely financial information on a regular basis, which enables the Board and management to make more informed decisions, and often the year-end audit costs are reduced because the bookkeeping is current at year-end or shortly thereafter. Sometimes the audit fee drops enough to cover the cost of contracting out the bookkeeping. A copy of the list of firms is located on our website at http://www.nctreasurer.com. On the Home Page, under State and Local Government, select "Auditing and Reporting Resources." Then, select the link labeled "Accounting Firms Supplying Non-Audit Services" and, once opened, select the firm to retrieve additional information. Converting cash financial statements to accrual basis statements, making audit adjustments, and other non audit services provided by the auditor: The same controls that apply to the drafting of the financial statements may apply to other non-audit services provided by the auditor for the client. The auditor will determine if the government has adequate controls to prevent and detect financial misstatements. Su~~ested guidelines to determine whether a client has sufficient accounting competence and knowledge to detect or prevent a misstatement or mistake: Guidance from the AICPA's frequently asked questions concerning SAS No. 112 states that the auditor is not required to test the competency of their client. However, the competency may be questioned if the auditor is unsure as to whether or not adequate controls are in place to prevent and detect financial statement misstatements. The client may request the auditor to perform certain services for the client's convenience rather than due to lack of competency. If the auditor feels that the unit of government could not perform the service themselves and/or does not have the suitable skills, knowledge, and experience to review the work in such a manner that the unit's control would prevent or detect a material misstatement, a control deficiency has been identified.