Audits can be intimidating, but adequate planning can help eliminate audit surprises, say Justin Diedericks and Berna Botha. In this article they highlight the various aspects leadership should consider and drive within their departments/organisations
Whether an audit is performed by the Auditor-General of South Africa (AGSA), or any other auditing firm, on-going preparation and planning throughout the year can bring about improved data quality, increase the accuracy of financial statements and performance reporting, and ultimately allow for far more effective and transparent business processes. The following reflections can help clients in both the public and private sectors streamline their operations in preparation of the annual audit.
DAILY AND MONTHLY REQUIREMENTS
To ensure audit readiness, the best place to start is with the implementation and daily exercising of disciplines based on the development and updating of policies and procedures. This ensures:
• Achieving control objectives
• Appropriate and consistent performance of staff in day-to-day operations
• Clarity of expectations and accountability for performance
• Standardisation of processes and consistent outcomes
A key starting point is document sign-off. This must occur immediately after the source documentation (invoice, credit note, journal) has been accurately captured in the general ledger and reviewed by the responsible senior. This includes coding to the appropriate general ledger code.
Preparing weekly bank reconciliations is regulatory but also ensures current information is processed and that unreconciling items are cleared in a timely manner.
Monthly management accounts ensure processing is done regularly and provide information on the actual performance based on the plans/budgets set per the strategic plan/integrated development plan (IDP), annual performance plan (APP), and service delivery and budget implementation plan (SDBIP). The monthly review of performance assists in future forecasting and ensuring remediate actions are implemented where performance deviates. Monthly management accounts include:
• Statement of financial position (including supporting reconciliations)
• Statement of financial performance
• Cash flow statement
• Budget versus actual variance analysis and comments
• Performance information including a list of all projects/programmes engaged in and progress on each
• A schedule of future commitments
Areas of concern will be highlighted when comparative information is included in the monthly management accounts. This makes the analytical review process easier and assists in addressing concerns immediately.
On a monthly basis, asset registers should be updated with additions, disposals and depreciations and must agree to the general ledger. Bi-annual asset counts are also recommended.
GRAP 17 requires annual consideration of the aspects relating to property, plant and equipment, such as:
• The nature of each category of assets and the inherent likelihood of changes in useful lives, residual values or depreciation methods
Supporting documentation for the considerations and conclusions of the above are required by the auditors.
Consumables and inventory must follow the same process as assets but with more regular counts. Management should identify obsolete consumables and inventory during the review of these counts and also consider impairments to these.
Management’s review of the monthly management accounts ensures the accuracy and completeness of information. It must be a standing item on the agenda of the finance committee, audit committee, and board/council meetings.
There is an increased focus on the auditing of predetermined objectives. Management’s process begins when policies are developed and must continue through each of the planning, budgeting, implementation and reporting phases. SMART targets and indicators must be set in the APP and evidence supporting the achievements of these must be maintained and recorded.
Preparing management account reports, including financial and performance information, is important but sound records supporting the information recorded is fundamental for good governance and effective administration. The integrity of the records must always be protected and good practice in this area will ensure sufficient audit evidence is available to facilitate an audit. A sound record management system includes:
• The setting up of a dedicated registry for the safekeeping of records
• Register of files opened
• Access control and control over the movement of source documents
• Register of disposal authorities containing copies of all documents
• Destruction register
Quarterly reports measuring the actual progress against the strategic plan/IDP and the APP/SDBIP should be used as a checkpoint to identify challenges and corrective action plans.
HALF-YEARLY FINANCIAL STATEMENTS
Preparing half-yearly financial statements will ensure that a roll-forward of the opening balances is performed and confirmed with the closing balances of the audited trial balance at an early stage. Updating the notes on the financial statements will reduce time spent during year-end preparations and will highlight shortcomings, areas of concern and new reporting requirements issued by the Accounting Standards Board (ASB).
The preparation of the annual financial statements and performance report is only the result of the number of key inputs mentioned above.
The next step is to create a year-end audit file supporting the information captured in the general ledger and ultimately in the financial statements as well as the performance information. This file should contain the following:
• A report from the accounting system indicating all batches have been posted and none are open
• Lead sheets per statement of financial performance and financial position and general ledger category, that is, provisions, revenue, administration expenditure, reconciling to the financial statements
• Supporting documentation for each transaction included in the balance of the statement of financial position categories, that is, debtors reconciliations, a list of accruals with supporting invoices attached, etc
• External confirmation for the related parties, creditors and the bank
• List of commitments
• Performance information with supporting references
Critical skills and capacity shortages are some of the key issues in finance and accounting departments. Preparation of GRAP-compliant financial statements requires staff to attend regular technical updates and programmes to keep abreast with any changes. Appropriate recruitment and skills development strategies must be developed and implemented to ensure the required in-house capacity is available.
Quarterly reports should drive a culture of self-assessment of the key internal controls. The internal audit function should review the effectiveness of the internal controls and identify areas of development.
The following basic internal controls are required to support sound financial management and good governance:
• Proper record-keeping
• Processing and reconciling controls
• Regular and accurate reporting
• Compliance with the legislative framework
• Proper IT systems controls
• Effective audit committees
• Effective internal audit function
• Sound risk management framework and regular risk meetings
• Effective leadership culture
• Oversight responsibility
• Sound HR management
• Effective and updated policies and procedures
• Clear action plans to address any deficiencies
• Sound IT governance
PREVIOUS YEARS’ AUDIT FINDINGS
Once the year-end external audit has been finalised, a register of findings and action plans for each underlying root cause should be prepared. A similar register with action plans should be compiled for the internal audit findings as well.
The previous years’ registers should be updated and monitored and presented at audit committee meetings, highlighting the status on the findings as well as proactive processes put in place to avoid similar findings in future.
COMPLIANCE WITH LAWS AND REGULATIONS
Management should monitor compliance with laws and regulations by developing and implementing checklists or dashboards listing the requirements and the timeframes of compliance. Reporting these to the various oversight committees must be a standing agenda item.
Sound corporate governance requires greater corporate responsibility and conduct within acceptable ethical standards. Financial and performance reporting should support this through external and internal reporting. It is critically important that the reports be supported and evidenced by reliable information and reviewed by the board/council and its sub-committees.
Annual training initiatives should be established to assist the board/council and its sub-committees to implement its oversight role. In addition, self-assessment reviews should be performed to evaluate the effectiveness of the committee. ❐
Author: Justin Diedericks is Associate Director of Audit at Deloitte and Berna Botha is Senior Manager of Finance and Accounting Outsourcing, also at Deloitte