The audit process, and review of financial statements, can be a bit overwhelming for you as an elected official if you don’t have a strong financial background. Here are five tips to help you wrap your arms around this task.
1. Look through last year’s audited financial statements.
Ask for a copy of the previous year’s financial statements and look through them. Especially take time to read the Management Discussion & Analysis section (MD&A). The MD&A is a great overview in layman terms as to what happened during that year, as well as expectations and projections for the future. The audited financial statements can also be found on the Michigan Department of Treasury’s website at www.michigan.gov/treasury.
2. Ask about the various funds that exist at your municipality.
Besides the general fund, which is the government’s basic operating fund, most municipalities utilize various other funds. The number of funds can vary significantly from one government to another. Unlike a private business, where all funds are accounted for as a single entity, governmental accounting is tracked through separate funds that balance in and of themselves. The accountant, bookkeeper or Chief Financial Officer will be able to give you an overview of the types of funds and, more importantly, the purpose of each fund.
3. Understand the internal controls in place at your municipality.
Internal controls are a series of events or methods put in place by the municipality to ensure the integrity of accounting and financial information. It is also a process of applying management policies throughout the entire entity. It is very important that internal controls are documented to provide an audit trail, and it is management’s responsibility to establish and maintain the internal controls. This will give you an understanding of the flow of information into and out of the municipality.
Organizations with a limited number of staff need to work especially hard to maintain the segregation of duties. Tasks must be delegated to different people to ensure no single individual is in a position where they could authorize, record, and be in custody of a financial transaction and the resulting asset.
4. Review the Budget to Actual Report often.
The Budget to Actual Report is a useful tool for decision-making, which is a responsibility of the elected officials. The budget is the “best guess” of how much money will come into the government and how much will go out each fiscal year. The budget should be updated throughout the year as events and circumstances change the government’s original “best guess.” It is a state law that the local unit’s actual expenditures are within the amounts authorized in the budget.
5. Ask questions about the draft financial statements and or audit process.
Ask questions when you aren’t sure of something or need clarification. The audited financial statements are the responsibility of management. Therefore, having a good understanding of the statements, schedules, and footnotes is required. Please speak up during the exit conference or draft meeting and ask questions. Your auditors love to talk numbers and internal control processes and procedures.
If you would like specific training related to understanding the audit process and or financial statements, please contact us.