Audit 402058

Finding Reference Number 2024-001, Inadequate Design – Maintenance of Accounting System Condition: The Organization did not properly maintain their accounting system during the fiscal year. This was primarily due to the Organization maintaining its accounting system to comply with grant fund reporting which allows capital asset items to be expensed. However, for generally accepted accounting principles (GAAP), capital assets meeting the definition of long-term assets should be capitalized and depreciated over the life of the assets. the Organization has been relying on their auditors to adjust their financial reporting system to adjust for capitalized assets over the years in addition to new additions. We also noted the recording as expenses of equipment which only represented encumbrances. the Organization accounting process records these items as expense disbursement in order to spend grant funds within the grant period. However, since they are only encumbrances, under GAAP, they are not reportable as expense or capitalizable items. Cause: There is a lack of understanding by prior management of the Organization on the consequences of not maintaining their accounting system on a GAAP basis throughout the fiscal period. Because of how things are purchased and the entity’s capitalization policy it is difficult to retroactively identify those assets that should have been capitalized under their capitalization policy. This can result in a non-consistent basis of capitalization and errors in recording. Effect: The lack of an internal control structure over fixed asset capitalization has resulted in an inconsistent identification and recording of capitalizable fixed assets and their resulting reporting. GAAP does not allow for the auditor to be a part of the entity internal control structure related to identifying, recording and reporting over their financial information. As a result, difficulties were noted in identifying those assets that should have been capitalized during 2024. In addition, the cumulative effect of prior year capitalized assets has to be adjusted for each year in order to properly report the entity’s fiscal position. Result: As a result, we noted several errors in the determination of fixed asset subject to reporting under the Organization’s capitalization policy. The Statements on Auditing Standards has determined that inadequate design and maintenance of internal control over the preparation of financial statements is an internal control deficiency. We believe the design deficiency represented a material weakness. Recommendation: The Organization should revise its accounting procedures to implement internal controls over the determination, recording and reporting of capitalizable fixed assets. This is necessary to assure someone with the necessary skills, knowledge and education oversees the organization’s accounting system and that transactions and records are being properly executed and maintained.

Finding 2024-002, Transaction Support Condition: The Organization internal controls did not require all transactions to be properly documented and maintained. As a consequence, we noted the Organization was not readily able to document support for accounts receivable and investments holdings at October 31, 2024. In addition, the source and support for some revenue items selected for testing could not initially be explained or provided to the auditor to verify the reasonableness of the amount reported. Although once the Organization’s CEO became aware of the revenue testing issue she was able to identify the source documentation required to meet our audit requirements. Cause: There has been a high amount of turnover in the financial management side of the organization’s operation. Additionally, there were periods of time when accounting staff was not available because of a leave of absence. Other accounting staff tried to assist us in our request but due to the person’s limited time in the position it was difficult for them to identify the necessary support required. Effect: The Statements on Auditing Standards requires the independent auditor to review sufficient and adequate audit evidence in order to opine on the financial information. We were able to apply sufficient alternative procedures related to revenues selections. Additionally, we were able to have the Organization obtain subsequent documentation to verify the existence of the investment as of October 31, 2024. Result: It was difficult to obtain sufficient supporting documentation as required by auditing standards for all transactions subjected to audit verification.