Finding Text
Finding 2023-001 Accounting for Prepaid Expenses
Type of Finding:
Material Weakness in Internal Control over Financial Reporting
Criteria:
According to accounting principles generally accepted in the United States of America ("GAAP"), an organization must have effective internal controls over accounting for prepaid expenses to ensure that transactions are recorded in the correct accounting period. This includes properly accounting for the timing of the receipt of prepaid supplies.
Condition:
Invoices for prepaid supplies were included in accounts payable for supplies that were not received in the same period. This resulted in an overstatement of expenses related to the prepaid supplies, as the expenses were not properly matched with the periods in which the supplies were actually received and used.
Cause:
The underlying cause of the condition was a failure to account for the timing of receipt for the supplies. This indicates a deficiency in the internal controls and procedures related to the recording of prepaid expenses.
Possible or Known Effect:
The effect of this condition was an overstatement of expenses, which could potentially mislead financial statement users and impact decision-making. This could also lead to inaccurate financial reporting and potential non-compliance with federal grant requirements.
Questioned Costs:
There are no specific questioned costs identified in this finding as the overstatement impacts the accuracy of financial reporting rather than a direct disallowed cost. However, the overstatement of expenses may affect the accuracy of financial statements and compliance with grant terms.
Repeat Finding:
This finding is not a repeat finding from the prior year.
Recommendation:
It is recommended that the organization implement a corrective action plan to address the internal control deficiencies identified. This plan should focus on revising procedures to ensure that prepaid supplies are accurately recorded in the period in which they are received. Additionally, enhancing training for staff involved in accounting for prepaid expenses will help ensure proper understanding and execution of these procedures. Regular reviews and reconciliations of accounts payable and prepaid supplies records should be conducted to prevent similar issues in the future. Finally, performing periodic audits of internal controls will help ensure ongoing compliance with accounting standards and grant requirements.
Views of Responsible Officials:
The Organizations’ Board and Executive Team consisting of the Chief Executive Officer (CEO) and the Chief Operating Officer (COO) and key Overdose Lifeline (ODL) Staff to include the independent bookkeeper and Grant and Finance Manager recognize the internal control deficiencies identified during the year 2023. As noted by the Independent Public Accounting Firm (Pile CPAs) significant improvements have occurred and in the first half of 2024 ODL implemented a new inventory accounting process through QuickBooks. This finding is addressed through this new accounting process. Overdose Lifeline moved from tracking inventory manually in excel spreadsheets to utilizing inventory management in Quickbooks Online (QBO).
The process is:
- Receipts: Once inventory is physically received, a QBO bill is entered identifying the quantity and cost of the items.
- Shipments: Shipments are reflected on a weekly basis identifying the items and quantity shipped per item on a zero-dollar invoice.
QBO utilizes FIFO (First In/First Out) methodology for inventory valuation. The physical inventory is reconciled to the QBO inventory counts monthly. Additionally the Grants and Finance Manager, Executive Team and other key personnel will conduct periodic audits of internal controls.