by Richard Rosenbaum

Mr. Rosenbaum is an audit manager with Coopers & Lybrand, international accounting firm. A member of the Illinois Parks and Recreation Association, he manages the field services on four C&L park district clients. Mr. Rosenbaum holds a BA from Rutgers University and an MBA from the University of Chicago. He is a member of the American Institute of CPAs and the Illinois CPA Society and currently serves on the latter's Business Counseling and Education Committee.

All Illinois park districts appropriating more than $100,000 are required by statute to have an annual financial audit. For many, it is not particularly useful to the everyday functioning of the district.

Auditors go to the administrative offices once each year, ask numerous questions, then issue a report that doesn't remotely resemble the accounting records. Few individuals read, much less understand, the report. The auditors aren't heard from again until the following year unless they also post the books each month.

Why then go through this process? What do auditors do and can their work mean more to the government unit being served?

Independent auditors primarily fulfill an "attest" function. As such, they give an outsider's opinion of the financial statement's accuracy and whether it conforms to generally accepted accounting principles (GAAP). This independent opinion enables other users of the information (banks, bonding authorities, and citizens) to rely upon the financial statements without worry about completeness or accuracy. Also, knowing that all government reports are prepared using the same principles (GAAP), users can make comparisons between reports.

Government units are just developing their use of GAAP, and it doesn't always represent the most logical or efficient way of recording financial data for operating purposes. Park districts generally use a cash basis budget; commercial enterprises use accrual basis accounting almost exclusively. There is a strong feeling by users of financial information that governments should report financial results on a basis as similar as possible to commercial enterprises. Commissioners and other officials who review cash basis data all year cannot be expected to shift gears easily at year-end to a different basis of accounting. This is the source of much of the misunderstanding about modified accrual basis audit reports.

A change for the better, fortunately, is coming. The National Council on Governmental Accounting and the Municipal Finance Officers Association issued a restatement of a policy which becomes effective for fiscal years ended after June 30, 1980. The restatement changes the reporting requirements and provides for operating statements prepared on the budgetary basis as well as the modified accrual basis. It reduces the number of "required" financial statements for compliance with GAAP. As a result, board members and administrators should find financial reports are easier to understand and will provide more information.

To determine whether financial statements are prepared according to GAAP, CPAs perform audits according to standards issued by the American Institute of Certified Public Accountants. These standards encompass a wide variety of audit techniques and leave the individual practitioner considerable leeway in the specific tests to be performed. All, however, encompass the concepts of selective testing and materiality.

Both these concepts enable an auditor to form an opinion on the financial statements "taken as a whole" without having to look at every transaction during the year. An auditor need only examine enough documentation to form a professional opinion whether material errors exist in the financial statement. (Materiality generally is defined as at least 95% error free.)

The specific tests fall into two main groups—procedural and validation. Auditors can rely, in large part, upon their clients' accounting controls to ensure the accuracy of financial data if they first test the reliability of those controls. These client systems tests are called procedural tests. Validation tests review documentation of specific transactions or balances.

Each type of test is useful in various circumstances. Procedural tests are especially well suited in reviewing a large number of relatively small transactions where accounting controls are expected to be reliable (e.g., program revenues or payroll expenditures). Validation tests are more useful where a small number of large transactions exist (e.g., property taxes) and in establishing a proper cut-off for accounting systems known to be reliable (e.g., reviewing bank reconciliations or accounts payable).

The decision to use a particular type of test in a given circumstance depends primarily on audit efficiency. It is less time consuming to test controls over program revenues than to trace each receipt to a bank deposit. Where proper accounting controls do not exist, the latter could be necessary. Similarly, it takes less time to trace a dozen property tax receipts to a bank deposit than to perform a procedural test relating to the relevant controls.

This points out one area where park districts generally can become more active in the audit process. Most CPAs issue letters of recommendation to their clients concerning accounting control weaknesses, and these can serve as the basis for discussing improved controls.

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Illinois Parks and Recreation 6 November/December 1980

Audit. . .

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Where improvements can be achieved at an appropriate cost, it is often possible, due to the increased reliability of the accounting system, for an auditor to use procedural tests where time consuming validation tests previously were necessary. This reduces audit hours and, ultimately, reduces audit fees.

Because of their familiarity with procedural tests, auditors can function as effective system consultants and should be involved in any new manual or computer systems being developed. Auditors can help ensure that any new system performs as requested and can be audited efficiently. Early involvement can prevent many headaches later.

In summary, CPAs have not been understood because the rules they followed meant little to clients or weren't understood. Now CPAs have taken steps towards making financial statements mean more and generally are willing to explain their work process. The audit process enables a CPA to provide other services which can improve park district operations. Officials now can become more involved in the audit process and have a significant impact upon audit efficiency. Recent changes should lead to the auditor becoming less of an enigma to his clients.

Illinois Parks and Recreation 14 November/December 1980