Avoid Common Mistakes in Governmental Audits

Governmental audits are complex. This means there are more i’s to dot and t’s to cross to ensure your finances are being accurately reported. While this can mean more headaches for you, it doesn’t have to be that way. You can smooth out the process by avoiding these common mistakes made by municipalities.

The Kansas Municipal Audit and Accounting Guide (KMAAG) and Generally Accepted Accounting Standards (GAAP) require significant preparation from the local governmental entity for the audit. There are a few areas that cause governments, like yours, confusion. As a result, mistakes are made, which add time and stress to the audit. If you understand where your mistakes are most likely to occur, you can change your processes to ensure they are cleaned up before your auditors ever step foot onsite.

Applicable to all Government Audits:

  1. Encumbrances. These often result from a lack of tracking and/or reviewing approved contracts (in writing or in the minutes) at year-end. As a result, current year expenditures will be inaccurately represented and, depending on the size of the missing encumbrance, could cause the financial statements to be materially misstated. Make sure your process includes reviewing contracts and minutes annually.

Tip: Record encumbrances within your accounting system, or a separate spreadsheet if such a feature is not available in your system, as soon as approved. Minutes can be a good source of information for encumbrances to record.

  1. Internal Controls. Unfortunately, fraud in government is prevalent. One way to prevent it is with strong internal controls, which also reduce errors. While some entities have inadequate controls in place based on their size, some have yet to implement significant controls. This is often a challenge since many public offices have small teams that make dividing up the work a challenge. If that sounds like you, know there are still methods to work through this challenge with an eye toward strengthening internal controls.

Tip: If your accounting team is limited, get a Council/Commission/Board member involved as an additional layer of oversight. Review of expenditures and bank statements are great places to start!

For those GASB Audits (not KMAAG):

  1. Capital Assets. Don’t forget to track and record capital assets properly throughout the year. Not doing so can slow down the audit and add extra stress throughout the process.

Tip: Adopt a capital assets policy with a set dollar amount required capitalization. When an asset is purchased, record it as a capital asset at that time. If you are uncertain, reach out to your auditor at that point for clarification.

  1. Accounts Receivable. Be sure to record accounts receivable in the correct period. When revenue gets recorded in the wrong period, your financial statements may be materially misrepresented, similar to missing encumbrances or capital assets.

Tip: Understand your revenue streams and the periods they pertain to. With those revenues and periods identified, when and how to record the accounts receivable and associated revenue can be identified. Again, reach out to your auditor for verification.

If any of these common mistakes are occurring at your municipality, take some time to develop a plan to fix the issue(s). The audit process doesn’t have to be all that painful. With the right assistance and proper preparation, you can gear up to start your next audit on the right foot!