Internal controls Kimberly M. Shult, Partner September 20,

Internal controls Kimberly M. Shult, Partner September 20,

Internal controls Kimberly M. Shult, Partner September 20, 2018 Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. Agenda >Definition and internal control components >Control activities >Examples of control activities >Other considerations >Questions

2 Definition Control: A mechanism used to prevent, detect, or correct an undesirable outcome Trust is not an internal control. 3 Internal control

components Control environment Monitoring Information & communication Risk assessment Control activities

4 Internal control components (cont.) Control environment tone at the top > Integrity and ethical values > Commitment to competence > Organizational structure > Managements philosophy and operating style > Human resource policies and procedures

5 Internal control components (cont.) Risk assessment > Identification of risks > Assess significance and likelihood of financial reporting risks Control activities

> Design controls and procedures to address risks 6 Internal control components (cont.) Information and communication > Accurate and timely financial information is available > Individuals understand their roles and responsibilities

Monitoring > Ongoing evaluation of new risk > Effectiveness of control activities > Corrective action is initiated when necessary 7 Types of controls 8 Types of controls > Incompatible duties are segregated

> All transactions are properly authorized > Accounting records and documentation are properly designed and maintained > Access to assets and records is controlled > Accounting records are periodically compared with underlying records 9 Types of controls (cont.) Purpose > To deter process-related issues from occurring

Preventive controls Example > Requiring for proper authorization before an employee gains access into a system, general separation of duties Purpose > To identify problems within a government's processes Detective controls Example

> Checking actual versus budgeted expenditures, reconciling accounts 10 Types of controls (cont.) Definition Manual controls > Control performed by a person without the use of automation

Example > Physically counting cash in a register to match total receipts Definition Automated controls > Control performed by an automated system without the interference of a person Example > Departmental credit card limits 11

Types of controls (cont.) Segregation of duties > Separation of tasks in the accounting and recordkeeping process so no one individual handles an entire transaction from beginning to end. Even if you cannot fully segregate duties you can mitigate risk with certain controls or procedures. 12 Example control activities

13 General disbursements New vendors > Form to gather data for issuing 1099 requires approval > Require a street address for all new vendors > Produce report of new vendors for review and approval quarterly > Approval by someone who does not order

goods or process payments 14 General disbursements (cont.) ACH payments/wire transfers > Approval by someone not initiating the transaction > Approval by governing body > Separation of duties - person initiating the transaction should not be posting the journal entry or preparing the bank

reconciliation 15 General disbursements (cont.) Payment of invoices > Separate processing of accounts payable and ordering/receiving goods or services > One person sets up and another releases > Invoices are approved for payment > Ensure compliance with purchase order policies

16 Payroll New employees and pay rate changes > Separation of duties within the payroll system > Approval of position, salary or wage, etc. by management or governing body > Review information in system is accurate > Documented in the employee file

17 Payroll (cont.) Timesheets > Approval by supervisor for all hourly employees > Include review of where time is charged Overall payroll approval > Total of direct deposits and payroll checks matches payroll register > Withholdings appear reasonable > Completed by someone who does not

prepare payroll 18 All disbursements > Secure all check stock > Do not allow the signing of blank checks > Avoid use of manual checks > Ensure appropriate security and controls regarding signature stamps 19

Credit or purchase cards > Establish clear policies regarding use > Limit the number of cards and the maximum charged > All charges should be supported by documentation > Transactions should be approved 20 Property taxes collections Separation of duties

> Collections, posting to general ledger, and bank deposits > Bank reconciliations Reconciliations > Batch collections are reconciled from general ledger to tax collection system > Tax refund overpayments are reconciled from tax collection system to general ledger 21

Utility billing/receipting Billing rates > Entered from PSCW tariff or authorized by governing body > Separate review of data from system after change > Manual recalculation of sample bills Account adjustments or write-offs > Policy for who can authorize > Tiered policy suggested > Document reason and approval

22 Utility billing/receipting (cont.) New account setup > Data provided to clerk by manager, building inspector, etc. > System report of new accounts provided back to manager for review Meter reading data

> High/low or other exception reports > Follow up on exceptions > High level analysis of sales to volume pumped or purchased 23 Utility billing/receipting (cont.) Billing vs. receipting > Separate the functions when possible > Require use of cash register or receipt

system Reconciliations > Monthly reconcile billing system detail to general ledger > Investigate any differences 24 Period close Reconciliation of accounts > Performed by someone independent of processing

transactions > All balance sheet accounts should be reconciled on a periodic basis (cash should always be monthly) > Reconciliations should be reviewed and approved 25 Period close (cont.) Preparation of trial balances or budget reports > Reviewed by management and governing body > Reports should be generated by accounting

system > Variances should be investigated 26 Period close (cont.) Journal entries > Approved by someone other than preparer > Approver should see the actual entry as entered into the system > Ensure each entry has a unique identifier and all are accounted for

27 Other considerations 28 Cost benefit 29 Cost benefit (cont.) Cross-training employees

> Can both perform functions in each area to create segregation of duties > Flexibility 30 Cost benefit (cont.) Get the board involved > Perform approval, other functions > Need to understand importance of controls > Key for smaller municipalities

31 Cost benefit (cont.) Maximize IT/system functionality > Look into ways to better utilize accounting system Reconciliations Required approvals > Can make general functions more efficient > Upgrade system?

32 Red flags > Unusual discrepancy between actual and > > > > > expected results Disbursements to unknown vendors

Gaps in receipt or check numbers Late reports or unwillingness to provide information Lack of scrutiny with review/approvals Disregarding internal control policies or procedures 33 Documentation of control activities Controls should provide insight into Controls

> > > > Who individual performing the control (can be systematic) What specific action being performed When the frequency or what point in the process does this occur Why the purpose of the action being performed Control examples Poor

Better Employees enter their time in the Kronos application. Department Managers review the employees time and submit it for processing. Department managers review and approve time submitted by their employees on a weekly basis. Variances greater than 10% of the expected hours (based on a 40-hour work week) are investigated. An account reconciliation is performed for Accounts Payable.

On a monthly basis, the Accounting Manager performs a reconciliation of Accounts Payable between the general ledger and the AP sub ledger report. Reconciling items greater than $1,000 are researched and resolved within three business days. 34 Questions? Kimberly M. Shult, CPA, Partner 3410 Oakwood Mall Drive, Suite 200 Eau Claire, WI 54701 715 828 3409 [email protected]

Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. 2018 Baker Tilly Virchow Krause, LLP 35

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