Common Audit Findings and How to Prevent Them


July 1, 2024
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Common Audit Findings and How to Prevent Them 

 

In the following guide, we provide an overview of the most common audit findings and offer insight on how to prevent them. Keep reading to find out more. 

When Honest Buck Accounting conducts Yellow Book audits (link to “What Is a Yellow Book Audit?” article), our audit team uncovers findings that are common to many preschools and childcare organizations we serve. The following are the most common audit findings we come across and practical ways you can prevent them in your own Yellow Book audit. Once you know what to expect, you will be better equipped to take the necessary steps to prepare for a successful audit. 

Insufficient Documentation

The problem:

The first common finding we observe is incomplete or inaccurate documentation. A childcare organization may not provide sufficient documentation to support financial reporting and transactions. Supporting documentation includes invoices, receipts, and copies of checks. 

The solution:

Prevent a finding of insufficient documentation by establishing clear policies and procedures for document retention and organization, training your employees on these protocols, and creating a paper trail for the performance of all internal controls. 

Inadequate Internal Controls

The problem:

Another common finding is a lack of internal controls, or policies and procedures that an organization puts in place in order to protect the integrity of its financial information. Internal controls also encompass compliance with relevant laws and regulations, as well as overall effectiveness and efficiency of operations. Inadequate internal controls can lead to errors, fraud, and noncompliance.  

The solution: 

Avoid a finding of inadequate internal controls by conducting internal audits to identify weaknesses and by implementing a system of checks and balances in which multiple staff members review and approve transactions. 

Lack of Segregation of Duties 

The problem: 

Another typical audit finding is a lack of segregation of duties. This occurs when key financial tasks are completed by only one individual or a couple individuals. In these cases, errors and fraud become more likely. 

The solution: 

Establish a segregation of duties among multiple employees, enforce a system of checks and balances to create accountability, and consider ways you can eliminate risk of errors and fraud, such as rotating job responsibilities or requiring dual approval for certain transactions. 

Incorrect Classification of Revenue or Expenses

The problem: 

Misclassification of revenue or expenses is yet another common audit finding and can significantly impact the accuracy of an organization’s financial reporting. It occurs when transactions are mistakenly recorded in the wrong category. Revenue may be recorded as expenses, or vice versa. 

The solution: 

Prevent erroneous classification of transactions by establishing clear and straightforward classification guidelines, training your employees, implementing effective internal controls, and frequently monitoring and reviewing financial reports. 

Non-Compliance with Regulations 

The problem: 

Non-compliance with regulations is an audit finding that poses serious risk for an organization and requires immediate attention. The failure of a childcare provider to comply with federal and state regulations may result in financial loss, a damaged reputation, or even legal action. As such, it is imperative that businesses identify and rectify non-compliance issues as soon as possible. 

The solution:

Stay compliant by keeping up-to-date with regulatory changes impacting the childcare industry, creating robust compliance policies and procedures, and providing adequate employee training for your staff. 

Gaps in Employee Training 

The problem: 

A lack of employee training can have an impact on any of the findings we have discussed so far and can itself be an issue that comes up during an audit. Gaps in employee training mean employees may lack the knowledge and skills to identify and address a variety of financial risks and errors. Inadequate employee knowledge and skills must be recognized by management and addressed with the training needed. 

The solution: 

Employers should implement regular assessments of employee knowledge and skills in order to identify areas where additional training is needed through formal employee performance reviews as well as informal check-ins both teamwide and individually. 

Failure to Reconcile Accounts 

The problem: 

A failure to reconcile accounts means that an organization has not taken the necessary steps to verify transactions in the general ledger against supporting financial documents, such as bank statements and credit card statements. Reconciliation is a crucial task that safeguards the accuracy of the financial statements. Not reconciling accounts can lead to serious errors in financial reporting and potentially increase the risk of fraudulent activity.  

The solution: 

Businesses should be reconciling bank accounts at least once a month, implementing the segregation of duties among multiple employees to ensure accuracy and accountability. 

Outdated Software

The problem:

Outdated software refers to software that has not been updated with the latest bug fixes and security patches. Failure to update software poses a significant risk of vulnerability to cybersecurity threats. In addition, out-of-date software can undermine compliance with regulations. 

The solution: 

Be sure to keep all software up-to-date, always running the latest versions of programs and regularly monitoring for new security patches so they can be applied promptly. 

Ultimately, you can minimize the likelihood of these common findings in your own Yellow Book audit by following the recommendations we’ve listed here. 

When you’re ready to begin your audit, contact the experts at Honest Buck Accounting. We specialize in Yellow Book audits for preschools and other childcare organizations. Contact us today.


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