TOWNSHIP OF SALEM

2021-001 Material audit adjustments and financial statement preparation: Criteria: All governmental units in Michigan are required to prepare financial statements in accordance with generally accepted accounting principles (GAAP). This is the responsibility of management. The preparation of financial statements in accordance with GAAP requires internal controls over both (1) recording, processing, and summarizing accounting data (i.e. maintaining internal accounting records), and (2) reporting government-wide and fund financial statements, including the related notes to the financial statements (i.e. external financial reporting). Condition: We identified and proposed the following material audit adjustments that management reviewed and approved. Adjustments were recorded to: ? Correct beginning fund balance to record prior year adjustments ? Accrue receivables at year end and reverse prior year accruals ? Accrue payables at year end and reverse prior year accruals ? Record various reclassifications ? Record grant fund activity related to tornado shelter grant ? Convert the fund-based data necessary to prepare the government-wide financial statements As is the case with many small and medium-sized governmental units, the Authority has historically relied on its independent external auditor to assist with the preparation of the financial statements, the related notes, and the management?s discussion and analysis as part of its external financial reporting process. Accordingly, the Authority?s ability to prepare financial statements in accordance with GAAP is based, in part, on its reliance on its external auditor, who cannot by definition be considered part of the Authority?s internal controls. This is a repeat finding. Cause: This condition was caused by the Authority?s decision to outsource the preparation of its annual financial statements to the external auditor rather than incur the costs of obtaining the necessary training and expertise required for the Authority to perform this task internally because outsourcing the task is considered more cost effective. Effect: The Authority?s accounting records were initially misstated by amounts material to the financial statements. In addition, the Authority lacks complete internal controls over the preparation of its financial statements in accordance with GAAP and relies, at least in part, on assistance from its external auditor with this task. Auditor?s Recommendation: We recommend that management continue to monitor the relative costs and benefits of securing the internal or other external resources necessary to develop material adjustments and prepare a draft of the Authority?s annual financial statements versus contracting with its auditor for these services. Management Response: Management has made an ongoing evaluation of the respective costs and benefits of obtaining internal or external resources, specifically for the preparation of financial statements, and has determined that the additional benefits derived from implementing such a system would not outweigh the costs incurred to do so. Management will continue to review the draft financial statements and notes prior to approving them and accepting responsibility for their content and presentation.