How Should a Government Respond to Audit Findings?

​Local governments get audited all the time – by the annual independent auditors, the internal auditor, various granting agencies, and various taxing and regulatory agencies. No matter how competent your Finance Department is, it is inevitable that some of its various auditors will issue audit findings.

The most frequent audit findings are from the annual independent auditors.
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Their findings are categorized as
a) material weaknesses in internal control,
b) significant deficiencies in internal control, and
c) other matters of interest to governing officials.
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​If the annual independent auditors conduct a single audit of federal financial assistance programs, additional categories of findings are

a) non-compliance with laws and regulations that are material to the financial statements, and
b) non-compliance with federal grant regulations that are material to a federal financial assistance program.
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Audit findings are generally accompanied by recommended corrective action.

How should you respond to audit findings?
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1. ​Usually, the auditor will share findings with the auditee before the audit report is issued. This is your opportunity to understand what the auditor observed, including what they believe is the exact regulation, policy, or internal control not being followed. This is also your opportunity to help the auditor understand anything they missed. If you disagree with the finding, provide documentary evidence of why the auditor has misinterpreted or misunderstood, and attempt to negotiate having the finding removed or reworded. Even if you agree with the finding, you may be able to negotiate wording of the finding or the recommended corrective action.
2. After the wording of the finding is finalized, the auditors will usually ask for management’s response to each finding, which is typically included along with the finding in the audit report. This management’s response is generally a short statement that you either agree with the finding and will fix the problem, or that you disagree with the finding. If you disagree, you will need to provide details about why. It is generally better to say you agree (even if you don’t totally agree) and what you will do to improve the situation instead of disagreeing, because audit findings are viewed as an independent assessment and carry significant weight by stakeholders. Disagreements with the auditors are frequently viewed as defensive maneuvers or nitpicking by management.
3. Next, you should write a corrective action plan. This plan should include the steps that need to be taken to fix the issue that was noted in the finding, and to fix the internal controls to assure the issue does not recur. The person who will be responsible as well as the deadline date should be identified for each step.
4. You should inform appropriate senior management, governing board officials, and stakeholders about the finding. Be sure to share the corrective action plan, so they know you are proactively addressing the issue.
5. You should assure them the corrective action plan is accomplished because the auditors will generally follow up during their next visit to verify resolution.​

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Click here to see an example of a common finding, an example of an appropriate management response to the finding, and an example of an appropriate corrective action plan:

Click the image to view and download this example as a Word document.

​When you receive an audit finding, don’t overreact. An audit finding is not a report card. At best, it is an opportunity to learn and improve. At worst, it is an opportunity to demonstrate professionalism and responsiveness to independent criticism.
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​If you have more questions about how to respond to an audit finding, feel free to reach out to Kevin directly:

kharper@kevinharpercpa.com
(510) 593-5037