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Justice of the Peace Manual February 2002 CHAPTER 5

Auditing the Office
This part of the manual is intended to: show why internal auditing is necessary; offer guidelines for getting ready for the audit; and provide some basic audit programs that can be used for justice of the peace offices. Justice of the peace offices are not all alike. Some of the information in this part may need to be adapted to meet a county's individual needs. Although this part was written with the internal audit function in mind, much of the information provided should also prove useful for outside auditors, justices of the peace and for those working in justice offices.

Definition - Auditing
Auditing is simply examining information and operations to ensure their mathematical accuracy, legality and propriety. It is a process of determining whether all transactions are properly recorded in the accounts, and appropriately reflected in statements and reports. The type of information and operations that can be examined include: documents; records; reports; systems of internal control; accounting procedures; and actual operations. Someone who works for the organization being audited performs the internal audit. For example, the county auditor is an internal auditor.

Objectives of Internal Auditing
The broad purpose of internal auditing in Texas counties is to help ensure the integrity of the county's financial operations. Texas statutes have five objectives for internal auditing of justice of the peace offices. They are to help assure that: 1. the justice has collected all the money that he or she is supposed to collect; 2. the money collected was properly remitted to the appropriate party (e.g. Texas Comptroller, Parks and Wildlife, county treasurer, etc.); 3. other property is properly managed; 4. all money and other property are properly accounted for, properly reported and adequately safeguarded; and 5. the operations of the office conform to prescribed procedures. No system of internal auditing can guarantee that collections, records and reports are 100 percent complete and correct; however, internal auditing can be a means for prevention and early detection and correction of material mistakes and irregularities. Although not specifically covered in the statutes, the internal audit function should have another objective: to ensure the best and most efficient use of the county's resources (the public's money). The county auditor performing an internal audit has the authority to require that improvements be made in procedures. However, recommendations should be made in a constructive, friendly manner. The goals of both the internal auditor and those being audited should be the same. Many internal audits have resulted in lower operating costs, more efficient ways of getting things done and better service to the public. In small justice of the peace offices, where the staff size does not provide for a normal segregation of duties, the internal audit function also provides needed additional oversight or review of work being done. Finally, a good internal audit function can also provide for more efficient and less costly outside audits.

Internal Auditing Versus the Objective of an Annual Audit by a CPA

The objective of an internal audit is significantly different from that of the annual outside audit by a certified public accountant (CPA), which is to express a professional opinion on the material accuracy of the annual financial statements. "Material accuracy" usually implies a less stringent level of review than an internal audit. For example, if the collections of one justice out of four were minor in comparison to the total fine revenue collected by the county, the CPA would likely spend very little time auditing that office. The CPA's objective is to express an opinion on the financial statements of the county as a whole, not on the operations of one particular justice of the peace. Many county commissioners and some county auditors make the mistake of thinking that county officers have been sufficiently audited by the independent CPA, when in fact some officers may not even be audited if their operations are immaterial to the financial statements. Although the independent auditor must test for compliance with the county's system of internal controls, the auditor is not required to look for improprieties. The test of compliance is merely to determine how much additional test work must be performed to express an opinion on the accuracy of the financial statements. However, the CPA must investigate and report any improprieties discovered in the course of testing for compliance. Although required by generally accepted auditing standards (GAAS), independent CPAs are sometimes not very familiar with state laws regulating county government. Counties are highly regulated by statute and compliance with these statutes may not affect the financial statements; therefore, the CPA will normally not test for compliance with state law even if familiar with the statutes. An example is the requirement of the Public Funds Investment Act that the county have its investment policy audited for compliance. If the commissioners expect the independent CPA to conduct a more thorough examination of one or all county officers or departments, they must add these requirements to the contract for the annual audit.

Statutory Responsibility for Auditing - County Auditors
The county auditor must audit the receipt books in criminal cases monthly. [220] The county auditor has the specific authority and responsibility to examine the books, accounts, reports, vouchers and other records of the justice. [221] The county auditor must examine the reports made to the

commissioners court about the collection of money, and at least once each quarter, check the books and examine in detail the reports of the justice of the peace. [222] A justice of the peace shall deliver receipt books, or a copy of any receipt records contained in a computer database, to the county auditor at the end of each month's business, or at the end of each month to allow the county auditor electronic access to receipt records contained in the computer database. The county auditor shall examine the receipt book or computer records and determine whether the money collected has been properly satisfied. If all receipts have been used the county auditor shall keep the book. If any receipt in the book has not been used, the auditor shall return the book to the justice of the peace. The county auditor may keep a copy of computer-generated receipt records delivered to the county auditor. Any person may inspect a receipt book or a computer-generated receipt record kept by the county auditor. [223] The county auditor or the treasurer, if there is no county auditor, must examine the accounts, dockets and records of each justice of the peace to determine if any money belonging to the county and in the possession of the justice has not been accounted for and paid over according to law. [224] If the auditor finds that such money does exist, he must report the findings to the commissioners court at its next meeting for the purpose of instituting a suit for the recovery of the money. The county auditor must fully examine the accounts and reports of each justice of the peace at least once each county fiscal year. [225] The examination has to be done without advance notice. The auditor has to verify the correctness of the accounts and after audit completion report the findings to the commissioners court at the next meeting. What to Do if Required Audits are Not Being Performed When required audits are not being performed, the justice should take the following steps to ensure account audits are completed. The first step should be to ask the appropriate official (county auditor or county treasurer) in writing, that the audits be performed, citing the appropriate legal reference. If this written request proves unsuccessful, the next step depends on which official is failing to fulfill the audit responsibilities. If it is the county auditor, write to the district judge and include a copy of the original request to the county auditor.

If it is the county treasurer, write to the commissioners court and include a copy of the original request to the treasurer. If both approaches fail, consult the county and district attorneys for further advice. It is also recommended that the justice ask for an audit of the justice of the peace office be included in any outside audit of the county's financial records. Audit Plan and Calendar The audit plan and calendar are integral parts of the internal audit. The audit plan, prepared in advance by the officer who will conduct the audit, should be designed to ensure that: no procedures or items are overlooked; audit work and staff are allocated appropriately between offices to be audited; the examination of specific areas is coordinated with the workload in the justice office (for example, the auditor should not plan to examine the docket book on arraignment day); and all assignments are completed in a coordinated manner. The basic components of an audit plan include: areas to be examined; estimated hours required; dates and times when examinations are to be performed; staff assignments; audit procedures to be followed; and estimated deadlines for completion of fieldwork and release of the audit report. The plan serves as a guide for the review, although circumstances revealed during the audit may require revisions to the original plan. In any case, the audit plan should be updated as needed to reflect changes in the justice office as well as new audit methods and techniques. The officer conducting the audit should develop the calendar specifying the dates and times of audits to be conducted. Performing the Examination The audit involves five steps: 1. Review internal controls and any prior audit reports and work papers. Internal controls are the procedures established by management of the county to protect assets and ensure integrity

2. 3. 4. 5.

of the data collected, as well as the accounting system. These procedures include: segregation of duties; independent checks of performance such as inventories and bank reconciliations; controlled access to assets and records such as locked storerooms and computer passwords; and the use of prenumbered documents such as vouchers, invoices and checks. [226] Determine the extent of audit (revising this scope as needed). Perform the audit review in accordance with the revised scope for the particular office. Document and evaluate the audit results. Prepare the written report.

Review of Internal Controls and Previous Audits After becoming familiar with the office to be examined through a review of internal controls, the internal auditor should have a general idea of the reliability of the internal control of that office. The purpose of this review, conducted before the actual audit, is to determine whether any recent changes in the four elements of internal control would change the auditor's opinion of the controls' reliability. The internal auditor should refer to the justice's office files to be audited and, if necessary, actual tests of transactions and note any recent changes in: division of duties; personnel; procedures; and actual performance of procedures. The auditor should assess the impact of any recent changes (such as addition or loss of key personnel or changes to statutes or relevant county policies) on the reliability of the accounting function in the office under review. The result should be an up-to-date judgment of the office's internal controls. The internal auditor should also review the results of the previous audit of that office and should provide for follow-up examination of problems or situations that required correction. Extent of Examination Using professional judgment about the reliability of the accounting in the office under examination, and considering any other relevant factors (such as the examples listed below), the internal auditor must decide the extent of the examination to be conducted. Assuming that each and every transaction cannot be reasonably audited, the auditor must decide how many records need to be examined to judge that the figures in

monthly reports, journals or ledgers are complete and correct. Sample size can be determined through statistical sampling or by simple judgment. Statistical sampling is the only approach, outside of a 100 percent test of transactions, that can be used to make provable assertions about a probable error rate or a rate of occurrence in the overall population. This method, however, is too involved to adequately explain in this manual. The auditor should be familiar with the method and it may be found in most auditing textbooks. Judgment sampling, while simpler, carries a greater risk of a sample size that is either larger than necessary (wasting the auditor's time) or smaller than necessary (providing insufficient evidence). Using the average count of items under review is not always the appropriate sample size. The internal auditor uses knowledge of the office under review and other factors, such as the reliability of existing internal controls, to decide the appropriate sample size. Auditing Factor Excellent internal controls Good internal controls Poor internal controls Unreliable internal controls High turnover of personnel New personnel Fewer personnel than office had in prior years reviewed Unfavorable publicity Good recent external audit report Large population from which to sample Many large individual transactions Effect on Sample Size Small portion of sample Larger than average sample size Larger than average sample size Testing entire sample may be necessary Larger than average sample size Larger than average sample size Larger than average sample size Larger than average sample size Smaller than average sample size Larger than average sample size Larger than average sample size

These are just a few examples. Many other factors may affect an auditor's choice of sample size. The transactions or records to be examined should be selected randomly. Usually, the auditor would look at high-dollar items or unusual and high-risk items such as refunds or voids that may be susceptible to fraud. A random number table may be used to select the remaining transactions to be reviewed. A random number table can be

developed using a computer application with functions able to generate random number lists and extracting random samples. One such program is available from the Texas State Auditor's Web site located at http://www.sao.state.tx.us/Resources/Tools/toolbox.cfm. The internal auditor should examine all unusual transactions whether or not they fall in the sample. Also, some county offices are relatively small and 100 percent auditing may be done in relatively little time. Steps in Audit Programs The internal auditor is now ready to apply the steps of the internal audit program to the transactions selected for examination. (Sample audit programs are discussed in the subsequent section of this chapter.) The steps should be performed in order, exactly as indicated, and initialed when completed. Deviations from the program must be noted and explained. Audited transactions should be identified on related documents. Transactions with errors should be specially noted. Internal audit procedures must be well planned and documented thoroughly. Written audit documents are necessary to: prevent any misunderstanding of what is to be done; make sure that no procedure is overlooked; assign responsibility for the performance of audit procedures; provide the proper audit routine; ensure continuity of audit procedures over time; facilitate review of audit work performed; provide a written record of all audit work performed; provide a basis for the audit report; provide documentation for questions that may be posed by county officials and others, such as the press; and 10. help an external auditor evaluate the internal audit function. Since internal auditing in Texas counties usually involves the same types of audits on and the same offices month after month or quarter after quarter, the same audit programs may be used each time. Just prior to each audit, however, the program should be reviewed in light of any new conditions in the office to be audited that might affect normal examination procedures (such as staffing changes, an unusually busy month, changes in statutes or publicity surrounding the office). 1. 2. 3. 4. 5. 6. 7. 8. 9.

In addition, the scope of the audit may need to be changed once the examination begins, based on the findings that emerge.

Audit Programs
This manual discusses five audit programs detailed below. 1. 2. 3. 4. 5. Cash Count and Reconciliation Cash Receipts Cash Disbursements Property General Review

Cash Count and Reconciliation Audits The most convenient time to count cash is at the closing or opening of a business day. Cash counts also should be made on a surprise basis at irregular intervals. 1. Select the cash drawer or fund to be audited. 2. Count the cash in the drawer or fund. Use the cash count and reconciliation form (Exhibit 17) to record your results. Never allow the custodian of the counted cash to leave the auditor alone with the cash. Have the custodian sign the cash count and reconciliation form upon completion. 3. Using books of prenumbered receipts or cash register tapes, add the amount that should have been received. Enter the results on the "reconciliation" section of the cash count and reconciliation form. 4. Enter on the cash count and reconciliation form the amount of cash that should be in the drawer or fund for making change. 5. From the total money counted, subtract the total receipts indicated by the receipt books/register tapes (Step 3) and the authorized change fund (Step 4). 6. The answer should be zero. If it is not, recheck the entries and math on the cash count and reconciliation form. If they are correct, the problem is probably in the receipts. 7. Account for all receipt numbers. Examine any unused receipts held by the custodian of the drawer/fund. Make sure that unused receipts are all there and in an unbroken series. 8. Examine the used receipts to verify the amounts recorded are in accordance with statutory requirements (a sample may be used). 9. If the receipt copies are to be validated, check that they are validated for the proper amount and date (a sample may be used). 10. Examine all receipts that are voided or cancelled. All copies of the receipts should be there and all should be marked void. 11. Investigate any non-cash items included in the count for

applicability. 12. Notify the justice of the peace of any differences or discrepancies found during the cash count and reconciliation. 13. Observe and evaluate the internal controls over cash observed during the examination period. List any improvements that might be made. 14. The following additional procedures should be performed to reconcile cash and receipts with bank balances: a. Obtain the most recent bank statement and prepare a reconciliation for the current statement period. Investigate any unusual items (such as disbursements to unusual parties, any outstanding items, deposits in transit or signs of alteration). Obtain and examine copies of all cancelled checks. Use the bank reconciliation form for reconciliation (Exhibit 18). b. Match deposits shown by the bank statement with the specific days' receipts. Pay special attention to the five days preceding the date of each bank statement. Investigate any discrepancies. Use bank reconciliation form for reconciliation. Cash Receipts Audits 1. Verify the cash balance for the office that is responsible by counting and reconciling (see the cash count and reconciliation procedures above). 2. Determine the number of receipts used and account for all numbers by using a cutoff point of prenumbered receipts from the last audit and at the end of the current period under audit. 3. Examine receipts and determine if proper amounts were received. Examine any necessary supporting documents (for example, fee schedules, state and local court cost documents, docket books or tickets). 4. If a receipt has been voided or cancelled, examine all copies of the receipt, noting whether they are all present and marked void. 5. Foot (add up) various amounts on receipts, where applicable. 6. If necessary, based on professional judgment, obtain written confirmation (Exhibit 19): a. from selected payers as to amounts paid; b. from selected individuals as to amounts owed; and c. from selected individuals as to the fact that nothing was paid. 7. Where possible, trace transactions from original documents to receipts; for example, from complaints to receipts. 8. Trace receipts to accounting records and reports: a. to book of original entry (receipts journal);

9. 10.

11.

12. 13. 14. 15. 16. 17.

18. 19.

b. to subsidiary records (for example, docket books); and c. to monthly reports. Foot and cross-foot accounting records and reports. Match amounts received against amounts remitted to county treasurer and other parties. Check amounts on accounting records and reports against cancelled checks, check stubs and supporting documents. If applicable, examine the county's agreement with the bank depository to see that interest being paid is in accordance with contractual provisions. Check interest computations. Where applicable, ensure that interest earnings follow the source. Compare current audit period reports with reports of prior periods. Investigate any discrepancies. Notify the justice of any differences or discrepancies found. List any improvements that can be made in this area of the operations. Review bank accounts controlled by the justice of the peace to determine whether they are covered by the county depository agreement. Determine whether all deposits are made within the deadlines established by Chapter 113 of the Local Government Code and Article 103 of the Code of Criminal Procedure. Determine that the justice of the peace retains only restitution or other funds held on behalf of third parties in the bank account. Check that all county and state funds are deposited with the county treasurer. Check that unidentified funds are reported to the county treasurer and Texas Comptroller's office in accordance with the unclaimed property provisions of the Property Code. Reconcile the receipt book each month. If a computer is used to process receipts instead, verify transactions printout each month.

Cash Disbursements/Remittances Audits 1. Obtain a list of all disbursements made during the period under audit. Note: Only the county treasurer should be allowed to disburse county funds, except restitution money and fees held for merchants for hot checks and the related fees, which are transferred to the county prosecutor; restitution in other cases adjudicated in the justice of the peace court; refunds of cash bonds held for various writs and services; and, in some cases, cash bail bonds. All of these may be processed through the county treasurer. 2. If a check has been voided, examine all copies of the check, confirming that they are all accounted for and all marked void. 3. Foot amounts on checks and supporting documentation.

4. Examine supporting documentation to ensure that disbursements are proper and correct. Pay special attention to refunds. 5. Trace transactions from original documents to checks. 6. For example: a. from refund requests to checks; and b. from receipts to checks. 7. Trace checks to accounting records and reports: a. to books of original entry (disbursements journal); b. to subsidiary records (for example, docket books); and c. to monthly reports. 8. Foot and cross-foot accounting records and reports. 9. If necessary, obtain confirmation from payees as to amounts received (for example, by contacting other counties for amounts sent to their constables). 10. Notify the justice of the peace with any differences or discrepancies found. 11. List any improvements that can be made in this area of operations. Property Audits All county property, regardless of location, should be examined and counted by internal auditors at least once a year. It is not necessary to check all offices at the same time. In many instances, property audits are conducted in conjunction with normal audits of county offices and departments. 1. Obtain the property inventory record for the justice office to be audited. 2. Verify the existence, location and inventory number for all property shown on the inventory. Investigate any discrepancies, paying special attention to unrecorded transfers between offices and unrecorded disposals. 3. Note property not shown on the inventory, listing any found. Locate and review supporting documentation for such property. 4. Trace significant disposals, since the last audit, to accounting records and, if applicable, to the treasurer's cash receipts. Review minutes of commissioners court for authorizations to sell or otherwise dispose of such property. 5. Trace significant purchases since the last audit from invoice to actual purchase. Match the invoice description to the actual property. 6. If applicable, determine the location of and reason for property out for repairs and maintenance. If necessary, a. obtain written confirmation from service provider as to the property's existence, work being done and the inventory number; or

7. 8. 9. 10. 11. 12. 13. 14. 15.

b. visit the service location personally to verify the property's existence and inventory number. Note the condition of property. Investigate abnormal deterioration, usage and other factors implying misuse. Compare property insurance policies to significant assets covered, investigating and correcting discrepancies. Verify that coverage is adequate. If applicable, independently compute depreciation and compare to books. Check to ensure property is being used. Note any unused or underused property. Obtain significant outstanding requisitions and purchase orders. Review for necessity and proposed use. Correct property and accounting records as necessary. Notify the justice of any differences or discrepancies found. List any improvements that can be made in this area of the justice office operations. Have the justice sign an updated office property inventory. Give the justice a copy of the inventory.

General Review Audits 1. Review legislation and other information affecting justice of the peace offices. Compare information with current operations, noting any differences. 2. Examine accounting records and docket books for unusual or unexplained transactions or entries. Investigate any findings. 3. Examine docket books for dismissed cases and the reasons for dismissal. Based on professional judgment, obtain written confirmation that cases were actually dismissed without payments were made. 4. Compare current period audit results and operations with prior periods, noting any trends and fluctuations (for example, a sharp increase in the number or percentage of dismissed cases or a decrease in fines assessed in certain types of cases). Determine the reason(s) for significant trends and fluctuations. 5. Review any complaints received about the justice or justice office employees (for example, not getting a receipt for money paid). Based on professional judgment, expand the scope of the audit. 6. Look for apparent increases in spending habits by the justice or justice office employees. Based on professional judgment, expand the scope of the audit. 7. Look for personality changes in the justice or justice office employees that could be due to a severe drug, alcohol or financial problem. Based on professional judgment, expand the scope of the audit.

8. List any recommendations for improvements that can be made in the justice office operations.

Documenting and Evaluating Results
Results of the examination should be noted on the audit program checklist itself and separate working papers, and cross-referenced to the relevant procedure number. Special comments, unusual situations, items requiring follow-up and other pertinent observations may be noted in a special Memo To File. If the results of a sample audit are satisfactory, the internal auditor may conclude that the rest of the records also are satisfactory. If too many material errors are found, however, further testing may be necessary. What constitutes "satisfactory," "too many" or "material," of course, is a matter for professional judgment. It is simply impossible to be assured of a 100 percent accurate accounting function. However, the internal auditor does need to establish that the accounting in county offices is as free of material error as possible. Expectations should be used as guidelines. For example, if an internal auditor judges that an error rate of one in 50 transactions is acceptable in a certain office, an audit sample of 800 transactions that results in 8 errors (0.5 in 50) would be judged as acceptable, while a sample showing 25 errors (1.5 in 50) would not. By implication, the error rate in the sample is representative of the error rate in the entire group from which the sample is taken. There are no strict mathematical rules in judgment sampling. As in all other areas of auditing, the internal auditor must use sound professional judgment for the final evaluation.

Writing the Audit Report
The results of any audit should be communicated in writing to the official audited. This helps avoid later misunderstandings about what was done and what results were obtained. The letter should be brief; it need not go into detail about the procedures used and the exact records examined. The letter should contain: dates of examination; kind and general scope of examination; significant exceptions found;

positive findings during examination recommendations for improvement; and overall evaluation. The internal auditor also should discuss any significant matters with the justice of the peace or a designated staff member. The results of such conferences should be documented, preferably with a follow-up letter to the official. An example of an internal audit report letter is shown in Exhibit 20.

Endnotes

[220] Vernon's Ann. C.C.P. art. 103.011. [221] V.T.C.A., Local Government Code, §115.001. [222] V.T.C.A., Local Government Code, §115.002. [223] Vernon's Ann. C.C.P. art. 103.011. [224] V.T.C.A., Local Government Code, §115.901. [225] V.T.C.A., Local Government Code, §115.0035. [226] Government Accounting, Auditing and Financial Reporting. Government Finance Officers Association, 1994. Carole Keeton Strayhorn Texas Comptroller of Public Accounts Window on State Government Contact Us Privacy and Security Policy