Budget vs Actual 1373

  • Does anyone have a separate process for Financial Planning?
    We have a separate process, which was done last year when I was not working for this company. Our auditors (KPMG) had accessed documentation deficiency on all our process documentation, and so I am trying to make the documentation more robust for year 2.
    The forecast has 3 components: sales, production expenses and departmental expenses. But, only departmental expenses are compared to actuals.
    My question is: should we prepare BVA for sales forecast and production expenses too? KPMG did not bring this up last year.

  • We have a separate process for Financial Reporting and we compare all categories to BVA. I would anticipate that although KPMG didn’t bring it up last year, they’ll certainly dig deeper this year so it would be to your benefit to include this.

  • Yes, there is a separate process and a RACM for financial planning and forecasting on all clients we did SOX efforts on.

  • KPMG is our auditor as well. We have done nothing related to the planning process as we do not see any critical controls in this area that could impact actual financial reporting.
    We do document as part of our entity-level controls the fact that we have a rigorous planning process, but we do not place any reliance on that in the determination of controls that we have identified as ‘key’.
    Can KPMG tell you where they feel that your documentation is lacking? It is hard to imagine that the financial planning area could be that significant in your overall control scheme. You should ensure that you have tight documentation around processing controls as well as the financial close process.
    For most companies, the areas of greatest risk are revenue recognition, inventory, fixed assets, impairment, judgemental reserves and income taxes. Day to day G-and-A and transaction processing present a lower risk of significant financial error than the close process does.

  • Thanks. KPMG’s documentation deficiency was related to all processes in general. However, we do not compare actual sales to forecast and actaul production costs to forecasts. KPMG did not bring this up last year, but I am wondering if I should remediate it. Do companies compare actual sales to forecast and actual production to forecast as a part of BVA?

  • The comparison of budget or forecast to actual results is more of an operational control than a financial control. Unless you are relying on this to identify financial reporting errors, I would not spend much time in this area. To me, your important controls are those at the transaction level, account reconciliations, management review of actual results and supervisor review of reconciliations and journal entries. You could possibly add in some sort of trend analysis, but that is a high-level detect control that is almost secondary in nature. You can argue that comparison of actual results to budget, forecast or prior year is a control that you could document and test as this will highlight variances which shoudl then be explained, but this type of control will not catch errors such as accruing something to plan or forecast in order to hit your target versus accruing the actual revenue or expense. Only your prevent controls are going to catch those items.

  • Thanks once again. I think that would help me to put forward some valid explanations. SInce KPMG was not happy last year, they want to see explanations/thought process for everything this year, and we cannot afford to have documentation deficiency again this year, since it would then become material weakness.

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