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Michele A. Huntoon , CPA Associate Vice President Lewis W. Wiley, Jr. Director, Management Consulting Services PowerPoint Presentation
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Michele A. Huntoon , CPA Associate Vice President Lewis W. Wiley, Jr. Director, Management Consulting Services

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Michele A. Huntoon , CPA Associate Vice President Lewis W. Wiley, Jr. Director, Management Consulting Services

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  1. The Audit ChallengeWorkshop Michele A. Huntoon, CPAAssociate Vice President Lewis W. Wiley, Jr.Director, Management Consulting Services Cosponsored by:

  2. Workshop Topics • Audit basics • Audit administration • The annual audit • Charter school audits • Federal and state compliance issues • Audit findings and resolution • Internal audits and controls • Fraud prevention and detection

  3. Audit Basics

  4. Why Do We Have Audits? • Required by state and federal law • Education Code Section (E.C.) 41020 • Encourages sound fiscal management • Federal Single Audit Act (Office of Management and Budget [OMB] Circular No. A-133) • Requirement relates to expenditures of federal funds • Local educational agencies (LEAs) must have an audit that covers all funds and accounts and that addresses financial management and compliance with laws and regulations

  5. Who, What, and When? • Annual single audit is required to be performed by an independent Certified Public Accountant (CPA) with whom the LEA contracts • Must select an auditor by April 1 of each year to be audited • Program compliance of “build-upon” audits • Performed either by state or federal auditors • State Controller’s Office (SCO) • California Department of Education (CDE) • State Teachers’ Retirement System (STRS)

  6. Audit Standards • Financial Statement Audits • Generally Accepted Auditing Standards (GAAS) • Generally Accepted Accounting Principles (GAAP) • Generally Accepted Government Auditing Standards (GAGAS) (Yellow Book) • Title 5, California Code of Regulations (CCR), Education • Education Audit Appeals Panel (EAAP) • Audit of California K-12 LEAs

  7. Audit Standards • Compliance Audits • Yellow Book – General Accounting Office (GAO) • Federal OMB circulars • Federal Compliance Supplement • Catalog of Federal DomesticAssistance (CFDA) • K-12 Audit Regulations • Federal and state laws andregulations

  8. The Politics of State Compliance Auditing • The K-12 Audit Regulations are the playing field • At risk of losing funding • 675 audit findings reported in 2008-09 (22.2% in the attendance area) • 516 state • 159 federal • Other state areas with significant findings were class-size reduction (CSR) and the After School Education and Safety (ASES) grant • Federal program area with the largest number of findings was noncompliance with OMB Circular No. A-87, allowable cost/cost principles under Title I

  9. State Compliance Auditing • Current law requires: • SCO to publish by December 31 of each year a list of CPA firms that are eligible to perform LEA audits (E.C. 41020[f][1]) • Mandatory rotation of audit partners/firms at least every six years(E.C. 41020[f][2]) • Waiver available

  10. The Role of the State Controller’s Office • SCO, Division of Audits, has been designated by the Legislature as having oversight responsibility for school financial matters • Responsibilities include: • Proposing and coordinating updates to the K-12 Audit Regulations • Reviewing and certifying that audits are in compliance with legal, administrative, and professional standards • This includes K-12 Audit Regulation compliance • Performing Quality Control Reviews (QCRs) of audit firms performing school audits • Compiling data and making annual reports to the Legislature • Performing audits of districts with state loans • Performing build-upon audits (program audits)

  11. SCO Review of Annual Audit • SCO is responsible for monitoring quality of audit reports submitted • Done via a desk review of all audit reports, including charter school audits • Review focuses on eight areas: • Auditor’s report • Required supplemental information • Management Discussion andAnalysis • Basic financial statements • Notes to financial statements

  12. SCO Review of Annual Audit • Required Supplementary Information • Budgetary comparisons • Other Supplemental Information Section • Supplementing schedules • Other Reports Section • Internal control • Compliance • Findings and recommendations

  13. SCO Review of Annual Audit • If report does not meet standards, a letter identifying problems and requiring correction is sent to the CPA, county office of education (COE), and district • Negative impact to district • Increases district’s profile with SCO, CDE, and Departmentof Finance (DOF) • Increases likelihood ofbuild-upon audit

  14. Build-Upon Audits – Areas Likely to be Audited • Average daily attendance (ADA) is a primary area for audit: • Districts also could be subject to additional program-specific audits conducted by SCO • The areas likely to be reviewed are: • The attendance collection and reporting process • California Basic Educational Data System (CBEDS) enrollment changes – and the process for enrolling and disenrolling students • Independent study • Instructional time • CSR • Kindergarten admission age and retention requirements • Charter schools • Other alternative programs with significant ADA reported • Areas identified with audit findings in your single audit report

  15. Audit Administration

  16. The Audit Challenge – Annual Audit • Minimize the challenges and maximize the benefit • Auditor is hired by the district • District has the ability to choose from the list of auditors on the SCO website for the services • Audit administration is a district’s responsibility • Work with your auditor to make the process convenient and efficient for both parties • View the auditor as a business consultant, and utilize him or her to have areas of concern analyzed or procedures improved • Obtain validation of things operating well, and use to generate good public relations

  17. Issues of Audit Quality • Audit quality is affected by several factors: • Price • Specialized skill • Your value as a client • Without audit quality, be concerned that: • Errors and irregularities might go undetected and uncorrected • The SCO might reject your audit report • Issues of noncompliance may not be found in the early stages • You are wasting your school agency’s money

  18. Issues of Audit Quality • Ask for a copy of your audit firm’s most recent peer review or QCR opinion • Audit quality can also be gauged through: • Review of another school audit report the firm has prepared • Inquiry of other school agencies using the firm’s services • Checking the results of any QCRs performed by the SCO

  19. When to Change Auditors • Ask the COE about its experience with the firm when the firm performs audits elsewhere in the county • Firsthand assessment of the firm’s work • Some school agencies change auditors as a matter of policy, i.e., every five years • But there is no requirement that you need to change properly licensed auditors if you are satisfied with their thoroughness and responsiveness, except within the six-year rotation requirements of E.C. 41020(f)(2)

  20. Evaluating Audit Quality • In 2008-09, a sample of firms were reviewed by the SCO • Some elements were met • Majority of auditing standards and federal and state requirements were not met • For 2008-09, 77% of the audit reports were accepted • Number of rejected reports decreased from 377 in 2007-08 to 337 in 2008-09 • 34% were charter schools • Most rejections were due to errors in the findings and recommendations report and the supplemental information

  21. Use of an Audit Committee • Formation of an audit committee is beneficial for: • Bringing objectivity • Delegating audit administration responsibilities • Lending technical advice • Directing and reviewing the work of internal auditors • Improving financial practices and reporting • Enhancing the internal audit function • Enhancing the external audit function • Typical committee composition is three to five members who are selected for: • Their financial expertise • Their independence from the business office • Their interest as a Governing Board member

  22. Model Request for Proposals • Mandatory Criteria – items required by law or regulation: • Licensed CPA in California • On SCO list of approved CPAs • Lead and coordinating partners cannot have performed the services in the prior six years • Optional Criteria – items required to make a complete evaluation on quality: • School experience • Adequacy of sizes • Staff qualifications • Other expertise

  23. Point Ranking System • Try to give greater weight to expertise over cost (see right for example) • Avoid “all or nothing” scoring; use a scale • Assign the highest number of points to the firm best meeting that particular qualification • This formula can assist with the process of assigning points for auditor selection

  24. Audit Contracts • E.C. 14505 requires certain elements to be included in the audit contract • 10% of the audit fee to be withheld pending certification by the SCO • The contract must include a provision that a multiyear contract is null and void if the SCO declares an audit firm to be ineligible to conduct audits

  25. Managing the Audit—Coordination and Arrangements • Assign an audit coordinator/liaison • Auditors need: • Appropriate amount of space conveniently located to the accounting department – private, if possible • Full access to phones, faxes, and copiers • Ability to freely meet with key staff throughout the visit • Clerical assistance • Offer to run special computer reports and prepare schedules in advance • Consider allowing auditors direct access to certain files in the computerized accounting system from a terminal

  26. Request in advance a list of items necessary for the initial fieldworkvisit Gather data for the auditor in a timely manner Finalize key reports on time Be available to answer questions Insist on both an entrance and exit conference Hold progress meetings if you are a larger entitythat has more complex audits and longer audittimelines Insist on reviewing the draft reportprior to finalizing the audit Managing Field Work

  27. The Annual Audit

  28. The Basic Financial Statement Audit • The independent auditor is required to issue an opinion on the fair presentation of the financial statements • What are the basic financial statements? • Governmentwide Financial Statements • Statement of Net Assets • Statement of Activities • Fund Financial Statements • Balance Sheet – Governmental Funds • Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets

  29. Reconciliation of the Government Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities Statement of Fund Net Assets – Proprietary Funds Statement of Revenues, Expenses, and Changes in Fund Net Assets – Proprietary Funds Statement of Cash Flows – Proprietary Funds Statement of Fiduciary Net Assets – Fiduciary Funds Statement of Changes in Fiduciary Net Assets – Fiduciary Funds Statement of Revenue, Expenditures, and Changes in Fund Balances – Governmental Funds The Basic Financial Statement Audit

  30. The Basic Financial Statement Audit • In addition, the auditor may express an opinion on individual fund statements • Fund forms (Standardized Account CodeStructure [SACS] forms) are essentiallythe basic financial statements of aschool agency

  31. Audit Opinions • Four possible audit opinions • Unqualified • Clean opinion and in conformity with GAAP • Qualified • Reservations about the fair presentation of the financial statements • Insufficient records (i.e., inventory) • Inconsistent accounting principles from one year to the next • Adverse • Material departure from GAAP (i.e., governmentwidestatements not presented in financial statements) • Disclaimer • Material amounts without sufficient documentation – all or a portion of the financial statements

  32. Audit Adjustments • The auditor will propose audit adjustments to: • Correct errors • Record transactions in accordance with GAAP • Provide for allowances and estimates • Avoid audit adjustments by carefully closing the books • Cash with fiscal agents • Year-end accruals • Due to/from other funds • Interfund transfers and abatements • Fund balance reserves and designations • Other nonroutine entries (i.e., issuance costs on debt) • Prior-year accruals and audit adjustments

  33. Typical Audit Approaches • Typically, the audit approach is a combination of methods • Tests of controls (i.e., attendance, payroll, and disbursements) • Substantive testing (i.e., financial statements) • Compliance testing (i.e., OMB A-133) • Assertions • Existence or occurrence • Completeness • Rights and obligations • Valuation or allocation • Presentation or disclosure • 6th assertion – compliance with laws and regulations

  34. Sampling and Materiality • Auditors rarely test 100% of transactions • Sampling techniques are used, either statistically orjudgmentally drawn • Materiality is considered to be the level at which an error in the financial statements would change a reader’s opinion about the school district’s financial position and operation • Can be both qualitative and quantitative • Determined at the lowest level at which an opinion is rendered • Materiality may be mandated by law • ADA by instructional program

  35. For federal programs, materiality is determined at the program level Financial statement materiality is between 0.5% and 4.0% Sampling and Materiality

  36. The Audit Trail • All transactions need to: • Have sufficient supporting documentation • Be accessed in a timely manner • An inadequate audit trail leads to audit exceptions and increases the potential for fraud and errors

  37. The Single Audit Act of 1984 and Subsequent Amendments in 1996 and 2003 • In the mid-1970s, there were more than 100 different program audit guides • The process was unmanageable for both the auditor and auditee • A wasteful duplication of effort • Conflicting audit requirements • Findings resolution nightmares • To streamline the audit process, the Single Audit Act of 1984 was enacted • OMB Circular No. A-133, revised June 27, 2003 • Revision increased the threshold to $500,000, effective for periods ending after December 31, 2003 (i.e., the 2003-04fiscal year)

  38. The Single Audit Act of 1984 and Subsequent Amendments in 1996 and 2003 • Auditors will decide whether an auditee is low or high risk • If low risk, 25% of federal programs to be tested • If high risk, 50% of federal programs to be tested • A low-risk auditee must meet these criteria: • An unqualified opinion for the last two years • No material internal control weaknesses or findings in Type A programs

  39. The Single Audit Act of 1984 and Subsequent Amendments in 1996 and 2003 • The Single Audit Act adds numerous audit testing and reporting requirements and costs • Expenditures for an individual federal program are identified asType A programs as follows: • $300,000 or 3% (.03) of total federal awards expended for which total federal awards expended equal or exceed $300,000, but are less than or equal to $100 million • $3 million or 3/10 of 1% (.003) of total federal awards expended for which total federal awards expended exceed $100 million, but are less than or equal to $10 billion • $30 million or 15/100 of 1% (.0015) of total federal awards expended for which total federal awards expended exceed$10 billion

  40. The Single Audit Act of 1984 and Subsequent Amendments in 1996 and 2003 • Low risk are those with no findings of internal control weaknesses, and those that are not identified by the federal government as having problems • Federal programs not labeledType A shall be labeled Type Bprograms

  41. The Single Audit Act of 1984 and Subsequent Amendments in 1996 and 2003 • The auditor must perform risk assessments on Type B programs that exceed the larger of: • $100,000 or 3/10 of 1% (.003) of total federal awards expended when the auditee has less than or equal to $100 million in total federal awards expended • $300,000 or 3/100 of 1% (.0003) of total federal awards expended when the auditee has more than $100 million in total federal awards expended • Auditors test if risk is assessed as high • Compliance with specific requirements for major programs is tested • Compliance with common requirements is tested

  42. The Single Audit Act of 1984 and Subsequent Amendments in 1996 and 2003 • An auditor may be required to expand the testing of Type A programs if less than 50% of the total federal awards expended are not included in the test of federal programs • For a low-risk client, the auditor is required to test at least 25%of the total federal awards expended

  43. The Single Audit Act of 1984 and Subsequent Amendments in 1996 and 2003 • Activities allowed or not allowed • Allowable costs/cost principles • Cash management • Davis-Bacon Act • Equipment and real property management • Matching, level of effort, or earmarking* • Period of availability of federal funds • Real property acquisition and relocation • Procurement, suspension, and debarment • Eligibility* • Reporting* • Program income • Sub-recipients monitoring • Special tests and provisions The auditor will look at: *These compliance requirements are generally specific to a program and, for the majority of programs, are described in the Compliance Supplement.

  44. The Single Audit Act of 1984 and Subsequent Amendments in 1996 and 2003 • The auditor has many resources to assist in planning a single audit • K-12 Audit Regulations – available on EAAP’s website • • But SCO no longer publishes the procedures in an audit program format with authoritative references and supplemental information • The Compliance Supplement for Single Audits of State and Local Governments – available on OMB’s website • • The Catalog of Federal Domestic Assistance – available on the General Services Agency website •

  45. The Single Audit Act of 1984 and Subsequent Amendments in 1996 and 2003 • An idea to distribute audit costs: • Both OMB Circular Nos. A-87 and A-133 allow for the direct or indirect allocation of proportional audit cost to federal programs • However, if the indirect cost pool includes costs charged directly, then those costs cannot be charged twice

  46. Governmental Accounting Standards Board • The Governmental Accounting Standards Board (GASB) was established in 1984 and is responsible for developing standards of state and local governmental accounting and financial reporting that will: • Result in useful information for users of financial reports • Guide and educate the public, including issuers, auditors, and users of those financial reports • Compliance with GASB standards are enforced by some states laws and auditors through the audit process • GASB is a private sector not-for-profit entity

  47. Governmental Accounting Standards Board • GASB 43 – Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans • When an LEA reports an Other Than Postemployment Benefit (OPEB) plan as a trust or agency fund • GASB 45 – Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions • Financial reporting by government agencies sponsoring benefits for retirees other than pensions (i.e., medical, dental, life insurance, etc.) See CD-ROM for GASB 45

  48. Governmental Accounting Standards Board Statement No. 45 – Funding Alternatives

  49. Governmental Accounting Standards Board Statement No. 54 • Fund Balance Reporting and Governmental Fund Type Definitions • Issued on March 11, 2009, and became effective for the 2010-11 fiscal year • Improve usefulness of fund balance information by: • Clarifying the relationship between reserved fund balances reported under the modified accrual (SACS) and reserved balances reported under the full accrual basis (GASB 34)

  50. Governmental Accounting Standards Board Statement No. 54 • New categories of fund balance: • Nonspendable – store inventory, prepaids, etc. • Restricted: Amounts constrained by external parties • Committed: Amounts constrained by a government (internally by formal action) • Assigned: Amounts for a particular intended purpose • Unassigned: Amounts that are constrained or assigned • Also, GASB 54 specifies how to disclose “rainy day” amounts in the financial statements