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  • 1. THE CALIFORNIA STATE UNIVERSITY GAAP REPORTING MANUAL CHAPTER 9 – PREPARING FOR AN AUDIT TABLE OF CONTENTS Page Description 9-2 Introduction 9-10 Index – Sample Schedules and Prepared by Client (PBC) Lists Exhibits 1- 20 Sample Schedules Exhibit 21 Single Audit Risk Assessment Questionnaire Exhibit 22 Student Financial Aid System – Roadmap to Access Exhibit 23 Financial Statement Audit – PBC List Exhibit 24 A-133 Student Financial Assistance Program Higher Scope Audit – Single Audit Campus Team Instructions / PBC List Exhibit 25 A-133 Student Financial Assistance Program Limited Scope Audit – Single Audit Campus Team Instructions / PBC List Reporting Package Template 9-1
  • 2. The California State University GAAP Reporting Manual June 2006 INTRODUCTION For many organizations, the word “auditor” sends a message of negativity and panic; however, the audit process can be virtually painless if you are ready and your staff is educated on the audit process. This section of the manual is designed to provide the user with an understanding of how to prepare for a successful audit and, in addition, describes the roles of the independent auditor and campus personnel in the audit process. Understanding the Role of the Independent Auditor The role of the independent auditor is to examine, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on the effectiveness of the internal control over financial reporting. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. It is not the responsibility of the independent auditor to prepare the financial statements or the footnote disclosures. It is also not the responsibility of the independent auditor to reconcile accounting information or to compile data for analysis or for financial statement or footnote disclosure. The independent auditor is available to assist with such matters, which are usually considered to be outside of the scope of an audit. It is the responsibility of the campus and audit teams to develop “ground rules” for the conduct of the audit. The following summarizes some key responsibilities of the independent auditor: • To provide a prepared by client (PBC) list of items that will be required for the audit in advance of the start of fieldwork. The auditors will provide a preliminary PBC list; however, other requests should be expected during fieldwork based upon a review of the documents provided. • To meet all deadlines set by the campus and audit teams. • To plan and conduct the audit in a professional and effective manner. • To be courteous to campus personnel and be mindful of their other work commitments. • To communicate progress and any difficulties or issues encountered promptly and effectively to members of the campus management. Last revised May 18, 2006 9-2
  • 3. The California State University GAAP Reporting Manual June 2006 Understanding the Role of the Campus Management of each campus is responsible for preparing the reporting package provided by the Chancellor’s Office and their stand-alone financial statements, including footnotes and management’s discussion and analysis (MD&A). Further, management is responsible for the fair presentation of the financial statements in conformity with U.S. generally accepted accounting principles. The following summarizes additional responsibilities of the campus team: • To be prepared for the audit (see further discussion in “Planning” section later on in this chapter) • To have all requested items on the PBC list, including the completed and approved reporting package provided by the Chancellor’s office, prepared in accordance with the Chancellor’s Office established audit timeline. The majority of the items on the PBC list must be ready prior to the beginning of fieldwork. See sample schedules at the end of this chapter for further guidance. See the 2006 reporting package template at the Chancellor’s Office website at http://www.calstate.edu/sfsr/gaap/. • To provide a suitable work area for three to four auditors in close proximity to accounting and financial reporting personnel. The work areas should include a phone and data line and access to a fax machine. • To communicate any difficulties or issues encountered during the audit process promptly to either the audit manager or partner. • To provide a central contact to the audit team. • To meet all deadlines set by the Chancellor’s office, the campus and audit team. Key dates areas follows (refer to Audit Timeline for complete listing of dates): Key Deadlines: • Unaudited debt allocations and Energy Lease information will be passed down from the Chancellor’s office – August 21, 2006 • Audited auxiliary organization financial statements due to the Chancellor’s office September 29, 2006 • Audited risk pool allocation passed down from the Chancellor’s office – September 29, 2006 • Campuses to have completed and approved June 30, 2065 reporting package ready prior to the start of final fieldwork and arrival of their KPMG audit team (refer to Engagement Team Phone List for fieldwork start dates for each campus). • Campus audited reporting package due to the Chancellor’s office (must be submitted by KPMG audit team) – October 18, 2006 (Campus reporting packages must be reviewed and approved by their campus audit manager prior to submission) • Campus analytical review (fluctuation analysis) by financial statement line item (part of reporting package) due to the Chancellor’s Office (must be submitted by KPMG audit team) – October 18, 2006 Last revised May 18, 2006 9-3
  • 4. The California State University GAAP Reporting Manual June 2006 • • Campus Schedule of Expenditures of Federal Awards (part of reporting package), FISAP due to the Chancellor’s Office (must be submitted by KPMG audit team) – October 18, 2006 • Campus A-133 findings due to the systemwide team (must be submitted by KPMG audit team) – November 8, 2006 (All findings should be discussed with campus personnel prior to submission) • Campus draft stand-alone financial statements (including management approved MD&A) due to the KPMG audit team – November 17, 2006 Last revised May 18, 2006 9-4
  • 5. The California State University GAAP Reporting Manual June 2006 Planning One of the key elements of an efficient audit process is campus preparedness. Because of the significant resources needed to complete an audit, it is essential that the campus plan properly for the audit process. Campus staff that will need to be available should be notified of the timing several months before the audit fieldwork in order to ensure that they will be available. Key personnel should not plan to take vacations during audit fieldwork or during the time surrounding the submission deadline of the campus reporting package to the Chancellor’s Office. In addition, time should be set aside to prepare and review all of the audit schedules needed by KPMG (as listed on the PBC List) prior to the start of fieldwork. The independent auditor should make every effort to request and utilize schedules and reports that are already prepared by campus personnel in the conduct of their monthly or annual closing procedures. However, there are certain schedules that may be required to support financial statement balances and/or disclosures that are unique to the GAAP financial reporting process. If these audit requests have not been sent to you early enough for you to prepare, this should be communicated to your audit manager or partner. If items included on the PBC List are not clear to you, clarify these items with a member of your assigned audit team prior to their arrival for performance of fieldwork. Items on the PBC list must be centrally accumulated in a separate set of binders to be provided to the audit team on the first day of fieldwork. All schedules in the binders must be labeled and cross-referenced to the PBC list. This will help facilitate easy identification of the PBC items by the audit team. If additional items beyond those on the PBC list are included in this set of binders, a supplemental index should also be provided. Communication Communication with your own staff as well as your audit team is critical. It is important that you communicate issues, deadlines, and expectations in initial meetings with your campus and audit team. It is likely that your audit team will communicate expectations they have for you as well. If they don’t, ask!! Communicate with your audit team regarding how and when audit adjustments will be discussed – all together at the end or throughout audit fieldwork. Discuss with your audit team how staff should be contacted – through a central contact or directly, whether they can be “dropped in on” or if appointments are preferred. Additionally, in order to help facilitate an efficient audit process, weekly “hands-on” meetings with the campus central contact and audit team are strongly recommended to discuss such items as overall audit progress, proposed audit adjustments to date, and address various issues as they arise. Central Contact Although it is very important that the responsibility for audit preparation be delegated to relevant campus staff, it is key that one person from the campus acts as the central audit contact (GAAP contact). This person should be responsible for ensuring that all the requested schedules are completed properly and on-time. In addition, this person should be responsible for accumulating all the audit schedules from the various preparers and reviewing them to ensure that these detailed schedules agree to the general ledger and the financial statements. This person should Last revised May 18, 2006 9-5
  • 6. The California State University GAAP Reporting Manual June 2006 then centrally accumulate all schedules in a separate set of binders to be provided to the audit team on the first day of fieldwork. The GAAP contact should function as the audit liaison in working directly with the audit team. Audit Terminology The terminology used by independent auditors may not be understood by the individuals responsible for preparing audit schedules and thus they may be unable to provide the information requested. Following are some key terms with their definitions used by independent auditors: General ledger – The accounting system in which all account balances and changes in fund balances are recorded. For audit purposes, the SAM 07 is considered to be the general ledger of the CSU. Reconciliation – A procedure performed to ensure that one set of information agrees to another. A reconciliation often maps how detailed information (i.e., a subledger, subsidiary system, or other listing) agrees to the general ledger. A proper reconciliation provides a summary of reconciling items, the nature of their balances and their proposed disposition. Rollforward – A schedule prepared that reflects beginning balances, additions, deletions, and the balance at year-end. The ending balances in the rollforward schedule should agree to the general ledger and beginning balances should agree to the prior year audit report. This type of schedule is typically requested for capital assets accounts, debt outstanding, net assets, and prepaid assets, if significant. PBC list – The schedule of initial audit requests provided by the campus audit team, which are to be prepared by campus personnel. PBC stands for “Prepared By Client.” Other requests should be expected throughout final fieldwork. Subledger – A detailed listing of individual account balances (e.g., capital assets, student and other receivables, and inventory). These listings should not be rollforwards of the accounts, but rather a summary of the components of the ending balance or composition of each account. For example, a listing that shows additions and deletions to an inventory account is not a useful listing because it cannot be used to determine the composition of the ending balance. Aging report – A type of subledger that groups account balances by the amount of time that has passed since the balance originated (e.g., a receivable report that lists all accounts that are current, 30-60 days past due, etc.). The total balance on this report should agree to the total balance of the account on the general ledger. Leadsheet – A summary of accounts and their outstanding balances that is included in one line item on the financial statements (e.g., a listing of all cash accounts and their balances that agrees in total to the cash balance presented in the financial statements). Check register – A listing of all checks processed and disbursed in a certain period. At the CSU, a check register is the equivalent of a warrant register or claims listing. Methodology – Thought process or reasoning behind the development of certain financial statement accounts, the recording of which requires management judgment or a selection from alternative methods of accounting. Last revised May 18, 2006 9-6
  • 7. The California State University GAAP Reporting Manual June 2006 Trial balance – A summary schedule of the general ledger, which includes the ending balances of each type of account at year-end. For CSU audit purposes, the GAAP conversion template prepared for each fund will be considered a trial balance. For non-PeopleSoft 8.4 campuses, the GAAP conversion template is prepared manually. For PeopleSoft 8.4 campuses, the GAAP conversion template is Report CSUFS169 “Pre-Closing Trial Balance by Net Asset Category, Leadsheet – Summary”. The legal basis account balances per the GAAP conversion template must agree to the general ledger. Additionally, for PeopleSoft 8.4 campuses, the GAAP basis net transactions during the year must agree to the general ledger. Last revised May 18, 2006 9-7
  • 8. The California State University GAAP Reporting Manual June 2006 List of CSU Reports Commonly Used During the Audit and GAAP Conversion Process SAM 99* – Provides State Controller’s Office (SCO) balances available for General, Lottery, and Capital Outlay funds. This report is utilized to verify that the GAAP receivable for State Appropriations has been recorded accurately. SAM 18A* – Utilized to prepare journal entry to eliminate expenses (general and capital outlay funds) accrued on the legal basis books for goods and services not received. (i.e., encumbrances) (applicable to non-PeopleSoft 8.4 campuses only) SAM 07 – Pre-closing trial balance used to prepare the Excel spreadsheets (or other equivalents) in legal basis books for balance sheet accounts that support the GAAP template. Commonly referred to as the general ledger for the audit process. SAM 18B* – Used to eliminate due to/due from other funds from within a fund group. (applicable to non-PeopleSoft 8.4 campuses only) SAM 6C – Used to breakdown expenses by program for the GAAP template. (Unrestricted and Invested in capital assets, net of related debt only) (applicable to non-PeopleSoft 8.4 campuses only) SAM 6B –Provides budget amounts that are used for the schedule of State Appropriations revenue in General Fund and to record adjustments for State Appropriations receivable. CSUFS168 – Statement of Net Assets (PeopleSoft 8.4 campuses only) CSUFS166 – Statement of Revenues, Expenses, and Changes in Net Assets (PeopleSoft 8.4 campuses only) CSUFS169 – Pre-Closing Trial Balance by Net Asset Category, Leadsheet - Summary (PeopleSoft 8.4 campuses only) CSUFS170 – Leadsheet - Detail (PeopleSoft 8.4 campuses only) CSUFS167 – Operating Expenses Summary (PeopleSoft 8.4 campuses only) CSUFS171 – Leadsheet - GAAP Adjustments (PeopleSoft 8.4 campuses only) * Only available to campuses that use Financial Reporting System (FRS). Last revised May 18, 2006 9-8
  • 9. The California State University GAAP Reporting Manual June 2006 Other reports that have proved valuable for preparation of the GAAP conversion template and audit process are the following: • A locally-developed report that analyzes the reimbursed activities in the general fund accounts to make sure that revenues equaled expenses for purposes of elimination or reclassification as necessary. (AMO61 could be used for this also) • A locally-developed report for payments made and received from “related parties” for footnote disclosure purposes. • A locally-developed Focus report run against the Customer Information Retrieval System (CIRS) database to analyze vacation accruals for GAAP purposes. • The June 30th report from AMS (formally EFG Technologies), third party loan service provider, regarding Perkins and Nursing student loans receivable balances. This report can be used to determine entries needed for accrued interest income and allowances for doubtful accounts. Last revised May 18, 2006 9-9