IASBO 2012-The Audit, what to look for and what to communicate to your board
THE AUDIT: WHAT TO LOOK FORAND WHAT TO COMMUNICATETO YOUR BOARD
2Agenda• Audit Opinions• Analyzing Government-Wide Financial Statements• Internal Control• Other Deliverables• Internal Control Scenarios
3What is an audit?―the systematic gathering and evaluation of evidence as abasis for reaching an opinion about whether the assertionsmade by management in an entity’s financial statementscorrespond in all material respects with generally acceptedaccounting principles (GAAP)‖ (Auditing, Ricchiute)―The objective of the ordinary audit of the financialstatements by the independent auditor is the expression ofan opinion on the fairness with which they present, in allmaterial respects, financial position, results of operations,and its cash flows in conformity with generally acceptedaccounting principles.‖ (Statement of Auditing Standard,No.1, AU Section 110)
5Auditor OpinionUnqualified Opinion • Top of the Ladder • Materially compiles with generally accepted accounting principles (GAAP)
6Auditor Opinion Qualified Adverse• ―Except for‖ • The financial statements• The financial statements do NOT present fairly in materially comply with accordance with GAAP GAAP except for…. • Bottom of ladder• I.E. Specific GAAP departure
7Unqualified Auditor Opinion• GAAP Basis In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, business-type activities, each major fund, and the aggregate remaining fund information of the School District, Iowa as of June 30, 2011, and the respective changes in financial position, and where applicable, cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.
8Analyzing Government-Wide FinancialStatements • Statement of Net Assets • Statement of Activities
9The Ifs, Ands, and Buts of FinancialAnalysis• Financial analysis vs. Financial Ratios • Financial analysis – drawing meaning from financial statement information • Financial ratios – numbers calculated from financial statement information to conduct financial analysis.• So I calculated my ratio what does it mean • Compare to prior years • Compare to other Districts • Common ratio indicators
10Statement of Net Assets Governmental Business-Type Activities Activities Total Assets Cash and pooled investments $ 11,656,688 $ 452,160 $ 12,108,848 Receivables: Property tax: Current year 96,534 - 96,534 Succeeding year 14,470,000 - 14,470,000 Accounts 395,747 969 396,716 Due from other governments 1,328,538 - 1,328,538 Inventories - 28,540 28,540 Prepaid expenses 113,117 - 113,117 Capital assets: Nondepreciable 11,906,716 - 11,906,716 Depreciable, net 23,509,650 556,585 24,066,235 Total assets 63,476,990 1,038,254 64,515,244 Liabilities Accounts payable 1,477,665 521 1,478,186 Salaries and benefits payable 3,154,296 - 3,154,296 Due to other governments 260,649 - 260,649 Claims incurred but not reported 153,289 - 153,289 Unearned revenue: Succeeding year property tax 14,470,000 - 14,470,000 Other 1,107,806 31,719 1,139,525 Long-term liabilities: Portion due within one year: Early retirement 242,388 - 242,388 Compensated absences 256,161 - 256,161 Portion due after one year: Early retirement 106,962 - 106,962 Compensated absences 541,834 - 541,834 Net OPEB liability 438,034 2,018 440,052 Total liabilities 22,209,084 34,258 22,243,342 Net Assets Invested in capital assets, net of related debt 35,416,366 556,585 35,972,951 Restricted for: Categorical funding 341,798 - 341,798 Management levy 628,777 - 628,777 Physical plant and equipment levy 12,811 - 12,811 Other special revenue purposes 519,521 - 519,521 School infrastructure 1,086,593 - 1,086,593 Other - 20,500 20,500 Unrestricted 3,262,040 426,911 3,688,951 Total net assets $ 41,267,906 $ 1,003,996 $ 42,271,902 See Notes to Financial Statements.
11How Do I Use The Statement of NetAssets Information?• Common-Size Ratios• Assess your District’s Financial Status• Determine Financial Prospects • Ability to meet obligations • Ability to finance future services
12 Common-Size Ratios Percentage Percentage Percentage 2010 Distribution 2011 Distribution ChangeCash and cash equivalents 9,474,000 15.5% 11,657,000 18.5% 23.0%Property taxes receivable 13,879,000 22.7% 14,567,000 23.1% 5.0%Due from other governments 5,000,000 8.2% 1,329,000 2.1% -73.4%Inventories and prepaid items 108,000 0.2% 113,000 0.2% 4.6%Capital assets 32,675,000 53.4% 35,417,000 56.1% 8.4%Total assets 61,136,000 63,083,000
13Financial Status Total Percentage Total School District ChangeNet assets: June 30, 2010 June 30, 2011 2010-11 Invested in capital assets, net of related debt 33,289,967 35,972,951 8.1% Restricted 2,604,812 2,589,500 -0.6% Unrestricted 2,133,103 3,264,058 53.0% Total net assets $ 38,027,882 $ 41,826,509 10.0%
14Determine Financial ProspectsAbility to meet obligations• Liquidity Ratio • Current ratio • Quick ratio• Solvency Ratios • Leverage • Coverage
15Liquidity Ratios• Current ratio = current assets / current liabilities• Quick ratio = (cash + investments) / current liabilities
16Solvency Ratios• Leverage • Debt to assets ratio = total liabilities / total assets • Debt to net assets ratio = total liabilities / total net assets• Coverage • Times interest earned = (cash flow from operations + interest expense) / interest expense
17 Statement of Activities Net (Expens e) Revenue Progra m Revenues a nd Cha nges i n Net As s ets Cha rges Opera ti ng Gra nts Ca pi ta l Gra nts Governmenta l Bus i nes s -Type Functi ons /Progra ms Expens es for Servi ces a nd Contri buti ons a nd Contri buti ons Acti vi ti es Acti vi ti es Tota lGovernmenta l a cti vi ti es : Ins tructi on: Regul a r i ns tructi on $ 17,377,707 $ 2,241,370 $ 379,165 $ - $ (14,757,172) $ - $ (14,757,172) Speci a l i ns tructi on 3,094,014 11,250 872,714 - (2,210,050) - (2,210,050) Other 3,082,738 673,335 34,544 - (2,374,859) - (2,374,859) 23,554,459 2,925,955 1,286,423 - (19,342,081) - (19,342,081) Support s ervi ces : Student s ervi ces 1,002,834 - - - (1,002,834) - (1,002,834) Ins tructi ona l s ta ff s ervi ces 1,241,087 - 2,317,614 - 1,076,527 - 1,076,527 Admi ni s tra ti on s ervi ces 3,167,175 - - - (3,167,175) - (3,167,175) Opera ti on a nd ma i ntena nce of pl a nt s ervi ces 2,352,852 13,186 - - (2,339,666) - (2,339,666) Tra ns porta ti on s ervi ces 1,476,472 - 30,739 - (1,445,733) - (1,445,733) 9,240,420 13,186 2,348,353 - (6,878,881) - (6,878,881) Noni ns tructi ona l progra ms 31,633 - - - (31,633) - (31,633) Other expendi tures : Fa ci l i ti es a cqui s i ti on 457,791 - - 829,521 371,730 - 371,730 AEA fl owthrough 1,426,627 - 1,426,627 - - - - Depreci a ti on (una l l oca ted) * 1,160,776 - - - (1,160,776) - (1,160,776) 3,045,194 - 1,426,627 829,521 (789,046) - (789,046) Total governmental activities 35,871,706 2,939,141 5,061,403 829,521 (27,041,641) - (27,041,641)Bus i nes s -type a cti vi ti es : Support s ervi ces : Admi ni s tra ti on s ervi ces 25,939 - - - - (25,939) (25,939) Opera ti on a nd ma i ntena nce of pl a nt s ervi ces 39,784 - - - - (39,784) (39,784) 65,723 - - - - (65,723) (65,723) Noni ns tructi ona l progra ms , food s ervi ce opera ti ons 1,278,738 1,026,912 351,094 - - 99,268 99,268 Total business-type activities 1,344,461 1,026,912 351,094 - - 33,545 33,545 Total $ 37,216,167 $ 3,966,053 $ 5,412,497 $ 829,521 (27,041,641) 33,545 (27,008,096)Genera l revenues : Property ta x l evi ed for: Genera l purpos es 13,123,314 - 13,123,314 Ca pi ta l outl a y 1,448,716 - 1,448,716Sta tewi de s a l es a nd s ervi ces ta x 3,024,239 - 3,024,239Other ta xes 650,915 - 650,915Unres tri cted s ta te gra nts 12,638,289 - 12,638,289Unres tri cted i nves tment ea rni ngs 53,944 3,925 57,869Other 308,774 - 308,774 Total general revenues 31,248,191 3,925 31,252,116Tra ns fers 5,685 (5,685) - Total general revenues and transfers 31,253,876 (1,760) 31,252,116 Change in net assets 4,212,235 31,785 4,244,020Net a s s es , begi nni ng of yea r 37,055,671 972,211 38,027,882Net a s s es , end of yea r $ 41,267,906 $ 1,003,996 $ 42,271,902* Thi s a mount excl udes the depreci a ti on i ncl uded i n the di rect expens es of the va ri ous progra ms .See Notes to Financial Statements.
18How Do I Use The Statement of ActivitiesInformation?• Determine the cost of services• Determine where the District gets its money from and where does it use it• Determine if the District is better or worse off financially• Determine if there was financial activity between the Governmental and Business-type activities• Determine if the District will be able to finance services in the future.
19 Determine the Cost of Service P ercentage P ercentage To tal Co st o f Services Change Net Co st o f Services Change June 30, 2010 June 30, 2011 June 30, 2010 June 30, 2011Instructio n $ 22,850,919 $ 23,554,459 3.08% $ 17,036,075 $ 19,342,081 13.5%Suppo rt services 9,078,359 9,240,420 1.79% 6,854,880 6,878,881 0.4%No ninstructio nal 34,120 31,633 -7.29% 34,120 31,633 -7.3%Other 3,179,349 3,045,194 -4.22% 1,800,439 789,046 -56.2% T o tal 35,142,747 35,871,706 2.07% 25,725,514 $ 27,041,641 5.1%
20Determine where the District gets itsmoney from and where does it use it Figure A-5 - Sources of Revenues for 2010-11 Fiscal Year 7% 2% 10% 13% 2% Charges for Services 31% Operating Grants and Contributions Capital Grants and Contributions Property Taxes State Foundation Aid Statewide Sales and Services Tax 35% Other
21Determine if the District is better or worseoff financially• Did your District live within its means?• Is your District financing each year’s activities with revenues from that year?
22Determine if there was financial activitybetween the Governmental and Business-type activities
23Determine if the District will be able tofinance services in the future.• Sources of nonfinancial data: • Bureau of the Census: www.census.gov • Bureau of Economic Analysis: www.bea.doc.gov • Bureau of Labor Statistics: http://stats.bls.gov/ • National Center for Education: http://nces.ed.gov/
24Ability-to-Pay Ratios• Debt per $100 of assessed property value • (Total liabilities * 100) / total assessed property value• Debt per $1,000 of personal income • (Total liabilities * 1,000) / total personal income• Debt per capita • Total liabilities / total population
25Ability-to-Pay Ratios• Instructional and support services expenses per capital • Expenses / total population• Annual cost per pupil • Total expenses / total students• State aid per pupil • State formula grants / total students• Maintenance and operations cost per square foot • Maintenance and operations expenses / total square footage of schools and buildings
26Exercise-Net Assets Net Assets 2011 2010 2009 2008 Invested in capital assets, $93.7 $80.9 $74.1 $65.4 net of related debt Restricted $6.8 $5.4 $5.7 $10 Unrestricted $36.0 $34.0 $20.0 $9.0 Total Net Assets $136.5 $120.30 $99.8 $84.4
27Internal Control• A process-effected by those charged with governance, management and other personnel— designed to provide reasonable assurance about the achievement of the entity’s objectives in the following categories: • Effectiveness and efficiency of operations • Reliability of financial reporting; and • Compliance with applicable laws and regulations (COSO, Internal Control-Integrated Framework)
29Internal Control• Why is a Deficiency Reported? • Daily processing or year-end? • Design Deficiency? • Operation Deficiency? • Both?• Risk Discussion• Be creative
30 ―The Audit‖ Board Communications Financial Audit Single AuditAuditor’s Opinion Government Auditor’s Opinion over Financial Auditing over Major A-133 Report Statements Standards Report Programs Internal Controls Internal Controls Compliance Compliance Over Financial Over Major Laws & Regs Major Program Reporting Program
31Single Audit Results• Schedule of Findings and Questioned Costs Part 1: Summary of Independent Auditor’s Results• Major Programs: Why type of opinion was issued?• Internal Control Any deficiencies over federal programs?• Major Federal Program Compliance Any findings over federal programs?• Data Collection Form
32Single Audit Results• What does it mean that we are not a low risk auditee?• In the prior two years, did the District: a. Have a single audit performed? b. Timely file the Data Collection Form? c. Have unqualified opinions on the financial statements and schedule of expenditures of federal awards? d. Not have any material weaknesses in internal control over financial reporting or material noncompliance under the requirements of Government Auditing Standards? e. Not have audit findings over federal programs that were: i. Material weaknesses in internal control ii. Material noncompliance iii. Known/Likely questioned costs that exceed 5% of program
33Board Communication Letters• Required Communications • Significant accounting practices including accounting policies • Significant accounting estimates and financial statement disclosures • Significant difficulties, if any, encountered during the audit • Uncorrected misstatements • Disagreements with management, if any • Representations from management to the auditor • Material, corrected misstatements brought to the attention of management • Management’s consultations with other accountants • Significant issues, if any, arising from the audit• Control Deficiency/MAS Letter
34Adjustments• Uncorrected Misstatements • Not significant to opinion units • Reported in management representation letter • Reported in letter to the Board• Corrected/Audit Adjustments • Identified by auditor • Either significant or management determined to post • Reported in management representation letter • Reported in letter to the Board
35Audit Deliverables • Significant • Types of Opinions? Deficiencies? • Significant • Findings over State Deficiencies? Compliance? • Compliance Findings? Government Auditing Single Audit Standards Auditor Report Over Basic Board Financial Communications Statements • Type of Opinion? • Control • Financial Analysis Deficiencies/ MAS? • Audit Adjustments? • Other Issues?
36Internal Control Scenario 1Payroll Transaction Cycle• The Administrative Office for the District is the Superintendent, Business Manager, and Administrative Assistant.• The Business Manager is the only one authorized to access the payroll system.• The Superintendent/Principals will make hiring decisions and obtain Board approval.• The Administrative Assistant compiles the paperwork (W- 2s, Insurance, etc.) from the new hires and provides to the Business Manager.• The Business Manager sets up the new hire in the payroll module and has the capability to performs any edits such as pay rate changes or address changes to the payroll data.• Timesheets are signed by both the employee and principal and are provided to the Business Manager.
37Internal Control Scenario 1Payroll Transaction Cycle• The Business Manager enters hours into the payroll module and generates the payroll checks/direct deposit.• The Business Manager then distributes the checks/direct deposit stubs and prepares the file to be sent to the bank.• Annually, before the start of school, the Business Manager generates a report listing every employee and their current salary or hourly rate and provides this to the Board.• The Business Manager generates or prepares all financial reporting.Does the design of this system provide for adequatesegregation of duties?
38Internal Control Scenario 1Payroll Transaction CycleDoes the design of this system providefor adequate segregation of duties?
39Internal Control Scenario 1Payroll Transaction CycleMaterial Weakness is reported in GovernmentAuditing Standards report and possibly the A-133/Single Audit report. • What needs to be done to get this from a material weakness to a significant deficiency? • What needs to be done to resolve the significant deficiency?
40Internal Control Scenario 1Payroll Transaction Cycle• Password protections within applications to the payroll master file that would allow Administrative Assistant to perform edits.• Administrative assistant maintains check sequence/direct deposit log and all blank checks. Once the payroll is processed, the checks/direct deposit stubs are given to the Administrative Assistant to look for unknown employees, any unusual amounts, and ensure check sequence is in order.• Administrative assistant compares total pay amount to prior payroll period and investigates significant variances in the total amount paid from one pay period to the next and compares totals to budget for any variances.
41Internal Control Scenario 1Payroll Transaction Cycle• Can a payroll change/edit report be printed from the payroll system? The report should list all changes made to the employee master file as well as extra pays or leave time added for the pay period. The report should be reviewed by someone other than the Business Manager such as the Superintendent.• Another position should receive the monthly bank statement and review the cancelled checks to look for any unusual payees, amounts and to ensure the signatures are proper. This position should review the monthly bank reconciliations and compare the bank balances to the monthly bank statement, book balance to the general ledger system and make sure there are no unusual reconciling items listed on the reconciliation.
42Internal Control Scenario 2Cash Disbursement Cycle• Same District consisting of the Superintendent, Business Manager and Administrative Assistant• The Business Manager has sole access to the master vendor file and is responsible for setting up new vendors• The Business Manager receives invoices directly• The Business Manager enters the invoices into the system to be paid and generates a Bill Listing for the Board for approval• After the Board meeting, the Business Manager prints the checks from the check stock maintained in the BM’s office• The checks are signed within the system and are mailed out by the Business Manager
43Internal Control Scenario 2Cash Disbursement Cycle• The bank statement is received directly by the Business Manager• The bank reconciliation is completed by the Business Manager• There is no review of the bank reconciliation
44Internal Control Scenario 2Cash Disbursement CycleDoes the design of this system providefor adequate segregation of duties?
45Internal Control Scenario 2Cash Disbursement CycleMaterial Weakness is reported in GovernmentAuditing Standards report and possibly the A-133/Single Audit report. • What needs to be done to get this from a material weakness to a significant deficiency? • What needs to be done to resolve the significant deficiency?
46 Internal Control Scenario 2 Cash Disbursement Cycle• The District should investigate if there is capability in the system to restrict access of the master vendor file.• The creation of new vendors and any modifications to the vendor could be done by the Administrative Assistant.• A purchase order should be generated for all purchases with approval by building administrator or superintendent.• Purchase orders should be matched to invoices and receiving reports prior to payment.• The purchase order should indicate what account the transaction should be coded to in the general ledger system.
47Internal Control Scenario 2Cash Disbursement Cycle• The Superintendent could account for the check sequence. Any gaps in sequence should be investigated and accounted for.• The Superintendent should also compare the check listing to the Bills Listing approved by the Board (including any manual checks written between Board Meetings or payroll deduction checks written on expenditure check stock.)
48Internal Control Scenario 2Cash Disbursement Cycle• Each building administrator should receive a copy of the monthly general ledger transaction report for their building and ensure monies spent were posted to the proper accounts and are reasonable compared to their respective budget• The bank statement should be received by another individual. This individual should scan through the canceled checks to look for any unusual payees or amounts and ensure the authorized signature is appropriate.• Bank reconciliation should be reviewed monthly. This person should compare: • The bank balance on the reconciliation to the bank statement • The book balance to the general ledger • Review reconciling items for reoccurring or unusual items
49Sarah Bohnsack Mia Frommelt563.343.9595 913.660.39319911 84th Street West 9311 West 148th PlaceTaylor Ridge, IL 61284 Overland Park, KS firstname.lastname@example.org email@example.com