THE AUDIT: WHAT TO LOOK FOR AND WHAT TO COMMUNICATE TO YOUR BOARD

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Agenda• Audit Opinions• Analyzing Government-Wide Financial Statements• Internal Control• Other Deliverables• Internal Control Scenarios

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What is an audit?

“the systematic gathering and evaluation of evidence as a basis for reaching an opinion about whether the assertions made by management in an entity’s financial statements correspond in all material respects with generally accepted accounting principles (GAAP)” (Auditing, Ricchiute)

“The objective of the ordinary audit of the financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles.” (Statement of Auditing Standard, No.1, AU Section 110)

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Auditor Opinion

• Unqualified

• Qualified

• Adverse

• Disclaimer

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Auditor Opinion

Unqualified Opinion

• Top of the Ladder• Materially compiles with generally accepted accounting principles (GAAP)

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Auditor Opinion

Qualified

• “Except for”• The financial statements

materially comply with GAAP except for….

• I.E. Specific GAAP departure

Adverse

• The financial statements do NOT present fairly in accordance with GAAP

• Bottom of ladder

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Unqualified 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.

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Analyzing Government-Wide Financial Statements

•Statement of Net Assets

•Statement of Activities

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The Ifs, Ands, and Buts of Financial Analysis

• 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

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Statement of Net AssetsGovernmental Business-Type

Activities Activities Total

AssetsCash 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

LiabilitiesAccounts 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 AssetsInvested 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.

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How Do I Use The Statement of Net Assets Information?

• Common-Size Ratios

• Assess your District’s Financial Status

• Determine Financial Prospects• Ability to meet obligations• Ability to finance future services

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Common-Size Ratios

Percentage Percentage Percentage2010 Distribution 2011 Distribution Change

Cash 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

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Financial Status

TotalPercentage

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%

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Determine Financial ProspectsAbility to meet obligations

• Liquidity Ratio• Current ratio• Quick ratio

• Solvency Ratios• Leverage• Coverage

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Liquidity Ratios

• Current ratio = current assets / current liabilities

• Quick ratio = (cash + investments) / current liabilities

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Solvency 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

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Statement of ActivitiesNet (Expense) Revenue

Program Revenues and Changes in Net AssetsCharges Operating Grants Capita l Grants Governmental Bus iness-Type

Functions/Programs Expenses for Services and Contributions and Contributions Activities Activities Total

Governmental activities :Instruction:

Regular instruction 17,377,707$ 2,241,370$ 379,165$ -$ (14,757,172)$ -$ (14,757,172)$ Specia l instruction 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 services :

Student services 1,002,834 - - - (1,002,834) - (1,002,834) Instructional s taff services 1,241,087 - 2,317,614 - 1,076,527 - 1,076,527 Administration services 3,167,175 - - - (3,167,175) - (3,167,175) Operation and maintenance of plant services 2,352,852 13,186 - - (2,339,666) - (2,339,666) Transportation services 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)

Noninstructional programs 31,633 - - - (31,633) - (31,633)

Other expenditures :Faci l ities acquis ition 457,791 - - 829,521 371,730 - 371,730 AEA fl owthrough 1,426,627 - 1,426,627 - - - - Depreciation (unal located) * 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 iness-type activities:Support services :

Administration services 25,939 - - - - (25,939) (25,939) Operation and maintenance of plant services 39,784 - - - - (39,784) (39,784)

65,723 - - - - (65,723) (65,723) Noninstructional programs, food

service operations 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)

General revenues:Property tax levied for:

General purposes 13,123,314 - 13,123,314 Capita l outlay 1,448,716 - 1,448,716

Statewide sa les and services tax 3,024,239 - 3,024,239 Other taxes 650,915 - 650,915 Unrestricted state grants 12,638,289 - 12,638,289 Unrestricted investment earnings 53,944 3,925 57,869 Other 308,774 - 308,774

Total general revenues 31,248,191 3,925 31,252,116

Transfers 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 4,244,020

Net asses , beginning of year 37,055,671 972,211 38,027,882 Net asses , end of year 41,267,906$ 1,003,996$ 42,271,902$

* This amount excludes the depreciation included in the direct expenses of the various programs.

See Notes to Financial Statements.

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How Do I Use The Statement of Activities Information?• 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.

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Determine the Cost of ServiceP ercentage P ercentage

Total Cost of Services Change Net Cost of Services Change

J une 30, 2010 J une 30, 2011 J une 30, 2010 J une 30, 2011

Instruction 22,850,919$ 23,554,459$ 3.08% 17,036,075$ 19,342,081$ 13.5%

Support services 9,078,359 9,240,420 1.79% 6,854,880 6,878,881 0.4%

Noninstructional 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%

Total 35,142,747 35,871,706 2.07% 25,725,514 27,041,641$ 5.1%

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Determine where the District gets its money from and where does it use it

10%13%

2%

35%

30%

7% 2%

Figure A-5 - Sources of Revenues for 2010-11 Fiscal Year

Charges for Services

Operating Grants and Contributions

Capital Grants and Contributions

Property Taxes

State Foundation Aid

Statewide Sales and Services Tax

Other

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Determine if the District is better or worse off financially

• Did your District live within its means?

• Is your District financing each year’s activities with revenues from that year?

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Determine if there was financial activity between the Governmental and Business-type activities

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Determine if the District will be able to finance 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/

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Ability-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

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Ability-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

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Exercise-Net Assets

Net Assets 2011 2010 2009 2008

Invested in capital assets, net of related debt

$93.7 $80.9 $74.1 $65.4

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

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Internal 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)

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Internal Control Control Deficiency

Significant Deficiency

Material Weakness

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Internal Control• Why is a Deficiency Reported?

• Daily processing or year-end?• Design Deficiency?• Operation Deficiency?• Both?

• Risk Discussion• Be creative

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“The Audit”

Financial Audit

Auditor’s Opinion over Financial

Statements

Government Auditing

Standards Report

Internal Controls Over Financial

Reporting

Compliance Laws & Regs

Single Audit

Auditor’s Opinion over Major Programs

A-133 Report

Internal Controls Over Major

Program

Compliance Major Program

Board Communications

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Single 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

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Single 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

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Board 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

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Adjustments• 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

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Audit Deliverables

• Control Deficiencies/ MAS?

• Audit Adjustments?• Other Issues?

• Type of Opinion?• Financial Analysis

• Types of Opinions?• Significant

Deficiencies?• Compliance

Findings?

• Significant Deficiencies?

• Findings over State Compliance?

Government Auditing

StandardsSingle Audit

Board Communications

Auditor Report Over Basic Financial

Statements

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Internal 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.

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Internal 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 adequate segregation of duties?

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Internal Control Scenario 1Payroll Transaction Cycle

Does the design of this system provide for adequate segregation of duties?

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Internal Control Scenario 1Payroll Transaction Cycle

Material Weakness is reported in Government Auditing 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?

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Internal 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.

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Internal 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.

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Internal 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

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Internal 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

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Internal Control Scenario 2Cash Disbursement Cycle

Does the design of this system provide for adequate segregation of duties?

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Internal Control Scenario 2Cash Disbursement Cycle

Material Weakness is reported in Government Auditing 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?

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Internal Control Scenario 2Cash 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.

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Internal 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.)

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Internal 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

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Sarah Bohnsack563.343.9595

9911 84th Street West

Taylor Ridge, IL 61284sarah@governmentalservice.com

Mia Frommelt913.660.3931

9311 West 148th Place

Overland Park, KS 66221mia@governmentalservice.com