The School District Fiscal Audit

Brian Kahl, C.P.A.Wisconsin Department of Public Instruction

General Auditing Standards What is an Audit? What is Required?

◦ State Statutes◦ Wisconsin Administrative Code◦ Wisconsin Department of Public Instruction◦ OMB Circular A-133/Omni-Circular◦ State Single Audit Guidelines

Role of Management and the Auditor◦ Statement on Auditing Standard # 108

The School District Fiscal Audit Agenda

Management Representations◦ Statement on Auditing Standard # 85◦ Statement on Auditing Standard # 117

Required Communications◦ Statement on Auditing Standard # 114

Communicating Internal Control Matters◦ Statement on Auditing Standard # 115

Consideration of Fraud in a Financial Statement Audit◦ Statement on Auditing Standard # 99

Financial Statements

The School District Fiscal AuditAgenda

The Clarified auditing standards incorporates all SASs issued beginning with SAS # 122 and should be used for audits of financial statements for periods ending on or after December 15, 2012

SAS # 108 (AU-C Section 210) SAS # 85 (AU-C Section 580) SAS # 114 (AU-C Section 260) SAS # 115 (AU-C Section 265) SAS # 99 (AU-C Section 240)

Clarified Audit Standards

What services can an

independent auditor perform?

The auditor must maintain independence in mental attitude in all matters related to the audit.

To be independent the auditor must be intellectually honest: to be recognized independent, he must be free from any obligation to or interest in the client, its management, or owners.

Independent auditors should not only be independent in fact; they should avoid situations that may lead outsiders to doubt their independence.

Independence

The auditor must have adequate technical training and proficiency to perform the audit.

◦ Including knowledge of government auditing standards.

◦ Understanding of the environment in which Wisconsin school districts operate (including DPI reporting requirements).

Competence

An examination of records or financial accounts to check their accuracy.

An inspection, correction, and verification of accounts.

Each year they audit our accounts and certify them as true and fair.

What is an audit?

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principals and significant estimates made by the District’s Board of Education and management, as well as evaluating the overall financial statement presentation.

What is an audit?

Types of Audits◦ Financial Statement audits are designed to provide

users of financial reports with assurance concerning their reliability

◦ Attestation engagements are designed to provide assurance on matters other than financial reports

◦ Performance audits are designed to determine whether governmental programs and activities are meeting stated goals and objectives, and to determine if governments are performing duties in the most economic and efficient matter possible.

What is an audit?

A financial audit, or more accurately, an audit of financial statements, is the verification of the financial statements of a legal entity, with a view to express an audit opinion.

An audit is not designed to detect error or fraud that is immaterial to the financial statements.

What is an audit?

Auditors have traditionally provided a range of nonaudit services that are consistent with their skills and expertise to entities at which they perform audits.

Providing such nonaudit services may create threats to an auditor’s independence.

Government Auditing Standards

Nonaudit Services◦ Preparing Financial Statements◦ Maintaining the Capital Asset Record◦ Preparing Journal Entries◦ Performing Reconciliations

Does providing the nonaudit service create a threat to independence?

Consideration of management’s ability to effectively oversee the nonaudit service to be performed ◦ (this is a critical component of the determination)

Government Auditing Standards – Nonaudit Services

The auditor should determine that the audited entity has designated an individual who possesses suitable skill, knowledge, or experience and that the individual understands the services to be performed sufficiently to oversee them

The individual is not required to possess the expertise to perform or reperform the services

Reviewing, approving, and taking responsibility for the financial statements

Government Auditing Standards – Nonaudit Services

Wisconsin Statute 120.14 (1)◦ At the close of each fiscal year, the school board of

each school district shall employ a licensed accountant to audit the school district accounts and certify the audit

◦ The audit shall include information about expenditures for community programs and services

◦ If required by the state superintendent under statute 115.28(18), the audit shall include the number of pupils reported for membership purposes under statute 121.004(5)

What is required?

Wisconsin Statute 120.18(1) ◦ Annually at such time as the department

prescribes but after the end of the school year and no later than September 1, the school district clerk of a common or union high school district shall file a verified annual school district report with the department, on forms supplied by the department.

PI 1505 AC "Annual Report - Aid Certification".

What is required?

Wisconsin Statute 120.14 (1) Annually by September 15, the school district clerk

shall file a financial audit statement with the state superintendent.

Auditors file a Financial Audit Statement PI-1506 form.

What is required?

Wisconsin Statute 115.28 (18)◦ Pupil Membership Audits. Annually require at

least 25% of school boards to audit the number of pupils reported for membership purposes under statute 120.14 (1)

Wisconsin Statute 120.14 (4)◦ The department shall establish by rule a standard

contract and minimum standards for audits performed under this section.

What is required?

Wisconsin Administrative Code, PI 14◦ Establishes Minimum Standards for School District

Audits Auditor shall conduct an examination of the basic

financial statements including all funds of the school district for the fiscal year

Generally accepted audit standards United States office of management and budget (OMB)

Circular A-133 Standards for financial and compliance audits contained

in the standards for audits of governmental organizations, programs, activities, and functions issued by the comptroller general of the United States (Yellow Book).

What is required?

Wisconsin Administrative Code, PI 14

Financial statements presented in the auditor’s report shall comply with generally accepted accounting principals (GAAP)

The auditor shall express an opinion on the financial statements of all funds covered in the scope of the audit. If the auditor is unable to express an unqualified opinion, the auditor shall state fully the reasons for qualification or disclaimer of opinion. The school district shall correct any deficiency which results in a qualification or disclaimer of opinion

What is required?

Unqualified

Qualified

Adverse

Disclaimer of Opinion

Auditors Opinions

Wisconsin Administrative Code, PI 14 The auditor shall submit to the school board the

following reports and shall supply copies for transmittal to the department and other agencies as may be required under applicable statutes or rules.

Auditor’s report on the school district’s financial statements prepared according to generally accepted accounting principles, as promulgated by the governmental accounting standards board, with supplemental information as required by the department or requested by the district

Financial audit statement for the fiscal year

Management letter

What is required?

Wisconsin Administrative Code, PI 14

◦ Federal program audit reports and schedules, as appropriate

◦ State program audit reports and schedules, as appropriate

◦ Membership audit report, if required by the department under statute 115.28 (18)

What is required?

Wisconsin Administrative Code, PI 14◦ Standard School District Audit Contract – The school

board may utilize the standard school district audit contract format prescribed by the department in the appendix to this chapter.

◦ If the school board does not utilize the format prescribed by the department it shall ensure that the contract contains all the provisions in sub. (2) and all of the following provisions: It shall specify the compensation agreed upon between

the school board and the auditor including an estimate as to the total cost of the audit provided by the auditor

It shall specify terms of payment

What is required?

Wisconsin Administrative Code, PI 14 It shall be signed by both of the following:

A school district officer who is authorized by the school board to enter into a contractual agreement

The owner or partner of the audit firm

Noncompliance with Minimum Standards for Audit Any audit which the department determines is not in

compliance with this section shall be referred to the school district for corrective action.

What is required?

Wisconsin Department of Public Instruction Requirements◦ The department shall establish by rule a standard contract

and minimum standards for audits (statute 120.14 (4))

Auditors are required to follow the applicable audit procedures contained in the DPI audit manual located at http://sfs.dpi.wi.gov/sfs_aud_list .

The DPI manual contains guidance on auditing the following: Transportation Aid Special Education Aid General Aid Pupil Activity Funds Employee Benefit Trust Funds Compliance with State Statutes

What is required?

Circular No. A-133 ◦ Non-Federal entities that expend $500,000 or

more in a year in Federal awards shall have a single or program-specific audit conducted for that year in accordance with the provisions of Circular A-133.

◦ Districts must ensure that the audits required by Circular A-133 are properly performed and submitted when due.

What is required?

Circular No. A-133◦ The auditee shall also prepare a schedule of

expenditures of Federal awards for the period covered by the auditee's financial statements.

◦ The auditor is required to prepare a schedule of findings and questioned costs.

◦ The auditee is responsible for follow-up and corrective action on all audit findings.

◦ The auditee shall also prepare a corrective action plan for current year audit findings.

What is required?

The corrective action plan shall provide:

◦ The names of the contact person(s) responsible for the corrective action

◦ The corrective action planned

◦ The anticipated completion date

◦ If the auditee does not agree with the audit findings or believes corrective action is not required, then the corrective action plan shall include and explanation and specific reasons

What is required?

State Single Audit Guidelines◦ The State Single Audit Guidelines are applicable to a

school district audit if all three conditions are met: The agency is a local government or a non profit

organization that expended $500,000 or more in federal awards.

The agency received funding from a state department. This funding may be state money or federal pass-through money.

The granting agency has not otherwise specified that the Guidelines are not applicable.

What is required?

State Single Audit Guidelines◦ The audit report must include a “Corrective Action

Plan” for all audit findings, including findings related to state and federal pass-through programs.

◦ The auditee is responsible for ensuring that each granting agency receives the complete audit reporting package.

What is required?

Establishing an Understanding With the Client◦ The auditor should establish an understanding

with the client regarding the services to be performed for each engagement.

◦ The auditor should document the understanding through written communication with the client.

◦ Such an understanding reduces the risk that either the auditor or the client may misinterpret the needs or expectations of the other party.

SAS (AU-C Section 210) – Engagement Letter

The understanding should include:

the objectives of the engagement

management responsibilities

the auditor’s responsibilities

limitations of the engagement

SAS AU-C Section 210– Engagement Letter

An understanding with the client regarding an audit of the financial statements generally includes the following matters:

◦ The objective of the audit is the expression of an opinion on the financial statements.

◦ At the conclusion of the engagement, management will provide the auditor with a letter that confirms certain representations made during the audit.

SAS AU-C Section 210 – Engagement Letter

◦ Management is responsible for the following:

the entity’s financial statements and selection and application of the accounting policies.

establishing and maintaining effective internal control over financial reporting.

designing and implementing programs and controls to prevent and detect fraud.

SAS AU-C Section 210- Engagement Letter

◦ Management is responsible for the following:

identifying and ensuring that the entity complies with the laws and regulations applicable to its activities

making all financial records and related information available to the auditor

SAS AU-C Section 210 – Engagement Letter

The auditor is responsible for conducting the audit in accordance with generally accepted auditing standards.

◦ Those standards require the auditor obtain reasonable assurance rather than absolute assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Accordingly, a material misstatement may remain undetected.

SAS AU-C Section 210 – Engagement Letter

Management is responsible for

◦ adjusting the financial statements to correct material misstatements

◦ affirming to the auditor in the management representation letter that the effects of any uncorrected misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole

SAS AU-C Section 210 – Engagement Letter

On recurring audits, the auditor should assess whether circumstances require the terms of the audit engagement to be revised.

If the auditor concludes that the terms of the preceding engagement need not be revised for the current engagement, the auditor should remind management of the terms of the engagement and the reminder should be documented.

Engagement Letter – Clarified Auditing Standards

The auditor may remind management of the terms of the engagement in writing or orally.

A written reminder might be a letter confirming that the terms of the preceding engagement will govern the current engagement.

If the reminder is oral, audit documentation may include with whom the discussion took place, when, and the significant points discussed.

Engagement Letter – Clarified Auditing Standards

This section establishes a requirement that an independent auditor obtain written representations from management.

Specific representations should relate to the following matters in an audit of financial statements presented in accordance with generally accepted accounting principals.◦ Financial statements◦ Completeness of Information◦ Recognition, measurement, and disclosure◦ Subsequent events

SAS AU-C Section 580 – Written Representations

This section is a applicable when the auditor is engaged or is required by law or regulation to perform a compliance audit in accordance with all of the following:

◦ Generally accepted auditing standards (GAAS)◦ The standards for financial audits under Government

Auditing Standards◦ A governmental audit requirement that requires an auditor to

express an opinion on compliance

The auditor should request from management written representations that are tailored to the entity and the governmental audit requirement.

Statement on Audit Standards # 117 – Compliance Audits

This section establishes standards and provides guidance to auditors in fulfilling the responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement as it relates to fraud in an audit of financial statements conducted in accordance with generally accepted auditing standards.

SAS AU-Section 240 Consideration of Fraud

Fraud is a broad legal concept and auditors do not make legal determinations of whether fraud has occurred.

Rather the auditor's interest specifically relates to acts that result in a material misstatement of the financial statements.

SAS AU-C Section 240 Consideration of Fraud

The primary factor that distinguishes fraud from error is whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional.

For purposes of the section, fraud is an intentional act that results in a material misstatement in financial statements that are the subject of an audit.

SAS AU-C Section 240 Consideration of Fraud

Two types of misstatements are relevant to the auditor's consideration of fraud.

◦ misstatements arising from

fraudulent financial reporting

misappropriation of assets

SAS AU-C Section 240 Consideration of Fraud

Fraudulent financial reporting may be accomplished by the following:

◦ Manipulation, falsification, or alteration of accounting records or supporting documents from which financial statements are prepared

◦ Misrepresentation in or intentional omission from the financial statements of events, transactions, or other significant information

◦ Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure

SAS AU-C Section 240 Consideration of Fraud

Misstatements arising from misappropriation of assets involve the theft of an entity's assets where the effect of the theft causes the financial statements not to be presented, in all material respects, in conformity with GAAP.

Misappropriation of assets can be accomplished in various ways including ◦ embezzling receipts◦ stealing assets ◦ causing an entity to pay for goods or services that

have not been received

SAS AU-C Section 240 Consideration of Fraud

The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.

SAS AU-C Section 240 Consideration of Fraud

Management is responsible

◦ 1)-for adopting sound accounting policies

◦ 2)-for establishing and maintaining internal control that will, among other things, authorize, record, process, and report transactions (as well as events and conditions) consistent with management's assertions embodied in the financial statements

SAS AU-C Section 240 Consideration of Fraud

The auditor should perform procedures to obtain information that is used to identify the risks of material misstatement due to fraud.

Make inquiries of management and others within the entity to obtain their views about the risks of fraud and how they are addressed.

SAS AU-C Section 240 Consideration of Fraud

Whenever the auditor has determined that there is evidence that fraud may exist, that matter should be brought to the attention of an appropriate level of management.

◦ This is appropriate even if the matter might be considered inconsequential, such as a minor defalcation by an employee at a low level in the entity's organization.

◦ Fraud involving senior management and fraud (whether caused by senior management or other employees) that causes a material misstatement of the financial statements should be reported directly to those charged with governance.

SAS AU-C Section 240 Consideration of Fraud

Management along with those charged with governance should:◦ set the proper tone

◦ create and maintain a culture of honesty and high ethical standards

◦ establish appropriate controls to prevent, deter, and detect fraud

SAS AU-C Section 240 Consideration of Fraud

When management and those charged with governance fulfill those responsibilities, the opportunities to commit fraud can be reduced significantly.

SAS AU-C Section 240 Consideration of Fraud

This section establishes standards and provides guidance on the auditor's communication with those charged with governance in relation to an audit of financial statements.

The auditor should communicate in writing with those charged with governance significant findings from the audit.

SAS # 114 (AU-Section 260) – Required Communications

Significant findings from the audit◦ Qualitative aspects of the entity’s significant

accounting practices Accounting policies, estimates

◦ Difficulties encountered in performing the audit◦ Corrected and uncorrected misstatements◦ Disagreements with management

Representations the auditor is requesting from management

SAS # 114 (AU-C Section 260) – Required Communications

This section establishes standards and provides guidance on communicating matters related to an entity's internal control over financial reporting identified in an audit of financial statements.

Requires the auditor to communicate, in writing, to management and those charged with governance: ◦ significant deficiencies ◦ material weaknesses

AU-C Section 265– Communicating Internal Control Matters

A deficiency in design exists when

◦ a control necessary to meet the control objective is missing; or

◦ an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met.

AU-Section 265 – Communicating Internal Control Matters

A deficiency in operation exists when

◦ a properly designed control does not operate as designed; or

◦ the person performing the control does not possess the necessary authority or competence to perform the control effectively.

AU-C Section 265 – Communicating Internal Control Matters

Examples frequently found in school district audits:◦ The person responsible for the accounting and

reporting function lacks the skills and knowledge to apply GAAP in recording the entity's financial transactions or preparing its financial statements.

◦ Absent or inadequate segregation of duties

◦ Material audit adjustments to correct misstatements

◦ Failure to perform reconciliations of significant accounts

AU-C Section 265 – Communicating Internal Control Matters

Report significant deficiencies and material weaknesses on internal control over financial reporting

The AICPA requirements (AU-C Section 265) form the basis for reporting internal control over financial reporting deficiencies

Government Auditing Standards, 2011 Revision

Government-wide financial statements◦ Statement of Net Assets (Net Position)◦ Statement of Activities

Fund financial statements◦ Balance Sheet - Governmental Funds◦ Statement of Revenues, Expenditures, and

Changes in Fund Balance

Notes to the financial statements

Basic Financial Statements

GASB Statement # 34 Basic Financial Statements and Management’s Discussion and Analysis – State and Local Governments

◦ Information presented about major classes of capital assets should include: Beginning and end of year balances with accumulated

depreciation presented separately from historical cost Capital acquisitions Sales or other dispositions Current-period depreciation expense with disclosure of

the amounts charged to each of the functions in the statement of activities

Notes to the Financial Statements

MD&A should introduce the basic financial statements and provide an analytical overview of the government's financial activities.

MD&A should discuss the current-year results in comparison with the prior year, with emphasis on the current year.

This fact-based analysis should discuss the positive and negative aspects of the comparison with the prior year.

Management’s Discussion and Analysis (MD & A)

The use of charts, graphs, and tables is encouraged to enhance the understandability of the information.

An analysis of significant variations between original and final budget amounts and between final budget amounts and actual budget results for the general fund (or its equivalent). The analysis should include any currently known reasons for those variations that are expected to have a significant effect on future services or liquidity.

Management’s Discussion and Analysis (MD & A)

GASB Statement # 34 requires budgetary comparison schedules to be presented as RSI.

RSI should include budgetary comparison

schedules for the general fund and for each major special revenue fund that has a legally adopted annual budget.

The budgetary comparison schedules should present both (a) the original and (b) the final appropriated budgets.

Budgetary Comparison Schedules

Determination of an appropriate fund balance is a critical factor in district financial planning and budgeting processes, but it is strictly a local matter.

How Large a Fund Balance?

Fund Balance

A district with an appropriate fund balance can: ◦ avoid excessive short term borrowing thereby

avoiding associated interest cost.

◦ accumulate sufficient assets to make designated purchases or cover unforeseen expenditure needs.

◦ demonstrate financial stability and therefore preserve or enhance its bond rating, thereby lowering debt issuance costs.

Fund Balance

Wisconsin Statute 67.03(1)(b)◦ except that the aggregate amount of

indebtedness of any school district that offers no less than grades 1 to 12 and that at the time of incurring the debt is eligible to receive state aid under s. 121.08 shall not exceed 10% of the equalized value of the taxable property located in the school district.

◦ Debt applicable to the limit includes general obligation debt.

Debt Limit

Questions?