AUDIT FINDINGS & RECOMMENDATIONS

Transcription

1 AUDIT FINDINGS & RECOMMENDATIONS How they are determined and what you can do Presented by: Robert S. Marrone, Partner, CPA, RMA, PSA, CGMA Janice Grassia, Senior Manager, CPA, RMA, PSA, CFE

2 About Bowman & Company Largest locally based CPA firm in South Jersey. Bowman & Company LLP currently employs over 50 CPAs and 40 Public School Accountants. Bowman & Company LLP currently audits over 50 school districts and over 75 municipal governments across twelve counties in the State of New Jersey. Bowman & Company LLP has extensive experience conducting audits of large, medium and small school districts. Additionally, we also audit charter schools. Our Firm was one of the first in the State and a charter member to join the American Institute of Certified Public Accountants Governmental Audit Quality Center. Successfully passed Peer Review since its inception. Several partners and managers of the Firm have served on the New Jersey Society of CPA s Governmental Accounting and Auditing Committee, including two as Chair.

3 WHY AND HOW DO AUDIT EXCEPTIONS BECOME AUDIT FINDINGS IN THE CAFR?

4 TWO TYPES OF AUDIT FINDINGS Compliance Internal Control Material Weakness deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis Significant Deficiency deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Non-Compliance non-compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts

5 CLASSIFYING AUDIT FINDINGS An internal control deficiency will either be a significant deficiency OR a material weakness An audit finding can be both an internal control deficiency and non-compliance For example, untimely cash deposits are non-compliance with regulations and a deficiency in internal control

6 WHAT AFFECTS THE DECISION TO CLASSIFY AN EXCEPTION AS AN AUDIT FINDING?

7 MATERIALITY Financial Statement Materiality The determination of materiality for planning purposes is a matter of your informed, professional judgment and is affected by your perception of the financial information needs of users of the financial statements. You may apply a percentage to an appropriate benchmark, such as total revenues, income before taxes, or net assets, as a step in determining materiality for the financial statements as a whole. Single Audit Materiality The Uniform Guidance requires the auditor to consider a lower level of materiality for purposes of reporting audit findings in the schedule of findings and questioned costs than for other purposes. The materiality for an audit finding under the Uniform Guidance is different (and generally lower) than (a) the materiality used for planning and performing the single audit, (b) the materiality used for planning, performing, evaluating the results of, and reporting on the financial statement audit, or (c) expressing an opinion on the auditee's compliance with requirements having a direct and material effect on each major program. In designing audit tests and developing an opinion on an auditee's compliance with requirements having a direct and material effect on each major program, paragraph.a7 of AU-C section 935 states that the auditor generally considers materiality in relation to each major program

8 AUDITOR S JUDGMENT In many areas of the audit the auditor has the ability to exercise their judgment. For example, in some cases determining whether an instance of non-compliance is material. i.e. Public School Contracts Law - the auditor may consider number of violations However, there are many areas of the audit where the auditor does NOT have much room for judgment. State Aid Compliance Supplement - Single Audit (you will notice many of the top ten audit findings are issues related to this compliance supplement) Federal Compliance Supplements - Single Audit Specific issues required by the State in the Auditor's Management Report

9 SO WHAT PROCESS DOES THE AUDITOR GO THROUGH TO DETERMINE WHETHER THE EXCEPTION IS AN AUDIT FINDING?

10 EVALUATION OF SIGNIFICANT DEFICIENCY Is the likelihood that a misstatement of any magnitude could occur and not be detected by the clients controls at least a reasonable possibility (a no answer indicates that it's probable it won't be detected)? Is the magnitude of a potential misstatement inconsequential or less than inconsequential to the financial statements? (i.e. misstatement less than 20% of materiality) Are there complementary or redundant controls that were tested and evaluated that achieve the same control objective? Are there compensating controls that were tested and evaluated that limit the magnitude of a misstatement of the financial statements to inconsequential?

11 EVALUATION OF SIGNIFICANT DEFICIENCY (CONTINUED) If the answers to these questions are all no, then the deficiency is at least a significant deficiency. If the answer to any of these questions is yes, ask yourself the question Would a prudent official having my knowledge of facts and circumstances agree that the deficiency is not at least a significant deficiency? If the official answers no and believes there is a significant deficiency, then you should conclude the same.

12 EVALUATION OF MATERIAL WEAKNESS If the finding is a significant deficiency then continue to answer the following Is the magnitude of the potential misstatement less than material to the financial statements? Are there compensating controls that were tested and evaluated that limit the magnitude of a misstatement of the financial statements to less than material but more then inconsequential? Does additional evaluation result in a judgment that the likelihood of a material misstatement of the financial statements is remote?

13 EVALUATION OF MATERIAL WEAKNESS (CONTINUED) If the answers to these questions are all no, then the deficiency is a material weakness. If the answer to these questions is yes, ask yourself the question Would a prudent official having my knowledge of facts and circumstances agree that the deficiency to be a significant deficiency and not a material weakness? If the official answers no and believes the deficiency to be a material weakness, then you should conclude the same.

14 EVALUATION OF NON-COMPLIANCE 1. Is the magnitude of the non-compliance less than material to the financial statements?

15 CONSIDERATIONS Number of instances Results of all audit testing i.e. a couple untimely deposits in student activities, food service and general fund indicate a greater lack of internal controls than just a few untimely deposits in student activities alone Results of internal controls testing - auditors are required to test internal controls and there are a limited number of exceptions that are acceptable before a finding should be reported Is it single audit related? (federal or state)

16 WHAT DOES IT MEAN WHEN AN ISSUE IS CONSIDERED DISCUSSION ONLY? Discussion Only items are presented to management for the following reasons. These items are not reported in the CAFR as an audit finding. For management to use as a tool to correct minor issues and strengthen internal controls Paid professional service fees to perform an audit and the results of that audit should be disclosed, no matter whether it is minor issue or a significant issue. Minor issues can blow up into significant issues. The earlier any issues are communicated to management the better so they can be addressed and not become significant.

17 HOW DO AUDIT FINDINGS AFFECT QSAC?

18 AUDIT FINDING OR DISCUSSION ONLY WHAT DO YOU THINK? Scenario - 5 of 15 capital assets selected from the District s capital asset record could not be located. It was determined that they were sold in prior years and not removed from the record. The 5 items net book value totaled $100,000 and the projected error was $865,000. Materiality for the government wide financial statements was $1,000,000. Audit Finding or Discussion Only What facts did you consider in your determination?

19 AUDIT FINDING OR DISCUSSION ONLY WHAT DO YOU THINK? Scenario - 10 of 75 low income application determinations were incorrect Audit Finding or Discussion Only What facts did you consider in your determination?

20 AUDIT FINDING OR DISCUSSION ONLY WHAT DO YOU THINK? Scenario - Bank reconciliations were performed but differed from the general ledger cash balance by a small amount. Audit Finding or Discussion Only What facts did you consider in your determination? Would your determination change if the bank reconciliations differed from the general ledger by the same small amount but the bank reconciliations were not performed timely throughout the year (i.e. many months late)?

21 TOP TEN FINDINGS IN NEW JERSEY SCHOOL DISTRICTS Includes all public and charter school districts in the State of NJ for the year ending June 30, 2016.

22 #1 FINDING (>20) = THE FINANCIAL RECORDS REFLECT ERRORS IN ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, REVENUES AND EXPENDITURES WHICH REQUIRED AUDIT ADJUSTMENTS Most districts have audit adjustments. An audit finding of this type would most likely result when the errors are significant. A modification of the opinion would occur if the uncorrected errors are material. Some reasons this may be a finding: The need to cancel significant AR that are not valid or uncollectable or the need to accrue significant AR. The need to cancel or accrue significant AP and/or encumbrances. The need to reallocate significant transactions between funds.

23 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? Keep an analysis of the AR recorded in the GL at year end. Verify that the amounts are collectable and valid. Verify that all AR that should be recorded are recorded for the proper amounts. GF Examples: Final state aid payment, extraordinary aid, NP transportation aid, state tuition AR, other tuition AR SR Examples: Final state aid payment, federal and state grants AR should equal what was spent and not reimbursed CP Examples: SDA grant AR, interfunds required for capital reserve transfers to/from the GF Carefully review the encumbrance and AP listings at year end and make sure there are valid purchase orders for each open order. Make sure all orders initiated in the fiscal year have been recorded.

24 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? (CONTINUED) Verify expenditures have been allocated to the proper funds when applicable. (i.e. health benefits, salaries, fuel costs, etc.) Verify reserve transfers have been recorded in the GL. (i.e. capital reserve, emergency reserve, debt service reserve, etc.) Liquidate all the prior year interfunds, if possible.

25 ANALYSIS OF ACCOUNTS Accounts Receivable - State Accounts Receivable - Federal

26 #2 FINDING (>20) = THE STUDENT COUNTS ON THE ASSA DID NOT AGREE TO SUPPORTING DOCUMENTATION There is not much room for auditor's judgment with this type of finding as this area must be addressed in the AMR and the results of the audit tests are included in a schedule at the end of the AMR

27 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? Verify data prior to submission to supporting documentation, including charter and renaissance school supporting documentation Per the State Audit Program supporting documentation includes the following: School registers - The public school must have all in-district, charter and renaissance school registers on file. Work papers - usually from Genesis or similar system, including listing of LEP and Private School students Valid tuition contracts and October tuition vouchers for private school and out of district students IEP's for special education students LEP test scores Lunch applications (or household surveys for CEP Districts). The public school must have all in-district, charter and renaissance school applications on file.

28 #3 FINDING (>15) = BUDGETARY OVER-EXPENDITURES Auditors do not have much judgment for this type of finding as it is in the State Aid Compliance Supplement and indicates a lack of internal controls over purchasing

29 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? Review your budget reports periodically - at least monthly. If possible, make sure there are controls in place in the accounting software that prohibits over-encumbering funds.

30 #4 FINDING (>15) = NON-COMPLIANCE WITH PUBLIC SCHOOL CONTRACTS LAW Among the reasons this may become an audit finding: Multiple violations of PSCL Violations with an appearance of a lack of knowledge of PSCL Violations that indicate a lack of internal controls in this area.

31 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? Make sure someone in the District is familiar with PSCL. There are many different laws and it can be confusing at times. If you unsure how to comply with PSCL, ask your professionals (i.e. attorney/auditor) or contact the State for verification. Make sure you are using the proper bid and quote thresholds for your situation. Be especially careful when procuring goods and/or services using federal funding.

32 #5 FINDING (>15) = IMPROPER OPEN ORDER CLASSIFICATION/UNRECORDED LIABILITIES An audit finding of this type would most likely result when the errors are significant. A modification of opinion would occur if the uncorrected errors are material.

33 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? Review the listing of encumbrances and AP at year end very closely. Verify they are properly classified as an encumbrance or AP and verify the order is valid. An encumbrance is a good or service that has been ordered on or before June 30 but has not been received. An AP is a good or service that has been ordered AND received on or before June 30. In general, services would only be AP but I suppose there could be some situations where they are encumbrances. Make sure all orders initiated in the fiscal year have been recorded. Unrecorded liabilities indicate a lack of controls over purchasing.

34 #6 FINDING (>10) = IMPROPER FEDERAL AND/OR STATE GRANT REPORTING This finding most likely would result from a single audit but it could happen during the course of the financial statement audit.

35 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? Make sure all applicable expenditures are charged to the grants prior to submitting the reports. Verify periodic reimbursement requests agree to the accounting system. Verify the final reports filed agree to the accounting system. Be careful of open orders and remember to liquidate them within the applicable time frame. File all reports by the applicable due dates. Verify the data submitted in the Title I reports. (i.e. comparability data, graduation data, etc.)

36 #7 FINDING (>10) = TREASURER'S REPORT (BANK RECONCILIATIONS) DID NOT AGREE TO THE GENERAL LEDGER AND/OR INACCURATE BANK RECS Among the reasons this may become an audit finding: Significant difference between bank reconciliation and general ledger Smaller differences between bank reconciliations and general ledger when in multiple funds or multiple months. This indicates lack of internal controls. Bank reconciliations include invalid reconciling items (i.e. "plugs").

37 What can you do to possibly avoid this type of finding? Simply reconcile all your bank accounts monthly and agree them to the GL. Only include legitimate DIT's and OS checks on the reconciliations.

38 #8 FINDING (>5) = NON-COMPLIANCE WITH NJ BUDGET TRANSFER REGULATIONS If you do not comply with the budget transfer regulations this will most likely be an audit finding as it is included in the State Aid compliance supplement.

39 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? Be familiar with the regulations and get county approval when necessary. N.J.S.A. 18A:22-8.2(3)(a) provides that no transfer may be made from appropriations or surplus accounts for interest and debt redemption charges. Adult education fees are limited to adult education program expenditures and may not be transferred elsewhere. (N.J.S.A. 18A:50.6) Districts may not transfer from the general fund to the special revenue fund, except for the budgeted transfer to fund preschool education. Line-item transfers FROM an advertised appropriation account as defined under N.J.A.C. 6A:23A-13.3(e) which on a cumulative basis exceed 10 percent of the amount included in the original budget, require Executive County Superintendent approval for. A transfer request is deemed approved after 10 working days of receipt by the county superintendent when no written approval or denial is provided within that timeframe. The burden is on the district to provide supporting documentation of receipt by the county superintendent.

40 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? (CONTINUED) Be familiar with the regulations and get county approval when necessary. (continued) Line-item transfers TO an advertised appropriation account identified as general administration, school administration, central services and administrative information technology or other support services that, on a cumulative basis, exceed 10 percent of the amount included in the original budget, require county superintendent approval. Transfers to capital outlay excluding equipment (for nonreferenda projects) require approval by the executive county superintendent and may be approved only to supplement a capital project previously approved by the voters or board of school estimate for an emergent circumstance". Approval may also be necessary to appropriate surplus depending on the circumstances. See page I-4.3 of the State Audit Program for additional guidance.

41 #9 FINDING (>5) = LACK OF FEDERAL PAYROLL CERTIFICATIONS (TIME AND EFFORT REPORTING DOCUMENTATION) There is not much room for auditor's judgment with this type of finding. This would most likely result from of a single audit. Remember that materiality in a single audit is lower than financial statement materiality.

42 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? Ultimately, the State of NJ in their monitoring process continues to request that District's utilize their sample time and effort reporting document. This can be found at: /schoolwide/timeandactivity.doc

43 #10 FINDING (>5) = IMPROPER ACCOUNTING/RECORDING OF CAPITAL ASSETS Among the reasons this may become an audit finding: Errors in audit testing (i.e. fixed assets could not be located or fixed assets were not included in the District's listing) Purchases of fixed assets not properly charged to capital outlay Depreciation not properly allocated to budget functions Outdated and/or invalid inventory

44 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? Have a good process and strong internal controls over recording additions AND deletions. Make sure all fixed assets are charged to capital outlay budget lines and are added to the fixed asset inventory. See link for description of capital vs. maintenance items

45 MAINTENANCE VS. CAPITAL LINK WILL TAKE YOU HERE

46 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? (CONTINUED) Make sure you allocate depreciation by budget function. This allocation should be based on valid reasoning. This is required for the GAAP conversion from exhibit B-2 to A-2.

47 OTHER SIGNIFICANT FINDINGS The student counts on the DRTRS did not agree to supporting documentation There is not much room for auditor's judgment with this type of finding as this area must be addressed in the AMR and the results of the audit tests are included in a schedule at the end of the AMR. Analysis of Payroll Agency account not properly maintained This would likely be an audit finding if an analysis of the balance of the payroll agency account is not maintained (either timely or accurately).

48 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? Verify data prior to submission to supporting documentation, including charter and renaissance school supporting documentation S R T R D Per the State Audit Program supporting documentation includes the following: School registers - The public school must have all in-district, charter and renaissance school registers on file. Transportation application form The Charter School Application for Transportation received by the district on or before October 15 and properly signed by the Chief School Administrator of the charter school. Transportation application form The Choice School Application for Transportation received by the district on or before October 15 B6T, B7T & B8T forms Valid tuition contracts and October tuition vouchers for private school and out of district students IEP's for special education students Verify students with transportation needs have the required documentation in the IEP. Verify that students who are under the mileage requirement have transportation required indicated in the IEP when applicable.

49 L L O Y R Y C A N P E AG WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? Keep a detailed analysis of the balance of the payroll agency account. This should tie into the bank reconciliation and should include all agencies which have a balance (positive or negative) at June 30. It's highly recommended to keep this analysis monthly as you do your bank reconciliation. It enables you to catch any errors made in payroll transfers, payroll taxes and agency remittances (i.e. late or incorrect payments) Keeping this analysis up to date monthly is a good internal control over payroll receipts and disbursements.

50 WHAT CAN YOU DO TO POSSIBLY AVOID THIS TYPE OF FINDING? PAYROLL DEDUCTIONS PAYABLE ANALYSIS

51