Preparing for the Financial Statements Audit

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Chapter 9

Preparing for the Financial Statements Audit

Overview

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 circumstances, 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 PBC list (for both the financial statement audit and the single audit); however, additional 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.

·  To communicate any additional work required in performing the audit that may result in potential fee overages to the campus and systemwide management as soon as possible, and no later than the systemwide exit conference.

·  Use utmost care to secure confidential and sensitive information, and return it to client immediately upon completion of review.

Understanding the Role of the Campus

Management of each campus is responsible for preparing the reporting package from the Year-end System (YES), 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, and the campus’ comprehensive analytical review prepared in accordance with the CO’s established audit timeline. The majority of the items on the PBC list must be ready prior to the beginning of fieldwork. See sample schedules and PBC lists at the end of this chapter for further guidance. See also the 20CY reporting package template in the YES.

·  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.

·  Mask confidential and sensitive information, whenever possible, prior to providing it to the auditors, and ensure it is returned immediately upon completion of review.

·  To meet all deadlines set by the CO, the campus and audit team. Refer to the CSU Audit Master Timeline for complete listing of key dates.

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 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 CO. 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.

Unless noted otherwise, all PBC items must be uploaded to SharePoint by the first day of fieldwork. All schedules on SharePoint must be clearly labeled and cross-referenced to the PBC list.

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 personnel 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 required 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 then centrally upload all schedules to SharePoint and accumulate all other supporting schedules in a separate set of binders to be provided to the audit team on the first day of fieldwork upon request. 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.

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, outstanding debt, net position, 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.” Additional 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 on a GAAP basis. 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 GAAP balances that is included in a 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.

Methodology – Thought process or reasoning behind the development of certain financial statement account balances, the recording of which requires management judgment or a selection from alternative methods of accounting

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 PeopleSoftcampuses, the GAAP conversion template is Report CSUFS169 “Pre-Closing Trial Balance by Net Position Category, Leadsheet – Summary”. The legal basis account balances per the GAAP conversion template must agree to the general ledger.

List of CSU Reports Commonly Used During the Audit and GAAP Conversion Process

SAM 06 – Provides budget amounts that are used for the schedule of State Appropriations revenue in the General Fund and to record adjustments for State Appropriations receivable.

SAM 07 – Pre-closing or post-closing trial balance used to prepare legal basis balance sheet accounts that support the GAAP conversion template. Commonly referred to as the general ledger for the audit process.

SAM 99 – Provides State Controller’s Office (SCO) balances available for General and Capital Outlay funds. This report is utilized to verify that the GAAP receivable balance for State Appropriations has been recorded accurately.

CSUGL012 – CMP/CSU/GAP Ledger Comparison

CSUFS166 – Statement of Revenues, Expenses, and Changes in Net Position

CSUFS167 – Operating Expenses Summary

CSUFS168 – Statement of Net Position

CSUFS169 – Pre-Closing Trial Balance by Net Position Category, Leadsheet - Summary

CSUFS170 – Leadsheet - Detail

CSUFS171 – Leadsheet - GAAP Adjustments

Other reports that have proved valuable for preparation of the GAAP conversion template and audit process are the following:

·  A locally developed report for payments made and received and amounts receivable from and payable to “related parties” for footnote disclosure purposes.

·  The H46 report generated from the Customer Information Retrieval System (CIRS) database or the standard reports generated from the CMS Human Resources module to analyze vacation accruals for GAAP purposes. (For only those campuses not using the Absence Management System)

·  The June30th report from ECSI, 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. This report should also be used to verify that the year-end GAAP balances for Perkins and Nursing loans receivable have been accurately recorded.

Internal Control Deficiencies and Communication Process

Statement on Auditing Standards (SAS) No. 115, Communicating Internal Control Related Matter Identified In An Audit

Under SAS No. 115, a significant deficiency and material weakness are defined as follows:

·  A significant deficiency is a 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.

·  A material weakness is a deficiency, or 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. A reasonable possibility exists when the likelihood of the event is either reasonably possible or probable.

Deficiencies that are indicators of a material weakness are as follows:

□  Identification of fraud, whether or not material, on the part of senior management;

□  Restatement of previously issued financial statements to reflect the correction of a material misstatement due to error or fraud;

□  Identification by the auditor of a material misstatement of the financial statements under audit in circumstances that indicate that the misstatement would not have been detected by the entity’s internal control; and

□  Ineffective oversight of the entity’s financial reporting and internal control by those charged with governance.

Evaluating Deficiencies Identified During the Audit

The auditor is required to evaluate the severity of each deficiency in internal control identified during the audit to determine whether the deficiency, individually or in combination, is a significant deficiency or a material weakness. The severity of a deficiency depends on: