Kentucky Auditor of Public AccountsDavid Pitts, Audit Manager

(502) 564-5841

1. Introduction2. Audit Requirements3. KDE’s Responsibility4. APA’s Responsibility5. Changes in Reporting Requirements as a

Result of the Clarity Standards6. Brief Summary of the Desk Review Process7. Results – FY 12/FY 13

The School District Audits are required by Federal and state law.

The State Committee for School District Audits requires all local school boards to have an annual audit of the records and accounts under the board's control - KRS 156.265. ◦ The Committee meets quarterly, consists of 5

members and is responsible for approving the audit contracts with the CPA firms.

◦ The Auditor of Public Accounts (APA) chairs the Committee, helps establish the audit requirements, and reviews and approves the CPA contracts with the school districts.

◦ The Committee also may, at any time, cause to be made a comprehensive and complete audit of any board.

OMB Circular - Subpart B—Audits - §___.200 Audit requirements.Audit required. Non-Federal entities that expend $500,000 for fiscal years ending after December 31, 2003 or more in a year in Federal awards shall have a single or program-specific audit

KDE, as a pass-through entity, is responsible for ensuring that required subrecipient audits are completed and reports are received in a timely manner and in accordance with the monitoring requirements of Circular A-133 - Part 3 of the Compliance Supplement.

◦ KDE Total Federal Fund Expenditures $604,911,087 ◦ Total Federal Funds $537,888,401 sent to the school districts.◦ SEEK General Fund Expenditures of $2,514,809

 

The results of the desk reviews are sent to KDE for follow-up with the firm.

KDE works with the firms to correct reporting errors and omissions.

The desk review is used as a monitoring tool by the Department of Education and the State Committee for School District Audits.

For FY 2013, The APA was engaged by the KY Department of Education (KDE) to conduct desk reviews of approximately 185 – that is 173 school district and 12 non-profit and universities audit reports - to ensure compliance with standards – generally accepted auditing standards, Government Auditing Standards, and OMB Circular A-133.

Report our findings to KDE for their dispensation.

The checklist is updated annually for new standards. We use CCH Accounting Research Manager to obtain reference materials.

◦ This clarified SAS requires the auditor’s report to be in a new format, and it also will contain additional required verbiage.  

◦ The new format will include the following headings: “Report on the Financial Statements” “Management’s Responsibility” “Auditor’s Responsibility” “Opinion” 

◦ The clarified SAS (AU-C 706) introduces the terms emphasis-of-matter and other-matter paragraphs.

The clarified SAS describes an emphasis of-matter as a paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements. It requires a separate heading. And does not affect the audit opinion. Examples would include:

Uncertainties concerning the future outcome of any extraordinarily significant litigation or regulatory action.

Any major castastrophe having a significant effect on the F/S.

Significant related party transactions. Unusual major subsequent events.

The clarified SAS describes an other-matter paragraph as a paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report. Such as:

Discussion of RSI, MD&A – Opinion on the SEFA

These items must also be communicated in your memo “To Those Charged with Governance”, if they are included as part of your opinion letter.

Other changes that will impact financial statement preparation include:

Terminology changes - Net Position/Net Assets Unmodified Opinion/Unqualified Opinion

Agreed upon procedures confirmed by KDE

◦ Audit Contract◦ Revisions to checklist◦ Additional checklist

Objectives of Desk Review ◦ Determine whether the form and content of the

audit reports issued performed under GAAS, GAGAS, and OMB Circular A-133 are acceptable under the reporting requirements;

◦ Identify any quality issues that may warrant follow-up audit work and/or revisions to the audit report;

◦ Identify audits for potential Quality Control Reviews; and,

◦ Identify issues that may require management attention.

New Checklist In addition to the revised desk review checklist,

we created a summary financial statement checklist to aid in the review of the financial statements and notes. The idea was to use this to ensure the basic elements were reported on, for example: Correct titles Footing and Cross-footing Tying financial statement amounts and related

reconciliations and notes to statements where applicable Agreeing prior year balances

Finalizing the report After we have reviewed all of the issued reports, we

will “classify” them into one of the following categories: Acceptable: Report contains no quality issues or only minor quality

issues that do not require corrective action for the audit under review. Acceptable with Deficiencies: Report contains quality deficiencies that

should be brought to the attention of the auditor (and auditee, where appropriate) for correction in future audits.

Technically Deficient: Report contains quality deficiencies that may affect the reliability of the audit report, and which must be corrected in the audit report under review.

Unacceptable: Report contains quality deficiencies that require the auditor to conduct additional audit work to support the opinions in the report under review.

Corrective Action

Use of the Report

Number of Audits – 185

Number of Findings – 90 audits deemed Acceptable 93 audits deemed Acceptable with Deficiencies 2 audits deemed Technically Deficient None noted as Unacceptable

Uncorrected prior year findings and prior year ending balances not agreeing with the current year beginning balances accounted for the issues noted under the Prior Year Findings and Other Matters category.

The Independent Auditor’s Report does not reference the separate report on internal control over financial reporting and on compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters prepared in accordance with Government Auditing Standards.

The end of fieldwork date on the Independent Auditor’s Report does not agree with the end of fieldwork date on the Report on Compliance With Requirements Applicable To Each Major Program And On Internal Control Over Compliance In Accordance With OMB Circular A-133.

We noted reports that have financial statements and note disclosures that were not mathematically correct and/or reported the wrong fiscal year.

The Independent Auditor’s Report does not include the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States as part of the standards with which the audit was conducted in accordance.

The Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with GAS should contain a statement that management is responsible for establishing and maintaining effective internal control over financial reporting.

The Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with GAS did not include a statement that the auditor did not audit management’s response and, accordingly, expresses no opinion in it.

The Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with GAS does not include a statement that the auditor did not identify any deficiencies in internal control over financial reporting that the auditor considers to be material weaknesses.

The Report on Internal Control Over Financial Reporting and on

Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with GAS and the Schedule of Findings and Questioned Costs identifies a current year finding as a material weakness in the report; however, in the “Recommendations and Comments to Management” report, it says, “We did not identify any deficiencies in internal control over financial reporting that we consider to be a material weakness.”

The Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with GAS does not include a statement that additional matters were communicated to the auditee in a management letter.

The identification of pass through numbers on the SEFA, especially for noncash programs, was a common issue noted during the desk reviews.

Other issues with the SEFA include not providing a program CFDA number when one was available.

Where applicable, the Schedule of Findings and Questioned Costs should contain a statement that no significant deficiencies or material weaknesses in internal control over major programs were disclosed by the audit. However, the statement did not include the term “none reported” as required by the AICPA Audit Guide.

The Schedule of Findings and Questioned Costs should include a statement that addresses whether significant deficiencies or material weaknesses in the internal control over major programs were disclosed by the audit.

Use of the obsolete term, “Net Assets”, instead of “Net Position” as now required.  While all firms appear to be aware of this needed change, many have missed some of the numerous places where the terminology is used.

New financial statement – Statement of Changes in Fiduciary Net Position.  Although applicable whenever a district has fiduciary funds other than agency funds, many reports have omitted it when required.

Restricted purpose paragraph replaced restricted use paragraph in Yellow Book and A-133 reports.  Some reports retain the obsolete paragraph, sometimes pairing it with the new reporting language.

Greatly expanded Opinion Letter report headings required.  Some headings have been omitted or have used terminology other than what was required.

 New language required in emphasis of matter paragraph - which requires some discussion on the impact on the opinion, where some reports have omitted the statement that the matter emphasized did not affect the financial statement opinion.

The reconciliation portion of the Statement of Cash Flows – Proprietary Funds was performed incorrectly.  Some reconciled to change in net position instead of to operating income (loss); to net increase (decrease) in cash instead of to net cash provided (used) by operating activities.

The Report on Internal Control over Financial Reporting and on Compliance and Other Matters must include a reference to a separate management letter whenever the letter (required by KDE) contains current-year comments.  This reference has frequently been omitted.

The description of the financial statements that have been audited (Independent Auditor’s Report and Report on Internal Control over Financial Reporting and on Compliance and Other Matters) has included a reference to discretely reported components when there were none.

Opinion letter indicates that the they have audited discretely presented component units when it doesn’t appear that a component unit is present in a particular district.

Classifications that should be used only for governmental fund balance have been used for net position, and vice versa.  Examples include unspendable, committed or assigned used as components of net position; net capital assets used as a component of fund balance.

On the Schedule of Findings and Questioned Costs language that describes the opinion as “unqualified” rather than the term “unmodified” which is now the required terminology.

Schedule of Findings and Questioned Costs reports no significant deficiencies rather than the using the required language of “none reported”.

Errors in classifying net position and fund balance.

Non-cash expenditures not identified in the SEFA schedule or notes.

Schedule of Prior year findings omitted.

Dating issues between the Independent Auditor’s Report and the Yellow Book Letters.

Thank You!