assn of school board new board training

Thinking. Adapting. Advising. For your Organization’s success.y g

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The Central New York School Boards AssociationBoards Association

October 15, 2011

Overview:

Internal ControlsInternal Controls

Audit Committee

• Role

• Interaction with the Internal Auditor

• Interaction with the External AuditorInteraction with the External Auditor

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3 Things to Take Away from the Presentationthe Presentation

Understand Internal Control issues and how they are communicated to you

What is a Material WeaknessWhat is a Material WeaknessWhat is a Significant Deficiency

Wh t t l k f i Fi i l St t tWhat to look for in Financial Statements and External Auditor’s Communications.

Understand and Review your risk assessment reports and gain anassessment reports and gain an understanding of your District’s risky areas.

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Internal Controls

Overview

What are internal controlsWhat are internal controls

COSO Framework

Key Terms

Fraud

Different Roles within a School DistrictDifferent Roles within a School District

Hot Spots

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Internal Controls

What are Internal Controls?

Internal Controls are processes in place that help you with the overall structure of yourhelp you with the overall structure of your

District.

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Internal Controls

What’s the Big Deal With Internal Controls?Controls?

Effectiveness & Efficiency of Operations

Reliability of Financial Reporting

Compliance with Laws and RegulationsCompliance with Laws and Regulations

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Internal ControlsKey Terms

Segregation of Duties

Management OverrideManagement Override

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Internal ControlsCOSO FrameworkCOSO Framework

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Control Environment

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Risk Assessment

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Control Activities & Communication

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Monitoring

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Internal Controls

Why is this so important?

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47.0%Lack of Internal Controls

Primary Internal Control Weakness by Size of Victim Organization

17.8%

22.7%

12.0%

17.5%

Override of Existing Internal Controls

Lack of Management Review

Lack of Internal Controls

ctor

<100 Employees

100+ Employees

8.5%

22.0%

7 0%

7.8%

f C /

Poor Tone at the Top

Override of Existing Internal Controls

ontr

ibut

ing

Fac 100 Employees

7.0%

5.8%

1 6%

5.6%

7.0%

Lack of Competent Personnel in Overnight Roles

Lack of Independent Checks/Audits

t Im

port

ant C

o

2.0%

2.0%

0 2%

1.2%

1.6%

Lack of Employee Fraud Education

Lack of Clear Lines of Authority

Mos

t

0.9%0.2%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

Lack of Reporting Mechanism

Percent of Cases

The Fraud TriangleThe Fraud Triangle

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A Fraud is Born…

My spouse lost their job and we’re barely

getting by…g g y

I work so hard and everyone

Nobody looks at the

tells me that, but I’m not

paid enough…

looks at the reports I

print so they won’t notice any moneyany money

is missing…

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Employees in Accounting, Finance and Operations perpetrated 44% of the reported cases and were

responsible for 44% of the median losses. espo s b e o % o t e ed a osses

Tips are by far the most frequent way that fraud is found.

Internal Controls

Different Roles in a School District

Board of Education - Parent

Management - Student

External Audit - Teacher

Internal Audit - Tutor

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Internal Controls

Different Roles in a School District

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Internal Controls

Hot Spots

Extraclassroom Funds

Internal Controls Over InformationInternal Controls Over Information Technology and Online Banking

P h iPurchasing

Fixed Assets

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Internal Controls

Hot Spots



P h iPurchasing

Fixed Assets

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Internal Controls

Hot Spots



P h iPurchasing

Fixed Assets

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Internal Controls

Hot Spots



P h iPurchasing

Fixed Assets

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Audit Committee

Overview

Role

Interaction with the Internal Auditor

Interaction with the External Auditor

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Audit CommitteeRole – ContinuedRole Continued

Recommend to the Board the appointment of External AuditorExternal Auditor

Approve all audit and non-audit services provided b th E t l A ditby the External Auditor

Recommend to the Board the appointment of I t l A ditInternal Auditor

Review the scope and plans of the Internal Auditor and independent accountants

Review reports prepared by the Internal Auditor and management’s responses to those reports

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Audit CommitteeRole C ti dRole - Continued

Review and reassess the adequacy of Audit Committee CharterCommittee Charter

Review the audited financial statements

Review “management letter” findings, management’s responses, and SAS 114 issues.

Meet periodically with management to review major risk exposures and management’s response

Review major changes to the District’s auditing and accounting principles and practices as suggested by the External Auditor Internal Auditor orby the External Auditor, Internal Auditor or management. 27

Audit CommitteeRoleRole - Continued

Periodic evaluation of the Internal Auditor and External Auditor

Maintain a procedure for the receipt and investigation of concerns received regarding an acco nting control or a ditingany accounting, control or auditing irregularities.

Report to the Board after each meeting

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Audit Committee

Interaction with theInteraction with the Internal Auditor

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Audit CommitteeInteraction with the Internal Auditor

Risk Assessment

Reporting

Management’s Role

Evaluation of the Internal AuditorEvaluation of the Internal Auditor

Reporting to the Board

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Audit CommitteeInteraction with the Internal Auditor

Risk Assessment

• What is Risk Assessment

• What considerations go into a RiskWhat considerations go into a Risk Assessment?

• ExampleExample

• Internal Audit Plan

• Questions to ask?

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Audit CommitteeAudit CommitteeInteraction with the Internal Auditor

WORKPLAN

In further analyzing each of these areas, we considered the size/impact to the District of material fraud or error occurring thesize/impact to the District of material fraud or error occurring, the complexity of the transaction, employee training, frequency of findings, and other factors. Based upon this analysis, we suggest the following testing be performed in order of priority:

School Lunch Catering

Our risk assessment did result in school lunch being classified asOur risk assessment did result in school lunch being classified as high risk because of the nature of the cash transactions, managements oversight. We recommend testing in the school lunch area to ensure they are receiving as much revenue as possible due

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to the hard financial times at districts throughout New York State.

Audit CommitteeInteraction with the Internal AuditorInteraction with the Internal Auditor

• What questions should we ask?What questions should we ask?

• What are the high risk areas and why?

• What can the District do to address the risks?

• Is it cost effective for the District to fully address the risk, or are there mitigating controls they canmitigating controls they can implement?

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Management’s Roleg

• Meeting Participation

W k ith I t l A dit f ti l• Work with Internal Auditor for practical solutions to internal audit findings.

• Prepare written response to Internal• Prepare written response to Internal Auditor’s report.

• Implement changes to procedures as• Implement changes to procedures as needed.

• Provide Audit Committee feedback on• Provide Audit Committee feedback on effectiveness of the internal audit function.

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Evaluation of the Internal Auditor

• AICPA Tool- link is at end of handout under “Resources.”

• Feedback from management

• Trust your gut!!

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Reporting to Board

• Highlights of the meeting

• Anything regarding Board action

• Meeting minutesMeeting minutes

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Audit Committee

Interaction with theInteraction with the External Auditor

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Audit CommitteeInteraction with the External AuditorInteraction with the External Auditor

Ri k A t• Risk Assessment

• Reporting

• Financial Statements Overview

• Management’s Role

E l ti f th E t l A dit• Evaluation of the External Auditor

• Reporting to the Board

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Risk AssessmentRisk Assessment

• Similar considerations as internal audit, but for different objectives.

• Audit Plan

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Reporting

• Financial Statements of the District

• Financial Statements of the• Financial Statements of the Extraclassroom Clubs

• “Management Letter”• Management Letter

• SAS 114 Letter

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Audit CommitteeInteraction with the External AuditorFinancial Statements of the District

Opinion on the Financial Statements• Opinion on the Financial Statements

• Management’s Discussions and Analysis

• District-Wide Financial Statements

• Government Fund Financial Statements

• Fiduciary Funds Statements

• Schedule of Federal Award ExpendituresSchedule of Federal Award Expenditures

• Single Audit Reports

S h d l f Fi di d Q ti d C t• Schedule of Findings and Questioned Costs

• Other Documents 43

Audit CommitteeInteraction with the External Auditor

Opinion on Financial Statements

Unqualified

QualifiedQ

Disclaimer

Adverse

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U lifi d O i i (E t)Unqualified Opinion (Excerpt)

In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities and each fund of the District as of June 30 2011District as of June 30, 2011…

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Qualified Opinion (Excerpt)Qualified Opinion (Excerpt)

In our opinion, except for the matter discussed above, thefi i l t t t f d t b t f i l i llfinancial statements referred to above present fairly, in allmaterial respects, the financial position of the ExampleCentral School District Extraclassroom Activity Fund as ofJune 30, 2010, and its cash receipts and disbursements forthe year then ended, on the basis of accounting described inNote 1Note 1.

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Management’s Discussion and Analysis

• The purpose of the MD&A is to provide the reader of the financial statements with an easy to understand overview of theeasy to understand overview of the statements as a whole.

• The minimum contents of the MD&A are• The minimum contents of the MD&A are prescribed in GASB 34 and 37 and are based on currently known facts, decisions or conditions.

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Management’s Discussions and Analysis

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Management’s Discussions and Analysis

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District Wide Statements

• The basis of accounting is the same as a business – (full accrual)

• Includes items such as

• Property Plant & EquipmentProperty, Plant & Equipment

• Depreciation Expense

• Long Term Liabilities such as notes and bonds

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District-Wide Financial Statements

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District-Wide Financial Statements

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Governmental Fund Financial Statements

• General Fund

• Special Aid Fund (Federal Funds)p ( )

• School Lunch

• Capital Fund

• Debt Service – as applicableDebt Service as applicable

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Fund Balance Classifications

Fund balance (District’s Equity) is classified in governmental funds in 5 different categories:governmental funds in 5 different categories:

• NonspendableR t i t d• Restricted

• Committed• Assignedg• Unassigned

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Government Fund Financial Statements

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Government Fund Financial Statements

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Fiduciary Fund Statements

• Trust & Agency Fundg y

• Expendable Trust

• Non-Expendable Trust

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Fiduciary Fund Financial Statements

Private Purpose

Trust

Scholarship Agency

ASSETS

Cash 17,549$ 416,935$ Restricted Cash 0 91,883Due from Other Funds 12 5,888Accounts Receivable 11,314 0

TOTAL ASSETS 28,875$ 514,706$

LIABILITIES

Extraclassroom Activity Balances 0$ 91,883$ Due to Other Funds 0 221,493Other Liabilities 0 201 330Other Liabilities 0 201,330

TOTAL LIABILITIES 0 514,706$

NET ASSETS

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Reserved for Scholarships 28,875

TOTAL NET ASSETS 28,875$


Single Audit Statements

• Required of the District is their expenditures are $500,000 or more.

• Programs are classified as major and non-major programs by dollar size and risk.

• Programs are selected for compliance testing based upon a prescribed formula.

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Schedule of Expenditures of Federal Award

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Single Audit Reports

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Single Audit Reports

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Schedule of Findings and Questioned Costs

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Extraclassroom Statements

• Districts with Extraclassroom clubs are required to have an audit at year end.

• Extraclassroom Clubs are not Booster Clubs

• Typically it is on the cash basis of accountingTypically it is on the cash basis of accounting

• Cash Receipts

• Cash Disbursements

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Financial Statements of the Extraclassroom Clubs

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Financial Statements of the Extraclassroom Clubs

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Management Letter

To the Board of Education ofExample Central School District

Ladies and Gentlemen:

In planning and performing our audit of the financial statements of Example Central School District for the year ended June 30, 2010, we considered the District’s internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing an opinion on the financial statements but not for the purpose of expressing an opinion on the District’s internal control. Accordingly, we do not express an opinion on the District’s internal control.

However, during our audit, we became aware of several matters that are opportunities for strengthening internal controls, improving operating efficiency and reducing expenses. The memorandum that accompanies this letter summarizes our comments and recommendations regarding those matters. A separate report dated October 6, XXX contains our report on significant deficiencies and material weaknesses in the District’s internal control. This letter does not affect our report dated October 6, XXX on the financial statements of the District.

We have already discussed these comments and recommendations with various District personnel, and will be pleased to discuss them in further detail at your convenience.

DERMODY, BURKE & BROWN, CPAs, LLC

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Communication with Governing Body - SAS 114 Letter

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Management’s Role

• Meeting participation

• Work with External Auditor for practical psolutions to audit findings.

• Prepare written response to auditor’s findings in the management letter and Schedule of Findings and Questioned Costs.Cos s

• Implement changes to procedures as needed.

• Provide Audit Committee feedback on effectiveness of the external audit function.

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Evaluation of the External AuditorEvaluation of the External Auditor

• AICPA Tool- link is at end of handout under “Resources.”

• Feedback from managementFeedback from management

• Trust your gut!!

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Reporting to BoardReporting to Board

• Highlights of the meeting

• Anything regarding Board action

• Meeting minutes

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3 Things to Take Away from the Presentationthe Presentation

Understand Internal Control issues and howUnderstand Internal Control issues and how they are communicated to you

Wh t i M t i l W kWhat is a Material WeaknessWhat is a Significant Deficiency

What to look for in Financial Statements and External Auditor’s Communications.

Understand and Review your risk t t d iassessment reports and gain an

understanding of your District’s risky areas.72

Questions?

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Resources

See www.p12.nysed.gov/mgtserv/internalcontrolsfor internal control checklists and the “Segregation of Duties is an Important Internal Control” worksheet

See coso.org/guidance.htm for more information on riskSee coso.org/guidance.htm for more information on risk assessment considerations

See AICPA.org– The AICPA Audit Committee Toolkit: G t O i ti “M t O id f I t lGovernment Organizations; “Management Override of Internal Controls: The Achilles’ Heel of Fraud Prevention”

1. Audit Committee Charter Matrix2. Evaluating the External Auditor3. Evaluating the Internal Audit Team4. Fraud and the Responsibilities of the Audit Committee

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Contact InformationBrian DuMond, CPA, Partner

Johanna Dorrance443 North Franklin Street443 North Franklin Street

Syracuse, NY 13204(315) 471-9171(315) 471-8555

dbbllwww.dbbllc.com

Auburn ~ New Hartford ~ Syracuse