A presentation done for the CNY Association of School Boards New Board Member Training 10/15/11.

1. Thinking. Adapting. Advising.
For your Organization’s success.
y g
1

2. The Central New York School
Boards Association
October 15, 2011
Overview:
Internal Controls
Audit Committee
• Role
• Interaction with the Internal Auditor
• Interaction with the External Auditor
2

3. 3 Things to Take Away from
the Presentation
Understand Internal Control issues and how
they are communicated to you
What is a Material Weakness
What is a Significant Deficiency
What to look for in Financial St t
Wh t t l k f i Fi i l Statements
t
and External Auditor’s Communications.
Understand and Review your risk
assessment reports and gain an
understanding of your District’s risky areas.
3

4. Internal Controls
Overview
What are internal controls
COSO Framework
Key Terms
Fraud
Different Roles within a School District
Hot Spots
4

5. Internal Controls
What are Internal Controls?
Internal Controls are processes in place that
help you with the overall structure of your
District.
5

6. Internal Controls
What’s the Big Deal With Internal
Controls?
Effectiveness & Efficiency of Operations
Reliability of Financial Reporting
Compliance with Laws and Regulations
6

7. Internal Controls
Key Terms
Segregation of Duties
Management Override
7

8. Internal Controls
COSO Framework
8

9. Internal Controls
COSO Framework
Control Environment
9

10. Internal Controls
COSO Framework
Risk Assessment
10

11. Internal Controls
COSO Framework
Control Activities & Communication
11

12. Internal Controls
COSO Framework
Monitoring
12

13. Internal Controls
Why is this so important?
13

14. Primary Internal Control Weakness by Size of Victim
Organization
47.0%
Lack of Internal Controls
22.7%
17.5%
Lack of Management Review
17.8%
<100 Employees
ctor
12.0% 100
100+ Employees
ontributing Fac
Override of Existing Internal Controls
22.0%
7.8%
Poor Tone at the Top
8.5%
7.0%
7 0%
Most Important Co
Lack of Independent Checks/Audits
f C /
5.8%
5.6%
Lack of Competent Personnel in Overnight Roles
7.0%
1.6%
1 6%
t
Lack of Clear Lines of Authority
2.0%
1.2%
Lack of Employee Fraud Education
2.0%
0.2%
0 2%
Lack of Reporting Mechanism
0.9%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Percent of Cases

15. The Fraud Triangle
15

16. A Fraud is Born…
My spouse lost their
job and we’re barely
g
getting by…
g y
Nobody I work so hard
looks at the and everyone
reports I tells me that,
print so they but I’m not
won’t notice paid enough…
any money
is missing…
16

17. Employees in Accounting, Finance and Operations
perpetrated 44% of the reported cases and were
responsible for 44% o t e median losses.
espo s b e o % of the ed a osses

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

19. Internal Controls
Different Roles in a School District
Board of Education - Parent
Management - Student
External Audit - Teacher
Internal Audit - Tutor
19

20. Internal Controls
Different Roles in a School District
20

21. Internal Controls
Hot Spots
Extraclassroom Funds
Internal Controls Over Information
Technology and Online Banking
Purchasing
P h i
Fixed Assets
21

22. Internal Controls
Hot Spots
Extraclassroom Funds
Internal Controls Over Information
Technology and Online Banking
Purchasing
P h i
Fixed Assets
22

23. Internal Controls
Hot Spots
Extraclassroom Funds
Internal Controls Over Information
Technology and Online Banking
Purchasing
P h i
Fixed Assets
23

24. Internal Controls
Hot Spots
Extraclassroom Funds
Internal Controls Over Information
Technology and Online Banking
Purchasing
P h i
Fixed Assets
24

25. Audit Committee
Overview
Role
Interaction with the Internal Auditor
Interaction with the External Auditor
25

26. Audit Committee
Role – Continued
Recommend to the Board the appointment of
External Auditor
Approve all audit and non-audit services provided
by the External A dit
b th E t l Auditor
Recommend to the Board the appointment of
Internal Auditor
I t l A dit
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
26

27. Audit Committee
Role - C ti d
Continued
Review and reassess the adequacy of Audit
Committee 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 or
Auditor,
management. 27

28. Audit Committee
Role - Continued
Periodic evaluation of the Internal Auditor and
External Auditor
Maintain a procedure for the receipt and
investigation of concerns received regarding
any acco nting
an accounting, control or a diting
auditing
irregularities.
Report to the Board after each meeting
28

29. Audit Committee
Interaction with the
Internal Auditor
29

30. Audit Committee
Interaction with the Internal Auditor
Risk Assessment
Reporting
Management’s Role
Evaluation of the Internal Auditor
Reporting to the Board
30

31. Audit Committee
Interaction with the Internal Auditor
Risk Assessment
• What is Risk Assessment
• What considerations go into a Risk
Assessment?
• Example
• Internal Audit Plan
• Questions to ask?
31

32. 32

33. 33

34. Audit Committee
Interaction 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 the
occurring,
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 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
to the hard financial times at districts throughout New York State.
34

35. Audit Committee
Interaction with the Internal Auditor
• 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 can
implement?
35

36. Audit Committee
Interaction with the Internal Auditor
Management’s Role
g
• Meeting Participation
• W k with Internal Auditor for practical
Work ith I t l A dit f ti l
solutions to internal audit findings.
• Prepare written response to Internal
Auditor’s report.
• Implement changes to procedures as
needed.
• Provide Audit Committee feedback on
effectiveness of the internal audit function.
36

37. Audit Committee
Interaction with the Internal Auditor
Evaluation of the Internal Auditor
• AICPA Tool- link is at end of handout
under “Resources.”
• Feedback from management
• Trust your gut!!
37

38. Audit Committee
Interaction with the Internal Auditor
Reporting to Board
• Highlights of the meeting
• Anything regarding Board action
• Meeting minutes
38

39. Audit Committee
Interaction with the
External Auditor
39

40. Audit Committee
Interaction with the External Auditor
• Ri k A
Risk Assessment
t
• Reporting
• Financial Statements Overview
• Management’s Role
• E l ti of th E t
Evaluation f the External A dit
l Auditor
• Reporting to the Board
40

41. Audit Committee
Interaction with the External Auditor
Risk Assessment
• Similar considerations as internal
audit, but for different objectives.
• Audit Plan
41

42. Audit Committee
Interaction with the External Auditor
Reporting
• Financial Statements of the District
• Financial Statements of the
Extraclassroom Clubs
• “Management Letter”
Management Letter
• SAS 114 Letter
42

43. Audit Committee
Interaction with the External Auditor
Financial Statements of the District
• 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 Expenditures
• Single Audit Reports
• S h d l of Findings and Q
Schedule f Fi di d Questioned C t
ti d Costs
43
• Other Documents

44. Audit Committee
Interaction with the External Auditor
Opinion on Financial Statements
Unqualified
Q
Qualified
Disclaimer
Adverse
44

45. Audit Committee
Interaction with the External Auditor
Unqualified O i i (Excerpt)
U lifi d Opinion (E t)
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 2011
30, 2011…
45

46. Audit Committee
Interaction with the External Auditor
Qualified Opinion (Excerpt)
In our opinion, except for the matter discussed above, the
financial statements referred t above present f i l i all
fi i l t t t f d to b t fairly, in ll
material respects, the financial position of the Example
Central School District Extraclassroom Activity Fund as of
June 30, 2010, and its cash receipts and disbursements for
the year then ended, on the basis of accounting described in
Note 1
1.
46

47. Audit Committee
Interaction with the External Auditor
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 the
statements as a whole.
• The minimum contents of the MD&A are
prescribed in GASB 34 and 37 and are based
on currently known facts, decisions or
conditions.
47

48. Management’s Discussions and Analysis
48

49. Management’s Discussions and Analysis
49

50. Audit Committee
Interaction with the External Auditor
District Wide Statements
• The basis of accounting is the same as a
business – (full accrual)
• Includes items such as
• Property Plant & Equipment
Property,
• Depreciation Expense
• Long Term Liabilities such as notes and
bonds
50

51. District-Wide Financial Statements
51

52. District-Wide Financial Statements
52

53. Audit Committee
Interaction with the External Auditor
Governmental Fund Financial Statements
• General Fund
• Special Aid Fund (
p (Federal Funds)
)
• School Lunch
• Capital Fund
• Debt Service – as applicable
53

54. Audit Committee
Interaction with the External Auditor
Fund Balance Classifications
Fund balance (District’s Equity) is classified in
governmental funds in 5 different categories:
• Nonspendable
• Restricted
R ti t d
• Committed
• Assigned
g
• Unassigned
54

55. Government Fund Financial Statements
55

56. Government Fund Financial Statements
56

57. Audit Committee
Interaction with the External Auditor
Fiduciary Fund Statements
• Trust & Agency Fund
g y
• Expendable Trust
• Non-Expendable Trust
57

58. Fiduciary Fund Financial Statements
Private
Purpose
Trust
Scholarship Age ncy
ASSETS
Cash $ 17,549 $ 416,935
Restricted Cash 0 91,883
Due from Other Funds 12 5,888
Accounts Receivable 11,314 0
TOTAL ASSETS $ 28,875 $ 514,706
LIABILITIES
Extraclassroom Activity Balances $ 0 $ 91,883
Due to Other Funds 0 221,493
Other Liabilities 0 201,330
201 330
TOTAL LIABILITIES 0 $ 514,706
NET ASSETS
Reserved for Scholarships 28,875
TOTAL NET ASSETS $ 28,875 58

59. Audit Committee
Interaction with the External Auditor
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.
59

60. Schedule of Expenditures of Federal Award
60

61. Single Audit Reports
61

62. Single Audit Reports
62

63. Schedule of Findings and Questioned Costs
63

64. Audit Committee
Interaction with the External Auditor
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 accounting
• Cash Receipts
• Cash Disbursements
64

65. Financial Statements of the Extraclassroom Clubs
65

66. Financial Statements of the Extraclassroom Clubs
66

67. Management Letter
To the Board of Education of
Example 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
67

68. Communication with Governing Body - SAS 114 Letter
68

69. Audit Committee
Interaction with the External Auditor
Management’s Role
• Meeting participation
• Work with External Auditor for practical
p
solutions to audit findings.
• Prepare written response to auditor’s
findings in the management letter and
Schedule of Findings and Questioned
Cos s
Costs.
• Implement changes to procedures as
needed.
• Provide Audit Committee feedback on 69
effectiveness of the external audit function.

70. Audit Committee
Interaction with the External Auditor
Evaluation of the External Auditor
• AICPA Tool- link is at end of
handout under “Resources.”
• Feedback from management
• Trust your gut!!
70

71. Audit Committee
Interaction with the External Auditor
Reporting to Board
• Highlights of the meeting
• Anything regarding Board action
• Meeting minutes
71

72. 3 Things to Take Away from
the Presentation
Understand Internal Control issues and how
they are communicated to you
What i
Wh t is a Material W k
M t i l Weakness
What is a Significant Deficiency
What to look for in Financial Statements
and External Auditor’s Communications.
Understand and Review your risk
assessment reports and gain an
t t d i
understanding of your District’s risky areas.
72

73. Questions?
73

74. Resources
See www.p12.nysed.gov/mgtserv/internalcontrols
for internal control checklists and the “Segregation of Duties is
an Important Internal Control” worksheet
See coso.org/guidance.htm for more information on risk
assessment considerations
See AICPA.org– The AICPA Audit Committee Toolkit:
Government Organizations; “Management Override of Internal
G tO i ti “M tO id f I t l
Controls: The Achilles’ Heel of Fraud Prevention”
1. Audit Committee Charter Matrix
2. Evaluating the External Auditor
3. Evaluating the Internal Audit Team
4. Fraud and the Responsibilities of the Audit Committee
74

75. Contact Information
Brian DuMond, CPA, Partner
Johanna Dorrance
443 North Franklin Street
Syracuse, NY 13204
(315) 471-9171
(315) 471-8555
www.dbbllc.com
dbbll
Auburn ~ New Hartford ~ Syracuse