Bohnsack & Frommelt Presentation March 28, 2012 to the Iowa Association of School Business Officials. The Audit-What to look for and what to communicate to your board.

1. THE AUDIT: WHAT TO LOOK FOR
AND WHAT TO COMMUNICATE
TO YOUR BOARD

2. 2
Agenda
• Audit Opinions
• Analyzing Government-Wide Financial Statements
• Internal Control
• Other Deliverables
• Internal Control Scenarios

3. 3
What is an audit?
―the systematic gathering and evaluation of evidence as a
basis for reaching an opinion about whether the assertions
made by management in an entity’s financial statements
correspond in all material respects with generally accepted
accounting principles (GAAP)‖ (Auditing, Ricchiute)
―The objective of the ordinary audit of the financial
statements by the independent auditor is the expression of
an opinion on the fairness with which they present, in all
material respects, financial position, results of operations,
and its cash flows in conformity with generally accepted
accounting principles.‖ (Statement of Auditing Standard,
No.1, AU Section 110)

4. 4
Auditor Opinion
• Unqualified
• Qualified
• Adverse
• Disclaimer

5. 5
Auditor Opinion
Unqualified Opinion • Top of the Ladder
• Materially compiles
with generally
accepted accounting
principles (GAAP)

6. 6
Auditor Opinion
Qualified Adverse
• ―Except for‖ • The financial statements
• The financial statements do NOT present fairly in
materially comply with accordance with GAAP
GAAP except for…. • Bottom of ladder
• I.E. Specific GAAP
departure

7. 7
Unqualified Auditor Opinion
• GAAP Basis
In our opinion, the financial statements referred to above present
fairly, in all material respects, the respective financial position of the
governmental activities, business-type activities, each major
fund, and the aggregate remaining fund information of the School
District, Iowa as of June 30, 2011, and the respective changes in
financial position, and where applicable, cash flows thereof for the
year then ended in conformity with accounting principles generally
accepted in the United States of America.

8. 8
Analyzing Government-Wide Financial
Statements
• Statement of Net Assets
• Statement of Activities

9. 9
The Ifs, Ands, and Buts of Financial
Analysis
• Financial analysis vs. Financial Ratios
• Financial analysis – drawing meaning from financial statement
information
• Financial ratios – numbers calculated from financial statement
information to conduct financial analysis.
• So I calculated my ratio what does it mean
• Compare to prior years
• Compare to other Districts
• Common ratio indicators

10. 10
Statement of Net Assets
Governmental Business-Type
Activities Activities Total
Assets
Cash and pooled investments $ 11,656,688 $ 452,160 $ 12,108,848
Receivables:
Property tax:
Current year 96,534 - 96,534
Succeeding year 14,470,000 - 14,470,000
Accounts 395,747 969 396,716
Due from other governments 1,328,538 - 1,328,538
Inventories - 28,540 28,540
Prepaid expenses 113,117 - 113,117
Capital assets:
Nondepreciable 11,906,716 - 11,906,716
Depreciable, net 23,509,650 556,585 24,066,235
Total assets 63,476,990 1,038,254 64,515,244
Liabilities
Accounts payable 1,477,665 521 1,478,186
Salaries and benefits payable 3,154,296 - 3,154,296
Due to other governments 260,649 - 260,649
Claims incurred but not reported 153,289 - 153,289
Unearned revenue:
Succeeding year property tax 14,470,000 - 14,470,000
Other 1,107,806 31,719 1,139,525
Long-term liabilities:
Portion due within one year:
Early retirement 242,388 - 242,388
Compensated absences 256,161 - 256,161
Portion due after one year:
Early retirement 106,962 - 106,962
Compensated absences 541,834 - 541,834
Net OPEB liability 438,034 2,018 440,052
Total liabilities 22,209,084 34,258 22,243,342
Net Assets
Invested in capital assets, net of related debt 35,416,366 556,585 35,972,951
Restricted for:
Categorical funding 341,798 - 341,798
Management levy 628,777 - 628,777
Physical plant and equipment levy 12,811 - 12,811
Other special revenue purposes 519,521 - 519,521
School infrastructure 1,086,593 - 1,086,593
Other - 20,500 20,500
Unrestricted 3,262,040 426,911 3,688,951
Total net assets $ 41,267,906 $ 1,003,996 $ 42,271,902
See Notes to Financial Statements.

11. 11
How Do I Use The Statement of Net
Assets Information?
• Common-Size Ratios
• Assess your District’s Financial Status
• Determine Financial Prospects
• Ability to meet obligations
• Ability to finance future services

12. 12
Common-Size Ratios
Percentage Percentage Percentage
2010 Distribution 2011 Distribution Change
Cash and cash equivalents 9,474,000 15.5% 11,657,000 18.5% 23.0%
Property taxes receivable 13,879,000 22.7% 14,567,000 23.1% 5.0%
Due from other governments 5,000,000 8.2% 1,329,000 2.1% -73.4%
Inventories and prepaid items 108,000 0.2% 113,000 0.2% 4.6%
Capital assets 32,675,000 53.4% 35,417,000 56.1% 8.4%
Total assets 61,136,000 63,083,000

13. 13
Financial Status
Total
Percentage
Total School District Change
Net assets: June 30, 2010 June 30, 2011 2010-11
Invested in capital assets,
net of related debt 33,289,967 35,972,951 8.1%
Restricted 2,604,812 2,589,500 -0.6%
Unrestricted 2,133,103 3,264,058 53.0%
Total net assets $ 38,027,882 $ 41,826,509 10.0%

14. 14
Determine Financial Prospects
Ability to meet obligations
• Liquidity Ratio
• Current ratio
• Quick ratio
• Solvency Ratios
• Leverage
• Coverage

15. 15
Liquidity Ratios
• Current ratio = current assets / current liabilities
• Quick ratio = (cash + investments) / current liabilities

16. 16
Solvency Ratios
• Leverage
• Debt to assets ratio = total liabilities / total assets
• Debt to net assets ratio = total liabilities / total net assets
• Coverage
• Times interest earned = (cash flow from operations + interest
expense) / interest expense

17. 17
Statement of Activities Net (Expens e) Revenue
Progra m Revenues a nd Cha nges i n Net As s ets
Cha rges Opera ti ng Gra nts Ca pi ta l Gra nts Governmenta l Bus i nes s -Type
Functi ons /Progra ms Expens es for Servi ces a nd Contri buti ons a nd Contri buti ons Acti vi ti es Acti vi ti es Tota l
Governmenta l a cti vi ti es :
Ins tructi on:
Regul a r i ns tructi on $ 17,377,707 $ 2,241,370 $ 379,165 $ - $ (14,757,172) $ - $ (14,757,172)
Speci a l i ns tructi on 3,094,014 11,250 872,714 - (2,210,050) - (2,210,050)
Other 3,082,738 673,335 34,544 - (2,374,859) - (2,374,859)
23,554,459 2,925,955 1,286,423 - (19,342,081) - (19,342,081)
Support s ervi ces :
Student s ervi ces 1,002,834 - - - (1,002,834) - (1,002,834)
Ins tructi ona l s ta ff s ervi ces 1,241,087 - 2,317,614 - 1,076,527 - 1,076,527
Admi ni s tra ti on s ervi ces 3,167,175 - - - (3,167,175) - (3,167,175)
Opera ti on a nd ma i ntena nce of pl a nt s ervi ces 2,352,852 13,186 - - (2,339,666) - (2,339,666)
Tra ns porta ti on s ervi ces 1,476,472 - 30,739 - (1,445,733) - (1,445,733)
9,240,420 13,186 2,348,353 - (6,878,881) - (6,878,881)
Noni ns tructi ona l progra ms 31,633 - - - (31,633) - (31,633)
Other expendi tures :
Fa ci l i ti es a cqui s i ti on 457,791 - - 829,521 371,730 - 371,730
AEA fl owthrough 1,426,627 - 1,426,627 - - - -
Depreci a ti on (una l l oca ted) * 1,160,776 - - - (1,160,776) - (1,160,776)
3,045,194 - 1,426,627 829,521 (789,046) - (789,046)
Total governmental activities 35,871,706 2,939,141 5,061,403 829,521 (27,041,641) - (27,041,641)
Bus i nes s -type a cti vi ti es :
Support s ervi ces :
Admi ni s tra ti on s ervi ces 25,939 - - - - (25,939) (25,939)
Opera ti on a nd ma i ntena nce of pl a nt s ervi ces 39,784 - - - - (39,784) (39,784)
65,723 - - - - (65,723) (65,723)
Noni ns tructi ona l progra ms , food
s ervi ce opera ti ons 1,278,738 1,026,912 351,094 - - 99,268 99,268
Total business-type activities 1,344,461 1,026,912 351,094 - - 33,545 33,545
Total $ 37,216,167 $ 3,966,053 $ 5,412,497 $ 829,521 (27,041,641) 33,545 (27,008,096)
Genera l revenues :
Property ta x l evi ed for:
Genera l purpos es 13,123,314 - 13,123,314
Ca pi ta l outl a y 1,448,716 - 1,448,716
Sta tewi de s a l es a nd s ervi ces ta x 3,024,239 - 3,024,239
Other ta xes 650,915 - 650,915
Unres tri cted s ta te gra nts 12,638,289 - 12,638,289
Unres tri cted i nves tment ea rni ngs 53,944 3,925 57,869
Other 308,774 - 308,774
Total general revenues 31,248,191 3,925 31,252,116
Tra ns fers 5,685 (5,685) -
Total general revenues and transfers 31,253,876 (1,760) 31,252,116
Change in net assets 4,212,235 31,785 4,244,020
Net a s s es , begi nni ng of yea r 37,055,671 972,211 38,027,882
Net a s s es , end of yea r $ 41,267,906 $ 1,003,996 $ 42,271,902
* Thi s a mount excl udes the depreci a ti on i ncl uded i n the di rect expens es of the va ri ous progra ms .
See Notes to Financial Statements.

18. 18
How Do I Use The Statement of Activities
Information?
• Determine the cost of services
• Determine where the District gets its money from and
where does it use it
• Determine if the District is better or worse off financially
• Determine if there was financial activity between the
Governmental and Business-type activities
• Determine if the District will be able to finance services in
the future.

19. 19
Determine the Cost of Service
P ercentage P ercentage
To tal Co st o f Services Change Net Co st o f Services Change
June 30, 2010 June 30, 2011 June 30, 2010 June 30, 2011
Instructio n $ 22,850,919 $ 23,554,459 3.08% $ 17,036,075 $ 19,342,081 13.5%
Suppo rt services 9,078,359 9,240,420 1.79% 6,854,880 6,878,881 0.4%
No ninstructio nal 34,120 31,633 -7.29% 34,120 31,633 -7.3%
Other 3,179,349 3,045,194 -4.22% 1,800,439 789,046 -56.2%
T o tal 35,142,747 35,871,706 2.07% 25,725,514 $ 27,041,641 5.1%

20. 20
Determine where the District gets its
money from and where does it use it
Figure A-5 - Sources of Revenues for 2010-11 Fiscal Year
7% 2% 10%
13%
2% Charges for Services
31% Operating Grants and Contributions
Capital Grants and Contributions
Property Taxes
State Foundation Aid
Statewide Sales and Services Tax
35%
Other

21. 21
Determine if the District is better or worse
off financially
• Did your District live within its means?
• Is your District financing each year’s activities with
revenues from that year?

22. 22
Determine if there was financial activity
between the Governmental and Business-
type activities

23. 23
Determine if the District will be able to
finance services in the future.
• Sources of nonfinancial data:
• Bureau of the Census: www.census.gov
• Bureau of Economic Analysis: www.bea.doc.gov
• Bureau of Labor Statistics: http://stats.bls.gov/
• National Center for Education: http://nces.ed.gov/

24. 24
Ability-to-Pay Ratios
• Debt per $100 of assessed property value
• (Total liabilities * 100) / total assessed property value
• Debt per $1,000 of personal income
• (Total liabilities * 1,000) / total personal income
• Debt per capita
• Total liabilities / total population

25. 25
Ability-to-Pay Ratios
• Instructional and support services expenses per capital
• Expenses / total population
• Annual cost per pupil
• Total expenses / total students
• State aid per pupil
• State formula grants / total students
• Maintenance and operations cost per square foot
• Maintenance and operations expenses / total square footage of
schools and buildings

26. 26
Exercise-Net Assets
Net Assets 2011 2010 2009 2008
Invested in capital assets, $93.7 $80.9 $74.1 $65.4
net of related debt
Restricted $6.8 $5.4 $5.7 $10
Unrestricted $36.0 $34.0 $20.0 $9.0
Total Net Assets $136.5 $120.30 $99.8 $84.4

27. 27
Internal Control
• A process-effected by those charged with
governance, management and other personnel—
designed to provide reasonable assurance about the
achievement of the entity’s objectives in the following
categories:
• Effectiveness and efficiency of operations
• Reliability of financial reporting; and
• Compliance with applicable laws and regulations
(COSO, Internal Control-Integrated Framework)

28. 28
Internal Control
Control Deficiency
Significant Deficiency
Material Weakness

29. 29
Internal Control
• Why is a Deficiency Reported?
• Daily processing or year-end?
• Design Deficiency?
• Operation Deficiency?
• Both?
• Risk Discussion
• Be creative

30. 30
―The Audit‖
Board
Communications
Financial Audit Single Audit
Auditor’s Opinion Government Auditor’s Opinion
over Financial Auditing over Major A-133 Report
Statements Standards Report Programs
Internal Controls Internal Controls
Compliance Compliance
Over Financial Over Major
Laws & Regs Major Program
Reporting Program

31. 31
Single Audit Results
• Schedule of Findings and Questioned Costs
Part 1: Summary of Independent Auditor’s Results
• Major Programs: Why type of opinion was issued?
• Internal Control
Any deficiencies over federal programs?
• Major Federal Program Compliance
Any findings over federal programs?
• Data Collection Form

32. 32
Single Audit Results
• What does it mean that we are not a low risk auditee?
• In the prior two years, did the District:
a. Have a single audit performed?
b. Timely file the Data Collection Form?
c. Have unqualified opinions on the financial statements and
schedule of expenditures of federal awards?
d. Not have any material weaknesses in internal control over
financial reporting or material noncompliance under the
requirements of Government Auditing Standards?
e. Not have audit findings over federal programs that were:
i. Material weaknesses in internal control
ii. Material noncompliance
iii. Known/Likely questioned costs that exceed 5% of
program

33. 33
Board Communication Letters
• Required Communications
• Significant accounting practices including accounting policies
• Significant accounting estimates and financial statement
disclosures
• Significant difficulties, if any, encountered during the audit
• Uncorrected misstatements
• Disagreements with management, if any
• Representations from management to the auditor
• Material, corrected misstatements brought to the attention of
management
• Management’s consultations with other accountants
• Significant issues, if any, arising from the audit
• Control Deficiency/MAS Letter

34. 34
Adjustments
• Uncorrected Misstatements
• Not significant to opinion units
• Reported in management representation letter
• Reported in letter to the Board
• Corrected/Audit Adjustments
• Identified by auditor
• Either significant or management determined to post
• Reported in management representation letter
• Reported in letter to the Board

35. 35
Audit Deliverables
• Significant • Types of Opinions?
Deficiencies? • Significant
• Findings over State Deficiencies?
Compliance? • Compliance
Findings?
Government
Auditing Single Audit
Standards
Auditor Report
Over Basic Board
Financial Communications
Statements
• Type of Opinion? • Control
• Financial Analysis Deficiencies/ MAS?
• Audit Adjustments?
• Other Issues?

36. 36
Internal Control Scenario 1
Payroll Transaction Cycle
• The Administrative Office for the District is the
Superintendent, Business Manager, and Administrative
Assistant.
• The Business Manager is the only one authorized to access
the payroll system.
• The Superintendent/Principals will make hiring decisions and
obtain Board approval.
• The Administrative Assistant compiles the paperwork (W-
2s, Insurance, etc.) from the new hires and provides to the
Business Manager.
• The Business Manager sets up the new hire in the payroll
module and has the capability to performs any edits such as
pay rate changes or address changes to the payroll data.
• Timesheets are signed by both the employee and principal and
are provided to the Business Manager.

37. 37
Internal Control Scenario 1
Payroll Transaction Cycle
• The Business Manager enters hours into the payroll
module and generates the payroll checks/direct deposit.
• The Business Manager then distributes the checks/direct
deposit stubs and prepares the file to be sent to the bank.
• Annually, before the start of school, the Business
Manager generates a report listing every employee and
their current salary or hourly rate and provides this to the
Board.
• The Business Manager generates or prepares all financial
reporting.
Does the design of this system provide for adequate
segregation of duties?

38. 38
Internal Control Scenario 1
Payroll Transaction Cycle
Does the design of this system provide
for adequate segregation of duties?

39. 39
Internal Control Scenario 1
Payroll Transaction Cycle
Material Weakness is reported in Government
Auditing Standards report and possibly the A-
133/Single Audit report.
• What needs to be done to get this from a material
weakness to a significant deficiency?
• What needs to be done to resolve the significant
deficiency?

40. 40
Internal Control Scenario 1
Payroll Transaction Cycle
• Password protections within applications to the payroll master file
that would allow Administrative Assistant to perform edits.
• Administrative assistant maintains check sequence/direct deposit
log and all blank checks. Once the payroll is processed, the
checks/direct deposit stubs are given to the Administrative
Assistant to look for unknown employees, any unusual
amounts, and ensure check sequence is in order.
• Administrative assistant compares total pay amount to prior
payroll period and investigates significant variances in the total
amount paid from one pay period to the next and compares totals
to budget for any variances.

41. 41
Internal Control Scenario 1
Payroll Transaction Cycle
• Can a payroll change/edit report be printed from the payroll
system? The report should list all changes made to the employee
master file as well as extra pays or leave time added for the pay
period. The report should be reviewed by someone other than the
Business Manager such as the Superintendent.
• Another position should receive the monthly bank statement and
review the cancelled checks to look for any unusual
payees, amounts and to ensure the signatures are proper. This
position should review the monthly bank reconciliations and
compare the bank balances to the monthly bank statement, book
balance to the general ledger system and make sure there are no
unusual reconciling items listed on the reconciliation.

42. 42
Internal Control Scenario 2
Cash Disbursement Cycle
• Same District consisting of the Superintendent, Business
Manager and Administrative Assistant
• The Business Manager has sole access to the master
vendor file and is responsible for setting up new vendors
• The Business Manager receives invoices directly
• The Business Manager enters the invoices into the system
to be paid and generates a Bill Listing for the Board for
approval
• After the Board meeting, the Business Manager prints the
checks from the check stock maintained in the BM’s office
• The checks are signed within the system and are mailed
out by the Business Manager

43. 43
Internal Control Scenario 2
Cash Disbursement Cycle
• The bank statement is received directly by the Business
Manager
• The bank reconciliation is completed by the Business
Manager
• There is no review of the bank reconciliation

44. 44
Internal Control Scenario 2
Cash Disbursement Cycle
Does the design of this system provide
for adequate segregation of duties?

45. 45
Internal Control Scenario 2
Cash Disbursement Cycle
Material Weakness is reported in Government
Auditing Standards report and possibly the A-
133/Single Audit report.
• What needs to be done to get this from a material
weakness to a significant deficiency?
• What needs to be done to resolve the significant
deficiency?

46. 46
Internal Control Scenario 2
Cash Disbursement Cycle
• The District should investigate if there is capability in the
system to restrict access of the master vendor file.
• The creation of new vendors and any modifications to the
vendor could be done by the Administrative Assistant.
• A purchase order should be generated for all purchases with
approval by building administrator or superintendent.
• Purchase orders should be matched to invoices and
receiving reports prior to payment.
• The purchase order should indicate what account the
transaction should be coded to in the general ledger system.

47. 47
Internal Control Scenario 2
Cash Disbursement Cycle
• The Superintendent could account for the check
sequence. Any gaps in sequence should be investigated
and accounted for.
• The Superintendent should also compare the check listing
to the Bills Listing approved by the Board (including any
manual checks written between Board Meetings or payroll
deduction checks written on expenditure check stock.)

48. 48
Internal Control Scenario 2
Cash Disbursement Cycle
• Each building administrator should receive a copy of the monthly
general ledger transaction report for their building and ensure
monies spent were posted to the proper accounts and are
reasonable compared to their respective budget
• The bank statement should be received by another individual.
This individual should scan through the canceled checks to look
for any unusual payees or amounts and ensure the authorized
signature is appropriate.
• Bank reconciliation should be reviewed monthly. This person
should compare:
• The bank balance on the reconciliation to the bank statement
• The book balance to the general ledger
• Review reconciling items for reoccurring or unusual items

49. 49
Sarah Bohnsack Mia Frommelt
563.343.9595 913.660.3931
9911 84th Street West 9311 West 148th Place
Taylor Ridge, IL 61284 Overland Park, KS 66221
sarah@governmentalservice.com mia@governmentalservice.com