John Keel, CPA What to Expect on an A-133 Audit Ellie Thedford, CGAP, Senior Auditor Parsons Townsend, CGAP, CICA, Senior Auditor Texas State Auditor’s Office October 9, 2013

John Keel, CPA Objectives Single Audit Overview Initial Project Planning Preparing for an Audit Fieldwork Findings and Management Responses 1

John Keel, CPA SINGLE AUDIT OVERVIEW

John Keel, CPA Single Audit Background Established by the Single Audit Act of 1984 (amended in 1996). Applies to non-profit and government entities that expend $500,000 or more in federal awards annually. 2

John Keel, CPA Single Audit Background Components of the Single Audit. Financial statement opinion audit. Report on compliance and internal control over compliance for each major program. Schedule of Expenditures of Federal Awards (SEFA). 3

John Keel, CPA Single Audit Background Compliance Portion Objectives: Obtain understanding of internal controls over compliance for each major program, assess control risk of noncompliance, and perform tests of controls. Determine whether the entity complied with laws and regulations that may have a direct and material effect on each major program. 4

John Keel, CPA Single Audit Background SEFA Objective Determine whether the Schedule of Expenditures of Federal Awards (SEFA) is fairly presented in relation to the entity’s financial statements as a whole. Note: Because the SEFA serves as the primary basis for major program determination, the accuracy and completeness of the SEFA is very important to the Single Audit. 5

John Keel, CPA Single Audit in Texas For fiscal year 2012, the State expended:  $50.2 billion in federal funds.  $4 billion in Student Financial Assistance (SFA) cluster federal funds. The state audit covers all entities included in the State’s Comprehensive Annual Financial Report (CAFR).  Does not include community colleges or private institutions. 6

John Keel, CPA Proposed Changes to the Single Audit Consolidation of Circulars (8 into 1). Change in selection of Type A and Type B major program determinations. Reduction and consolidation of required compliance areas for testing. Additional findings requirements: Repeat finding Sample size support for statistical samples 7

John Keel, CPA Student Financial Assistance Cluster Federal Supplementation Educational Opportunity Grant Federal Work Study Federal Perkins Loans Federal Pell Grant Program Federal Direct Student Loans Teacher Education Assistance for College and Higher Education Grant Iraq and Afghanistan Service Grants Nurse Faculty Loan Program Health Professions Student Loans, including Primary Care Loans and Loans for Disadvantaged Students Nursing Student Loans ARRA- Nurse Faculty Loan Program SDS 8

John Keel, CPA Audit Time Line Initial Planning April- May Fieldwork June- August Complete Fieldwork and Review August- October SEFA Audit Work November- December Findings and Management Responses December- January Report February 9

John Keel, CPA INITIAL PROJECT PLANNING

John Keel, CPA Major Program Determination Process to determine which programs should be included in annual A-133 audit. Required to cover at least 50 percent of federal expenditures each year. For State of Texas, the determination is done by the State Auditor Office’s contractor. 10

John Keel, CPA Major Program Coverage To obtain sufficient audit coverage for the SFA cluster, we must audit multiple higher education institutions each year. We perform limited procedures for some of the higher education institutions with lower SFA cluster expenditures each year. 11

John Keel, CPA Site Selection Considerations SFA cluster expenditures Larger institutions audited annually Designation of tiers Prior audit results. Fraud complaints. Other risk notes, including other internal or external audits. Time since last audit. Southern Association of Colleges and Schools (SACS) accreditation cycle. 12

John Keel, CPA Initial Planning Initial contact. Engagement letter and expectations memo. Scheduling on-site fieldwork. Control questionnaires or documents Separate questionnaires or documents for each compliance area. Information and population requests. Multiple populations required. 13

John Keel, CPA Common Planning Issues Difficulty obtaining populations. No query or support provided to prove population completeness. Unofficial withdrawals. All cash draws made in year, rather than only draws on current awards. 14

John Keel, CPA PREPARING FOR AN AUDIT

John Keel, CPA Preparing for an Audit Establish and update written policies or procedures Maintain evidence of reviews or approvals Monitor critical activities, including student determinations and adjustments 15

John Keel, CPA FIELDWORK

Internal Controls Over Compliance Auditors gain an understanding of internal controls related to SFA cluster. Perform assessment of controls based on the Committee of Sponsoring Organizations of the Treadway Commission (COSO) model. Test internal controls that are key to SFA processes. Test information technology general controls. 16

John Keel, CPA Information Technology General Controls Information Security Policies User Access Passwords. High-profile Roles. Periodic Review of User Access. Change Management Authorization and Testing. Migration of Changes. Configuration and Emergency Changes. Operations 17

John Keel, CPA Common General Control Issues Lack of documentation of development testing and insufficient approval of system changes. User Access More access than necessary. Terminated or transferred employees. Shared generic accounts. No review of user access. Segregation of Duties Programmers with access to production. Users who can initiate, submit, and approve critical transactions. 18

John Keel, CPA Compliance Testing Typically done on a sample basis. If exceptions, auditors may attempt to quantify the exceptions for the entire population. For some compliance areas, auditors will perform data analysis to review the entire population. 19

John Keel, CPA Audit Procedures Office of Management and Budget Circular A- 133 Compliance Supplement Details requirements for each federal program. Guides the audit procedures and requirements tested for each program. Catalog of Federal Domestic Assistance (CFDA) number identifies each federal program Supplement was published in July

John Keel, CPA Compliance Sample Sizes American Institute of Certified Public Accountants’ (AICPA) Sample Size Guidance. Based on inherent risk and control risk for each compliance area. Sample sizes are increased when control weaknesses and/or compliance exceptions are identified. Sample sizes are typically 25, 40, or

John Keel, CPA Key Compliance Requirements 13 primary compliance requirements. Special Tests and Provisions. Additional areas that can be added by the federal awarding agency for each program or cluster. Limited vs. Full Scope Higher Education Institutions. Not all compliance areas are considered direct and material based on quantitative and/or qualitative considerations. Therefore, some compliance areas may not be included in our audit work. 22

John Keel, CPA Cash Management Objective: Determine whether, for advance payments, the recipient has minimized the time between transfer of funds and their disbursement. Test that disbursements were made within three business days of receipt of funds. Determine whether the higher education institution earned interest on federal funds. 23

John Keel, CPA Eligibility Objectives: Determine whether eligibility determinations were made, individual participants were determined to be eligible, and only eligible individuals participated. Determine whether amounts provided to participants were calculated according to requirements. 24

John Keel, CPA Eligibility Student met general SFA requirements. Enrolled in eligible, degree seeking program. U.S. citizen or national. Maintained satisfactory academic progress. Student met program specific requirements. For example, enrolled at least half-time for Direct Loans. 25

John Keel, CPA Eligibility Student had financial need. Cost of attendance correctly calculated, based on actual or expected enrollment. Correct expected family contribution. Awards made within annual and aggregate limits. Awards did not exceed student need. 26

John Keel, CPA Common Eligibility Issues Cost of Attendance Calculations Errors in manual calculations or adjustments. Institution does not have less than full-time budgets. Institution does not budget based on actual or expected enrollment. Documentation of professional judgment. Satisfactory Academic Progress (SAP) No documentation of appeal process. Process to assess SAP is not consistent with policy. Assistance awarded to students who did not maintain SAP. Data Analysis results Grad students receiving subsidized loans Incorrect awards for Pell, FSEOG, etc. 27

John Keel, CPA Reporting Objective: Determine whether required reports include all activity, are supported by accounting records, and are fairly presented in accordance with requirements. 28

John Keel, CPA Reporting Common Origination and Disbursement (COD) System Test origination and disbursement records to determine accuracy and completeness. Test timeliness of reporting. Key items include disbursement date and disbursement amount. Fiscal Operations Report and Application to Participate (FISAP) Test that FISAP amounts are accurately supported. 29

John Keel, CPA Common Reporting Issues Pell or Direct Loan disbursement records not submitted to the COD system in timely manner. Incorrect disbursement amount or date reported. Amounts reported on FISAP do not match supporting documentation. 30

John Keel, CPA Verification Objective: Determine whether the higher education institution established verification policies and verified all required information for selected students. 31

John Keel, CPA Verification Review verification policies to ensure they contain all required elements. Test that the higher education institution: Verified information for selected students. Obtained acceptable documentation. Matched information to the student application. Submitted corrections when required. Adjusted awards based on corrections, if applicable. 32

John Keel, CPA Common Verification Issues Verification policies do not meet federal requirements. Incorrect verification of information due to manual verification process Household size Number in college Income tax paid Lack of follow-up on required corrections (new Institutional Student Information Record, award adjustments) 33

John Keel, CPA Changes in Verification U.S. Department of Education Changes in Verification $25 threshold for corrections No more 30% requirement Federal Register Limited Scope Compliance Area in Fiscal Year

John Keel, CPA Disbursements Objective: Determine whether disbursements to students were made within required time frames and whether required documents and approvals were obtained before disbursing SFA funds. 35

John Keel, CPA Disbursements Test that disbursements were not made more than 10 days before start of semester. Test that all eligibility requirements were met before disbursements. Test that disbursement notifications for loans and certain grants were sent within the required time frames, as required. 36

John Keel, CPA Return of Title IV Funds Objective: Determine whether the higher education institution is making returns in the proper amount and in a timely manner and is applying the returns to federal programs as required. 37

John Keel, CPA Return of Title IV Funds Test that return calculations or determinations were accurate for students who withdrew, dropped out, or never began attendance. For students who received all Fs, determine whether returns were made, if applicable. Test that returns were made in a timely manner. 38

John Keel, CPA Common Return of Title IV Funds Issues Payment period determined incorrectly. Insufficient process for determining whether student ever attended during a term. All “F“ report not capturing a combination of “Fs,” withdrawals, etc. Insufficient documentation of attendance Using wrong date for calculation Determinations of withdrawal date for unofficial withdrawals not done in a timely manner. 39

John Keel, CPA Enrollment Reporting Objective: Determine whether the higher education institution is notifying the U.S. Department of Education and the National Student Loan Data System (NSLDS) of changes in student status in a timely and accurate manner. 40

John Keel, CPA Enrollment Reporting Test that student status changes were accurately reported to NSLDS within the required time frames. Higher education institution is responsible for timeliness even if it uses the National Student Clearinghouse for submissions. 41

John Keel, CPA Common Enrollment Reporting Issues Failure to report status changes to NSLDS. Incorrectly reporting graduated students as enrolled or withdrawn. For unofficially withdrawn students, not reporting students as withdrawn based on determined withdrawal date. 42

John Keel, CPA Institutional Eligibility Objective: Determine whether the higher education institution meets applicable institutional eligibility requirements. 43

John Keel, CPA Institutional Eligibility Test that higher education institution: Maintained and met required ratios for correspondence courses, incarcerated students, and ability-to-benefit students. Did not pay commission or bonuses. Established reasonable SAP standards. Received approval for additional locations on Eligibility and Certification Approval Report (ECAR). 44

John Keel, CPA Common Institutional Eligibility Issues Ratio calculations are not maintained, or there is no process to calculate the ratios. 45

John Keel, CPA Other Compliance Areas Activities Allowed or Unallowed. Matching, Level of Effort, Earmarking. Period of Availability. Program Income. Separate Funds. Student Loan Repayments. Federal Work Study. Written Arrangements. 46

John Keel, CPA FINDINGS AND MANAGEMENT RESPONSES

John Keel, CPA Potential Finding Classifications Internal Controls Over Compliance. Significant Deficiency. Material Weakness. Compliance. Non-Compliance. Material Non-Compliance. 47

John Keel, CPA Management Responses Written findings sent to higher education institutions. Generally have 10 working days for responses. Responses include corrective action plan, responsible person and implementation date. 48

John Keel, CPA Report Statewide Single Audit report. Separate SAO report on SFA Cluster findings. Fiscal year 2012 Reports: pdf pdf pdf pdf 49

John Keel, CPA Available Resources OMB Circular A Compliance Supplement, Parts 3 and 5 mpliance_supplement_ mpliance_supplement_2013 Catalog of Federal Domestic Assistance Code of Federal Regulations Title 34- Education Title 42- Public Health 50

John Keel, CPA Questions?

Contact Information Ellie Thedford (512) Parsons Townsend (512)