1. Kentucky Auditor of Public Accounts David Pitts, Audit Manager (502) 564-5841

2. 1. Introduction 2. Audit Requirements 3. KDE’s Responsibility 4. APA’s Responsibility 5. Changes in Reporting Requirements  Clarity Changes 6. Brief Summary of the Desk Review Process 7. Results – FY 13/FY 14

3.  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.

4. ◦ 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

5.  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-FY 13 $844,757,567 FY 14 $796,422,163 ◦ Total Federal Funds sent to the school districts-FY 13 $404,289,209 FY 14 $430,021,723 ◦ SEEK General Fund Expenditures – FY 13 $2,514,809,200 FY 14 $2,572,612,462

6.  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. ◦ Assists in the selection process of CPA firms for school district audits.

7.  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.

8. ◦ The clarified SAS required changes to the auditor’s report, and it contained additional required verbiage. ◦ The changes included the following headings:  “Report on the Financial Statements”  “Management’s Responsibility”  “Auditor’s Responsibility”  “Opinion”

9. ◦ The clarified SAS (AU-C 706) introduced 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 catastrophe having a significant effect on the F/S.  Significant related party transactions.  Unusual major subsequent events.

10.  The clarified SAS described 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

11.  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

12.  Agreed upon procedures confirmed by KDE ◦ Audit Contract ◦ Audit Review Checklist (revised each year, approved by the audit committee prior to each year’s desk review.)  Designed to be similar to a Peer Review Checklist and includes (10) sections that are reviewed.  Prior Year Matters  Qualifications and Independence  Reporting – Auditor’s Opinion; GAS; A-133 (yellow Book letters)  SEFA information  Schedule of Findings and Questioned Costs  Corrective Action Plan  Management Letter  Summary of Prior Audit Findings ◦ Financial Statement Checklist

13.  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  Assists in ensuring all applicable statements are included.

14.  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.

15.  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.

16.  Corrective Action ◦ Required for all audits classified as “Technically Deficient” or “Unacceptable”  Use of the Report o Identifies firms that may have difficulties o Assists State Audit Committee in the selection of CPA firms for the preparation of district audits

18.  Number of Audits – 185  Number of Findings –  42 audits deemed Acceptable  108 audits deemed Acceptable with Deficiencies  29 audits deemed Technically Deficient  6 noted as Unacceptable

19.  Prior Year Findings and Other Items ◦ 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 Statement of Changes in Fiduciary Net Position is required whenever an entity reports fiduciary funds other than agency funds, but it was often omitted from the basic financial statements when required. [GASB 2200.105, 2200.196] ◦ The financial statements contained significant math errors. ◦ The Proprietary Fund Statement of Cash Flows omitted a reconciliation of operating cash flows to operating income, used amounts other than operating cash flows and operating income in the reconciliation, or reported an amount for cash that differed from the amount in the Proprietary Fund Statement of Net Position. [GASB 2200.194]

20.  Prior Year Findings and Other Items ◦ The Statement of Fiduciary Net Position reported unequal amounts for assets and liabilities in an agency fund. [GASB 2200.199] ◦ Financial statements did not consistently replace obsolete language “Net Assets” with “Net Position.” This was a common issue noted during the desk reviews. [GASB 2200.115, 2200.173, 2200.197] ◦ Net position was improperly classified using types appropriate only for governmental fund balance: nonspendable, committed, assigned, and/or unassigned. Net position classifications are capital assets, net of related debt; restricted; and unrestricted. [GASB 1800.156] ◦ Governmental fund balance was improperly classified using types appropriate only for net position: capital assets, net of related debt and/or unrestricted. Governmental fund balance classifications are nonspendable, restricted, committed, assigned, and unassigned. [GASB 1800.165-.177]

21.  Reporting – Independent Auditor’s Report ◦ 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. ◦ The Independent Auditor’s Report failed to reference 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. [AU-C 700.37] ◦ The Independent Auditor’s Report omitted some of the basic financial statements from the list of information audited. [AU-C 700.25c, 700.A4] (In most cases the Statement of Changes in Fiduciary Net Assets where it is required to be reported) ◦ The Independent Auditor’s Report included both an “in relation” opinion and a disclaimer of opinion on the same element of supplementary information.

22.  Reporting – Independent Auditor’s Report ◦ The Independent Auditor’s Report stated discretely presented component units were audited when none were present. [AU-C 700.25.c] ◦ Various required headings or sub-headings were missing from the Independent Auditor’s Report, such as Emphasis of Matter, Other Matters, or Other Information. [AU-C 706.07b, 706.08, 720.A2]

23.  Reporting – Government Auditing Standards Report ◦ 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 definitions for material weaknesses, significant deficiencies, or control deficiencies. [AU-C 265.14] ◦ 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 identify any deficiencies in internal control over financial reporting that the auditor considers to be material weaknesses. [AICPA Audit and Accounting Guide, Government Auditing Standards and Circular A-133 Audits 4.54.g] ◦ 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.

24.  Reporting – Government Auditing Standards Report o 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 additional matters were communicated to the auditee in a management letter. This was a common issue noted during the desk reviews. (Required under KDE’s contract) o 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 stated discretely presented component units were audited when none were present. [AICPA Audit and Accounting Guide, Government Auditing Standards and Circular A-133 Audits 4.54.b]

25.  Reporting – A-133 Reports ◦ The Report on Compliance With Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A-133 states, “the results of our auditing procedures disclosed instances of noncompliance with those requirements, which are required to be reported in accordance with OMB Circular A-133 and which are described in the accompanying schedule of findings and questioned costs.” However, there were no findings presented in the Schedule of Findings and Questioned Costs. [A-133 §__.505(d)(2),(3)] ◦ The Report on Compliance With Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A-133 omitted a statement that management’s response to findings was not audited and the auditor expresses no opinion on it. [AICPA Audit and Accounting Guide, Government Auditing Standards and Circular A-133 Audits 13.31j.iv, 13.31.k.x]

26. Schedule of Expenditures of Federal Awards ◦ Auditor responsibilities listed in OMB Circular A-133 include expressing an opinion on the SEFA, but no opinion was present. [A-133 §__.505(a)] ◦ The lack of identification of pass through numbers on the SEFA, especially for noncash programs, was a common issue noted during the desk reviews. (Much improved in current year) ◦ The amount of noncash expenditures was not presented in either the schedule or notes to the SEFA. [A-133 §__.310(b)(6)] ◦ Other issues with the SEFA include not providing a program CFDA number when one was available and failing to identify the federal grantor.

27.  Schedule of Findings and Questioned Costs ◦ Findings identified in 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 or the Independent Auditor’s Report on Compliance with Requirements that Could Have A Direct and Material Effect on Each Major program and on Internal Control Over Compliance In Accordance with OMB Circular A-133 were not included in the Schedule of Findings and Questioned Costs. [A- 133 §__.505(d)(3)] ◦ 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.

28.  Schedule of Findings and Questioned Costs ◦ 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. ◦ The auditor’s opinion on the financial statements and on major program compliance was expressed using the obsolete term “Unqualified” instead of “Unmodified.” This was a common issue noted during the desk reviews. [A-133 §__.505.d.1.i, v; AU-C 700.19]

29.  Summary Schedule of Prior Audit Findings ◦ The required Summary Schedule of Prior Audit Findings was omitted, but no audit findings had been reported in the prior year. [KDE Auditor Contract Appendix I]  Management Letters ◦ The management letter did not report on the status of previous management letter comments and the progress toward the resolution of concerns identified during the preceding audit. [KDE Auditor Contract Appendix I.]

30.  Not yet ready for release but here are a few things we’ve noted in our current year work.  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.  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.

31.  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.

32.  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.  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.

33.  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.

34.  Thank You!