SURVIVING AN AUDIT – SO EASY A CAVE MAN CAN DO IT PRESENTED BY: C. DONALD WHEAT, CPA, CCIFP

1. SURVIVING AN AUDIT – SO EASY A CAVE MAN CAN DO IT PRESENTED BY: C. DONALD WHEAT, CPA, CCIFP

2. REQUIREMENTS: • Audit of financial statements; • Audit of Federal Funds expended (Single Audit); • Agreed Upon Procedures (BESE requirement); • Tax Return (990 for Non-Profit Entities); • Deadline – June 30 year end must be submitted to Legislative Auditor by December 31 (some local school boards want them much earlier).

3. AUDIT PREPARATION– PART I • Engagement letter from a licensed CPA; • Engagement approval on the La. Legislative Auditor’s Website; • Note: Engagement letter should include fees (Audit, Tax, BESE, etc.); • Note: Make sure the auditor includes a copy of their most recent peer review (required every three years).

4. AUDIT PREPARATION– PART II • Preparation for an audit begins over a year in advance; • Design, document, implement, and evaluate internal controls; • Assess risk in your organization; • Communicate policies, responsibilities, and expectations to all employees (often); • Document, document, document!

5. WHAT IS AN AUDIT AND WHY ARE THEY ASKING FOR THAT? • An audit is the process of arriving at a conclusion that financial statements are fairly stated (“auditors actually get a warm and fuzzy feeling about the numbers”); • Why do you need that? Auditors ask for a lot of information – sometimes because we are required to by standards and sometimes to satisfy the dreaded “Auditor Judgment”.

6. PARTS OF AN AUDIT • Planning & Risk Assessment. • Testing. • Concluding/Reporting.

7. PLANNING & RISK ASSESSMENT • Planning Requirements: • Document your internal controls – the auditor will make you do it anyway; • Analytical review – your auditor is going to compare current and prior year g/l (financial statement) balances and ask you about variances. Do this yourself and find issues before the auditors do (We love that!); • Board Minutes – the auditor will want to review all of them. REBOWE & COMPANY CPAS CONSULTANTS

8. PLANNING & RISK ASSESSMENT • Planning Requirements (Continued) • Fraud Inquiries – Auditors are required to assess the risk of fraud and make inquiries of personnel about fraud. Have fraud policies in place. Discuss fraud with all employees and what is expected of them. As a publicly financed entity the bar is set very high and mistakes end up in the newspaper or on TV.

9. PLANNING & RISK ASSESSMENT • Risk Assessment • Your auditor is required to assess risk (of material misstatement) in your organization. That can be as simple as your business manager not having the skill set to produce GAAP financials on their own (relatively common and relatively minor) to no segregation of accounting duties and very little oversight (also fairly common but potentially devastating). Analyze risks in your school and ask your auditor for help in mitigating them (Your auditor can offer advice but not make decisions).

10. TESTING • Types & amounts of tests can vary from one audit firm to the next (Auditor judgment) • Balance Sheet • Cash – make sure you reconcile cash to your g/l monthly. Confirmation may be needed. • Receivables – most significant amounts relate to federal awards. Make sure the detail of these reconcile to g/l. • Other Assets – typically not significant. Make sure the underlying support reconciles to g/l.

11. TESTING • Balance Sheet (continued) • Property & Equipment • Bought with donated dollars vs. public monies; • Establish a reasonable capitalization threshold; (Auditor will probably trace purchases to invoices so make sure they are properly authorized and recorded correctly – See Public Bid Law); • Tag everything and do a physical inventory (your auditor probably will).

12. TESTING • Balance Sheet (continued) • Internal Due to/froms (and Transfers) – if you have multiple “funds” and there are “interfund” transactions make sure they net to zero every month. • Accounts payable (accrued expenses) – if you have a detail, make sure it reconciles to g/l. Any product or service received requires the recognition in the period received. Do a search for unrecorded liabilities prior to auditor arrival – they will do one.

13. TESTING • Balance Sheet (continued) • Debt • Net Assets (Equity or Fund Balance) • Make sure g/l amounts agree to py audited financial statements (Don’t post anything to Net Assets directly); • Categories – Unrestricted (Can be Board Designated), Temporarily Restricted, Permanently Restricted.

14. TESTING • Income Statement • Revenues – (non-federal) • Maintain documentation on all significant donations (for audit and tax purposes); • Fundraisers – Make sure proper controls are in place for all (especially where cash is involved). Make sure event details reconcile to g/l amounts; • MFP – State Formula.

15. TESTING • Income Statement • Expenses – Expenses basically boil down to payroll and everything else. Payroll and related benefits is a very complex and constantly changing area. Most small (single school charters) don’t have the resources or manpower to keep up, so it is advisable to use a professional payroll service. Outside of payroll, the key is documentation. Make sure all expenditures are authorized and appropriate (and comply with bid law if necessary).

16. REPORTING • Audit report – “Unqualified” is what you want. This is the opinion of the Auditor. • Basic Financial Statements • Statement of Financial Position (Balance Sheet); • Statement of Activities (Income Statement or P&L); • Statement of Cash Flows; • Statement of Functional Expenses (Generally: Program, Support (G&A and Fundraising). • Supplemental Information – such as Combining Schedules, Detail Schedules of G&A, etc.

17. REPORTING • BESE Reporting. • Single Audit and Government Compliance reports. • “SAS 114” Letter – Communications with Board (“those charged with governance”). • “SAS 115” Letter – Internal control findings. • Management Letter – optional comments on improving efficiency.

18. AUDIT OF FEDERAL FUNDS (SINGLE AUDIT OR A-133 AUDIT) • Schedule of Federal Awards - Have it ready when your auditor arrives (have them explain it to you the first time). This schedule shows all expenditures of federal funds (includes CFDA numbers). • Auditor uses this to determine “Major Programs” and which programs are tested. If you understand how this works, you can probably tell what will be tested (your auditor should try to change it up though, to be unpredictable). • Compliance supplement helps the auditor determine what is tested and how. If you look at these you will know what is required in addition to the grant agreements themselves. • Number one rule in single audits is DOCUMENT, DOCUMENT, DOCUMENT!!!

19. AUDIT OF FEDERAL FUNDS (SINGLE AUDIT OR A-133 AUDIT) (Continued) • Federal awards can be: • Grants – direct or passed through State Agencies; • Loans; • Contracts or Cooperative Endeavors; • Non-cash assistance (such as donated foods); • Procedures may include: • Fraud inquiries of Grant Personnel; • Internal Control Evaluation and Testing (Walkthroughs); • Risk Assessment. • Two types of testing: • Tests of expenditures; • Tests of Non-Financial data (Such as eligibility).

20. AUDIT OF FEDERAL FUNDS (SINGLE AUDIT OR A-133 AUDIT) (Continued) • Findings: • The auditor should accumulate and discuss findings as they become known. You will be responsible for a written response (Corrective Action Plan). • The auditor’s reports should include: • Report on Internal Control; • Report on Compliance in Major Programs (A-133); • Schedule of Findings and Questioned Costs; • Corrective Action Plan; • Schedule of Prior Findings and Questioned Costs.

21. AUDIT OF FEDERAL FUNDS (SINGLE AUDIT OR A-133 AUDIT) (Continued) • Data Collection Form: • Website: http://harvester.census.gov/fac/collect/ddeindex.html • Your auditor may help with this process but it is basically transferring the Schedule of Federal Awards to this electronic form; • The process is all electronic. The form is filled out. The Financial Statement is converted to a pdf and uploaded. The auditor and Auditee signoff electronically. Finally, the report is certified and submitted; • A copy of the finalized form goes to the legislative auditor with a copy of the report (pdf) (NOTE: If you fall below the Single Audit threshold then there is a State Data Collection Form that must accompany the report to the Legislative Auditor.

22. AUDIT OF FEDERAL FUNDS (SINGLE AUDIT OR A-133 AUDIT) (Continued) • ARRA (American Recovery and Reinvestment Act): • All of these funds MUST be tracked separately; • Some may come through existing programs (like Title I) and some may be entirely new CFDA #s; • It is very likely these funds will require additional testing and therefore additional expense (get with your auditor early to evaluate the impact); • These funds will be disclosed separately on the Data Collection Form. • Updates to the 2009 Compliance Supplement will likely be monthly (rather than once annually under normal circumstances).

23. OMB A-87 TIME CERTIFICATION REQUIREMENT One important requirement for most DOE programs is a time certification for every employee funded by a federal grant. The time certification must be done at least twice in the grant period (ideally in December and June). The documentation must contain the employee’s name, social security number and the employee’s signature certifying that a specific number of hours and dollars were charged to the applicable grants.

24. BESE TESTING • Auditors will test 25 personnel files of teachers, assistant principals or principals. If you have fewer than 25 employees, your auditor will likely test every file. The testing procedures require checking for the following documentation: • Employee application; • Resume; • Copies of SS card, birth certificate & drivers license; • Copy of background check; • Signed letter of employment, stating salary; • Verification of prior school’s records; • Copy of valid teaching certificate ; • Transcripts from degree granting institution; • Copy of Praxis or NTE scores.

25. POLICY REQUIREMENTS • Written procedure for how the Board of Directors will review the Form 990 before it is filed. • Compensation Approval Policy. • Fundraising Policy. • Fiscal Policies. • Employee Handbook. • Parent and Student Handbook. • Conflict of Interest Policy. • Whistleblower Policy. • Document Retention and Destruction Policy. • Joint Venture Policy. • Expense Reimbursement Policy. • Gift Receiving Policy.

26. TAX RELATED REQUIREMENTS • Request Federal Employee Identification # (EIN) by mail or (phone for quicker response). • Request a Data Universal Numbering System # (DUNS#). • http://fedgov.dnb.com • Request 501(c)(3) Tax-Exempt Status via Form 1023 within first 3 months of Board operation. • Functional expense statement is an important part of the tax return that segregates expenses by Instruction, Administration & Fundraising activities. • Request a Federal I-9 Form from any independent contractors paid over $600 (i.e. Individuals, LLCs & LLPs) for completion of Form 1099s to be distributed at year end. • Request sales tax exemptions from state & parish and provide copy to all vendors who would otherwise charge sales tax.

27. ITEMS NEEDED FOR FORM 990 • List of officers and directors • Contributions to retirement, expense allowance, compensation, hours worked. • List of donors & addresses for all contributions in excess of $5,000 (cash & non-cash). • List of five highest paid employees other than officers & directors over $50,000. • List of five highest paid independent contractors for professional services over $50,000. • In the charter school environment, key personnel usually hold multiple roles (i.e. asst. principal, gym teacher & donor contact). The time spent on each activity MUST be documented for tax purposes by expense category.

28. CONTACT INFORMATION Don Wheat Email: dwheat@rebowe.com Office: (504)-837-9116 Cell: (504)-621-6731