Audit Changes Are Coming
School Advisor, 2006 Issue No. 3
The good news first—as of now, there are no new GASB pronouncements effective for June 30, 2007 that impact Michigan K-12 education. But, there will be new auditing standards effective for June 30, 2007, as well as many more for June 30, 2008. While these new standards (Statement on Auditing Standards [SAS] issued by the AICPA) impact CPA firms directly, they certainly will indirectly impact K-12 education, as CPAs begin conducting their audits under the new rules.
New rules for June 30, 2007:
SAS No. 103, Audit Documentation
This standard clarifies and increases the requirements that auditors must follow in obtaining, managing, and retaining documentation that supports the audit opinion. This means it is likely that auditors will be more specific in their requests for information, increasing a district’s time in preparation for the annual audit. It also means that the process of concluding on an audit could be prolonged. Historically, the audit “report date” was the last day we were working in district offices. Under the new rules, the dating of the report will be when the report is “complete.” This means that financial statement elements like the government-wide statements, footnotes, and MD&A will need to be complete before we can date the report. Districts will want to plan ahead for completion of these items to insure additional audit work is not necessary after the audit team leaves the field.
SAS No. 112, Communication of Internal Control Related Matters Noted in an Audit
This standard creates a big change in the extent of internal control “deficiencies” that are required to be reported in writing. This lowered threshold increases the likelihood that the auditor may raise concerns over issues or practices within the district that have not been discussed previously. For districts that have a single audit, such control deficiencies will continue to be reported as either financial statement findings or federal program findings in the schedule of findings and questioned costs. It is possible that they may also be highlighted in the letter to the Board of Education.
New rules for June 30, 2008:
SAS Nos. 104 to 111, The Risk Assessment Standards
These eight new standards will substantially affect the auditing process. At this point, the specific impact of these standards on the school district auditing process is being evaluated. Our early analysis indicates that it likely will require increased emphasis on evaluation of a district’s internal controls including:
- Control environment (tone at the top)
- Risk assessment by the district to determine where controls might be needed
- Control activities (procedures) in place to limit the risk of an error or fraud
- Information and communication (reporting) of financial activities of the district
- Monitoring (checks and balances) of the processes put in place
- Limits on “inquiry” as a valid audit test
- Greater focus on the impact of potential audit adjustments
- Additional support for information included in the notes to the financial statements
- Potential increases in audit sample sizes
- Increased need for the district to be actively involved in the preparation of their financial statements
Proposed SAS, The Auditor’s Communication with Those Charged with Governance
This SAS is still in the exposure stage but is expected to be adopted by the end of 2006. The standard represents a big change. Communication to all districts will be formalized in a format previously reserved specifically for audit committees. This new standard will require communication to the entire board (absent an existing audit committee) of required topics such as the following:
- Major difficulties in performing the audit
- Uncorrected misstatements (“passed adjustments”)
- Material adjustments made during the audit
- Disagreements with management
- Significant management representations
In subsequent issues of the School Advisor we will continue to inform you of the actual impact of these standards and how the district might begin to plan to insure an effective audit with few surprises.