ࡱ> !# M bjbj== 4IWWl^^^^^^^THHHH$H|~hbJxJ4JJJzjzjzj$ P#^zji"izjzj#k^^JJ8kkkzj"^J^JkzjkFk@rAt^^JVJ @(lDHj"^LN0~Vj<Vk^^^^  An Overview For School Board Members Prepared by Mary Ellen Clark Office of Educational Management State Education Department and William J. Klohck, CPA August 2006 Introduction This pamphlet is designed to provide a brief overview of how Boards should apply 2005 school accountability legislation (Chapter 263 of the Laws of 2005) to selected aspects of the internal audit activities in a New York State school district environment. Additional guidance can be obtained from the New York State Education Department, Office of Educational Management, the school districts legal counsel and independent auditing firm, and the New York State Education Law. Internal Audit Activities XE "Internal audit activities"  Audit activities are among the most crucial aspects of monitoring a school districts financial accounting system. It is the Board of Educations responsibility to maintain the fiscal health of the district and to ensure that all legal mandates relating to the financial transactions of the District are adhered to. There are two types of auditors that Board of Education members encounter in a school district setting: internal and external auditors. It is important for board members to be familiar with the role that each plays in the school district. External auditors are certified or licensed individuals from independent firms that contract with a school district to perform the annual financial statement audit. The work performed by the external auditor is guided by established professional standards and legal mandates. While they mainly work with the year-end financial statements, external auditors may also be consulted to discuss issues such as alternative accounting treatments of unfamiliar transactions and new legislative mandates. Because the district's external auditor must remain independent of the District, they cannot be appointed to perform claims audit, internal audit or audit committee functions. The internal audit activities of a school district fall into three categories: 1) Claims Auditor 2) Internal Audit Function 3) Audit Committee Claims Auditor XE "Claims Auditor"  The Claims Auditor focuses on transactions as they occur throughout the year, and reports directly to the Board of Education (with the exception of reporting to the Superintendent on administrative matters). The qualifications and duties are determined by the Board of Education. The specific duties of the Claims Auditor, as outlined later in this pamphlet, generally revolve around approval of voucher packets for payment. The decision to appoint a Claims Auditor is made by the Board after careful consideration of the needs of their school district. The Claims Auditor assumes the powers and duties of the Board of Education in regard to approving or disapproving claims against the District, and retains that authority unless the Board terminates the position. Should a Claims Auditor be Appointed? XE "Claims Auditor:Decision to applint"  Section 1724 of the Education Law requires school districts to audit each voucher packet before it is paid. This task can be performed either by the Board of Education, or a Claims Auditor, depending on which method the Board prefers. Regardless of whether the Board or a Claims Auditor performs this function, the duties are the same. In making the decision as to whether or not to appoint a Claims Auditor, the Board should consider a number of factors: If the Board performs the claims audit function, all Board members must audit each and every voucher and be familiar with the auditing process. It is not permissible to assign the claims audit duty to a single Board member, a rotation of different Board members, or a subcommittee of the Board. Whenever a board of education audits bills and passes a resolution approving the schedule of claims, which orders the treasurer to pay, it is presumed that each board member has inspected each of the bills and found them to be in order. Since almost no District payments, with the exception of principal and interest, postage, freight and utility bills, can be paid prior to the approval of the Board or Claims Auditor, logistical problems, loss of discounts and delays can be avoided by appointing a Claims Auditor. Once a Claims Auditor is appointed, and until the position is abolished, the Board no longer has the authority to audit and approve District bills. This duty and responsibility has been delegated to the Claims Auditor. The Claims Auditor reports directly to the Board. Concerns are brought directly to the Board. Further the Board should direct the Claims Auditor to provide reports in the format that the Board desires, as well as establish the frequency of such reports. Appointing a Claims Auditor XE "Claims Auditor:Appointment"  If the Board determines that it is in the best interest of the school district to appoint a Claims Auditor, selecting the best person for the position becomes very important. There are several individuals that are prohibited by Education Law from being a Claims Auditor. They include: Board member(s) Clerk of the Board Treasurer Superintendent Person responsible for business management Purchasing agent Clerical or professional personnel directly involved in accounting and purchasing In addition to individuals prohibited by law from being appointed as Claims Auditors, other classes of individuals should also not be appointed, including people with: Any responsibility for business operations A family member with responsibility for business operations Contracts (other than employment contracts) with the district A family member with contracts (other than employment contracts) with the district Persons who can be appointed as Claims Auditors include: Residents or non-residents of the school district District employees who are not specifically prohibited Inter-municipal cooperative agreements Shared services to the extent authorized by Education Law 1950 Independent contractors As the Board considers the duties that will be assigned to a Claims Auditor, it will become clear that the person should report directly to the Board. They should not and cannot be involved in any other business or accounting functions within the district. The claims auditing process is an integral part of the districts internal control and a separation of duties must be maintained. It would be appropriate to bond the Claims Auditor, in the amount determined by the Board, at the time of appointment. The Claims Auditor should be believed to be a highly ethical individual with personal qualities that encourage them to have an inquisitive outlook. As with most tasks, a Claims Auditor who exercises experience and judgment can provide a service that is more than simply a clerical, cut and dried gathering of the appropriate paperwork. A Claims Auditor who is properly trained and motivated presents a protective shield for the districts resources. Duties of the Claims Auditor XE "Claims Auditor:Duties"  The Claims Auditor should be familiar with the legal requirements associated with purchases in a public school environment. For example: Bid Law -Section 103 General Municipal Law (GML) Bid threshold is based upon the annual aggregate quantities ($10,000 for purchases; $20,000 for public works), Board of Education Policy - Section 104-b GML governs quotations and requests for proposals for purchases not required to be bid, Lease and lease-purchase requirements are governed by the following sections of law: Real Property-Sections 1709(7); 2503; 403-b; 1726 of the Education Law (EL) Personnel Property-Sections 1725; 1725-a EL; 109-b GML Separate contracts for construction-Section 101 GML Exceptions to the bid law are purchases made through county contracts and some Office of General Services contracts. Professional service and consultant contracts. While it is easy to list many specific tasks that the Claims Auditor should perform, it is impossible to identify all of the items that a Claims Auditor should be evaluating. As with most tasks that have high value, the basic outline of the job needs to be supplemented with an inquisitive approach, application of experienced judgment and cordial skepticism, ready access to the Board for consultation on items that may not be clear, and unimpeachable ethical standards. The Claims Auditor should work with a checklist that is designed to highlight relevant Board policies. However, both the Board and Claims Auditor, to enhance it, and to make it responsive to ongoing developments in the District, should review the checklist frequently. The Claims Auditor should maintain an open mind, and continually seek to observe issues that may not be fully reflected in a static checklist. Some of the specific questions that a Claims Auditor should evaluate in regard to each expenditure are: Are pre-numbered pre-pressed forms used? (e.g., purchase requisitions, purchase orders) Does the voucher packet appear complete, in accordance with the Districts policy? Does the voucher packet include a purchase order, with an appropriate authorization signed by the Purchasing Agent? Suggested legend: I certify that there are moneys available to pay this purchase order, and the appropriation accounts have been encumbered for the amount of this purchase order. If the purchase order that supports the voucher packet is a blanket purchase order, is there documentation in the voucher packet indicating: the person authorized to make the purchase the initial amount of the blanket purchase order the dollar amount of prior purchases that have been made under it evidence that the blanket purchase order has not been exceeded? Does the voucher packet include a receiving report, with an appropriate confirmation signed by a Receiving Agent? Suggested legend: I certify that the work has been completed and/or the materials delivered satisfactorily to the District on the dates stated. Does the voucher packet include documentation indicating that the officer giving rise to the claim (Purchasing Agent) approved the voucher packet? Suggested legend: I hereby certify that this claim has been rendered in accordance with the respective bid, contract, agreement or accepted estimate, and that the work has been completed and/or the material delivered satisfactorily to the places and on the dates indicated above. Does the voucher packet include an original invoice? Is a distinction made between appropriate original invoices and inappropriate statements or duplicate copies? Does the invoice clearly describe the goods or services being purchased, and do the descriptions correlate with the goods or services contemplated by the purchase order? Is the invoiced price comparable to the estimated cost on the purchase order? Is sales tax excluded from the dollar amount of the invoice? If the expenditure is one in which requires competitive bidding, is there appropriate documentation that the item has been bid and purchased from the successful bidder? Is the invoice price equal to or less than the bid? Do contract provisions and board minutes support the invoice submitted for professional services? If the expenditure is one in which does not require competitive bidding, is there evidence that the Districts 104(b) policy has been complied with? Do the goods or services being paid for appear reasonable, independently of the standard approval documentation? For example, are utilities being paid only for school district addresses? Does the Claims Auditors background knowledge suggest the possibility of duplicate payment or policy violation? Does the vendor appear reasonable in light of the Claims Auditors background knowledge, including consideration of related parties? If the payment is for an investment, is the investment of a type that is permitted by law? If the payment is from a scholarship or other trust, is there documentation that the payment meets trust requirements? If the payment is made from federal funds, is there documentation that unique federal requirements for that type of payment have been complied with? Are expenditures reasonable public expenditures? Documentation of Claims Auditor Approval XE "Claims Auditor:Attestation"  The Board should designate the method that the Claims Auditor will use to document approval of expenditures. The two methods most commonly used are the certification of the warrant, in a manner similar to that traditionally used by Boards of Education, or the certification of each individual voucher packet. The choice of methods rests solely with the Board, but there are reasons to suggest that certifying each individual voucher packet may be the better method in many cases. The certification of each voucher packet: Subjectively seems to encourage the Claims Auditor to focus attention on each individual transaction. Expedites the payment process for individual payments that may be time-sensitive, such as to qualify for cash discounts. Collects all expenditure approval documentation in a single physical place, making it easier to ascertain that all steps in the approval process have been taken. Regardless of whether the Claims Auditor certifies the warrants or voucher packets; there should be an appropriate verification for the Claims Auditor to sign. One legend that has been suggested for voucher packets is To the District Treasurer: I hereby certify that this claim has been audited and allowed in the total amount of $______. You are hereby authorized and directed to pay the claimant the amount allowed, and charge to the proper fund. Internal Audit Function XE "Internal Audit Function"  School accountability legislation requires all school districts to establish an Internal Audit Function by July 1, 2006, and have it in operation no later than December 31, 2006, except for school districts with: Less than eight teachers, or General fund expenditures totaling less than $5-million in the previous school year, or Actual enrollment of less than 300 students in the previous school year Districts that claim any of those exemptions must certify to the Commissioner that the District meets the requirements for exemption each year. City school districts in cities with populations of 125,000 or more which have a previously existing Internal Audit Function created by special or local law do not have to replace that function if the Superintendent annually certifies to the Commissioner that the existing Internal Audit function meets or exceeds the requirements of school accountability legislation. Appointing Internal Audit Function Staff XE "Internal Audit Function:Appointment"  The Internal Audit Function can be staffed with: Existing District personnel, except those involved in the business operation Inter-municipal cooperative agreements Shared services to the extent authorized by Education Law 1950 Independent contractors Internal Audit Function Duties XE "Internal Audit Function:Duties"  The Internal Audit Function is responsible to the Board of Education. Although the Audit Committee established under school accountability legislation is charged with assisting the Board with oversight of the Internal Audit Function, the Audit Committees authority is advisory only. The duties of the Internal Audit Function fall into two broad categories: 1) Perform a risk assessment: Doing a risk assessment includes a review of financial policies and procedures, and testing and evaluating internal controls. The risk assessment must be reviewed and updated each year. Report to the Board of Education: The Internal Audit Function should make recommendations for improvements in controls, and provide the Board with an estimate of the time frame required to implement those recommendations. Internal Audit Function Risk Assessment Types of Risk XE "Internal Audit Function:Types of risk"  The Internal Audit Function should consider at least three types of risk: Risks relating to incentives or pressures Risks relating to opportunities to commit fraud, or make errors Risks relating to misguided attitudes Risks relating to incentives or pressures might relate to the observation that excessive emphasis is being placed on meeting budgetary targets, or that District administrators have an abrasive management style. Sometimes this type of risk is associated with rumors of pending layoffs, or staff perceptions that they are overworked and under compensated. Occasionally Internal Audit Function staffs background knowledge of individual staff members personal financial concerns can lead to discovery of risks. Risks can relate to opportunities present in the Districts environment, such as unusual or complex transactions that offer greater chances of errors or fraud concealment. Concentration of management in a few individuals, weak Board oversight, and high staff turnover can contribute to this type of risk. Poor segregation of duties can often provide opportunities for error or fraud. Some attitudes increase a school districts level of risk. Budgets may be created without adequate consideration of likely problems that need to be overcome. Boards may not demand corrective action for risk assessment or audit findings. There may be inappropriate management desire to artificially justify specific programs. Sometimes Internal Audit Function staff with a close knowledge of the District can observe unreasonable changes in an individual staff members life style, which may indicate misappropriation of assets. Internal Audit Function Risk Assessment - Evaluation XE "Internal Audit Function:Risk evaluation"  It is insufficient simply to determine that a risk exists. Risks that are discovered should be evaluated in three ways: Kind of risk Importance of the risk Likelihood of the risk It is important to identify the kind of risk, because that knowledge leads to methods of reducing the risk. For example, risks may include the risk that financial results will be manipulated, such as by recording revenue in a year prior or subsequent to the correct year so that fund balance will meet projected targets. Risks may also include the risk that individual assets will be stolen, and the risk of unintentional error. The importance of the risk that has been discovered helps with the assessment of how much mitigation effort is cost-effective. If the risk is large, then substantial effort may be appropriate, while small risks may not justify as much. Even if the risk could mask a large error or fraud, the Internal Audit Function should assess how likely it is that it will. The likelihood of the risk having an effect should be considered in connection with the importance of the risk, when determining the effort to be expended to mitigate the risk. Internal Audit Function Risk Assessment - Performance XE "Internal Audit Function:Risk assessment"  The performance of a risk assessment can be visualized in four steps: Gathering an overview Identifying risk areas Identifying specific risks Responding to identified risks The Internal Audit Function should begin by looking for broad topics that may suggest risk. For example, general journal entries, limited numbers of staff, and segregation of custody vs. accounting may be identified as potential areas to be looked at. Those areas can then be narrowed down into the risk areas that they contain. For example, general journal entries may present risk areas of unusual transactions, difficult transactions and transactions outside the normal approval process. Further investigation may reveal that a risk area, such as limited numbers of staff, may present specific risks, such as potential inability to produce a timely payroll if the payroll clerk is sick. Responses to specific risks depend on the risk that has been observed. The risk area of difficult transactions recorded by general journal entry may suggest the likelihood of errors due to misunderstanding of requirements, which could be responded to by providing additional training to staff members. In addition to risks that the Internal Audit Function staff may observe in their individual school districts, there are two risks that should be considered to be always present: Risk of improper revenue recognition Risk of management override Some risks, such as the risk of failure to comply with federal award requirements, can be highly specific, and vary depending on individual district situations. Internal Audit Function Risk Assessment Testing and Evaluating Internal Controls  XE "Internal Audit Function:Evaluating internal control"  One of the ways that risks can be mitigated is through effective internal controls. Each district establishes internal control systems that it feels work best. The tests of controls that the Internal Audit Function applies will depend to a large extent on the types of internal control systems that are in place. One way to test controls, and to observe how well they are working, is to test historical transactions, performing control steps that should have already been performed. Some examples could include: Controls over voucher packets Is there documentation of the three signatures required (purchasing agent, receiver, officer giving rise to claim)? Do the vendor and items purchased appear reasonable? Is the original invoice cancelled? Is there documentation that there was an available appropriation at the time the purchase order was issued, or when the blanket purchase order was used? Is there a check copy showing appropriate account coding? Has the payment been approved by the Board, or Claims Auditor? Are bidding, 104(b), federal award and similar requirements observed? Controls over general journal entries Is there a packet of support that documents the reason and amount of the journal entry? Has the journal entry been approved by a person who did not prepare it? Does the journal entry make sense to the Internal Audit Function staff? Controls over bank reconciliations Is the arithmetic correct? Does the bank balance agree to the bank statement? Upon inquiry, does it appear that the bank statement was received directly by the bank reconciler from the bank, and that the bank reconciler obtained the book balance personally from the general ledger? Are old uncleared items disposed of? Do reconciling items appear reasonably explained? Has the reconciler traced a test sample of cancelled checks and deposits to the accounting records? An Internal Auditor, who is familiar with the laws governing purchases and follows a finite checklist of duties, such as those listed above, can perform a valuable service to the District. But the value associated with this service can be significantly enhanced if the Board and Internal Auditor seek out additional aspects of school district operations to evaluate. This may vary depending on the dynamic nature of the transactions the District encounters and the types of internal controls that the Board seeks to implement. For example an Internal Auditor can inquire, many times on a periodic basis, into specific areas to determine whether correct procedures have been followed. Those areas could include, but are not limited to the following: New York State law defines the types of investments that are permissible for school districts. Disbursements for the purchase of investments could be scrutinized for compliance and proper collateralization. Endorsements on cancelled checks can be compared against intended payees for reasonableness. Expenditures from donated trust funds may be required to meet conditions imposed by the donor. For example, scholarships may be given to students who have made specific achievements, and may be limited to expenditure of income (rather than trust corpus). The Internal Auditor can investigate whether donor restrictions have been complied with. Expenditures of federal awards are subject to rules that are described in Office of Management and Budgets Compliance Supplement; grant letters, pass-through agency budgets, Circular A-87, and associated sources. Many of the requirements are unique to each type of federal grant, and may include non-financial, as well as financial, criteria. For example, Title 1 awards generally require the servicing of specific eligible individuals, and documentation that program costs meet federal mandates. The Internal Auditor could assure that documentation of compliance with those rules exists. Some types of expenditures lend themselves to evaluation of the reasonableness of their amount, based on surrounding facts. For example, if tuition is being paid for special education students, there should be acceptable documentation in the voucher packet to demonstrate that the charge per student and the number of students served is traceable to the number of students approved for the service. In addition, receipts collected by Extraclassroom groups may be proportionate to resale items purchased, or perhaps traceable to serial numbers of event tickets sold. Internal Auditors can investigate issues of this type. The Internal Auditor can test payroll registers to determine if the Board has individually appointed employees paid by the District and that their compensation is correct. The employee, attesting to all of the parameters required to determine each employee's compensation, should sign on behalf of the District and district salary notices. Sample selections of salary notices should be audited against board minutes and contract provisions to evaluate their completeness and be compared with actual payroll records. Some districts reimburse retirees for the Medicare cost deducted from their Social Security payments. An Internal Auditor could evaluate whether the District has obtained documentation that the retiree is still living, and continues to be eligible for reimbursement. Amounts of principal and interest paid on debt service could be calculated by reference to the underlying debt instrument, amortization schedules, and the Bond and Note Register. The Internal Auditor should be alert to any indications that suggest kickbacks or other unethical procedures. Internal Audit Function personnel must have an inquisitive, professionally skeptical attitude. No brief list can enumerate all of the tests that Internal Audit Function staff could apply. An Internal Audit Functions duties should not be limited only to expenditure items. There are many aspects of the Districts finances that an Internal Audit Function can evaluate throughout the year, using random or judgment samples of District transactions. The Board may wish to list specific tests that it would like to have performed on a periodic or random basis. Some of these could include: Review of general journal entries. General journal entries, by their nature, may encompass a wide range of infrequent or perhaps unexpected transactions. For that reason, they offer a greater than normal likelihood of error or misappropriation. Documented, knowledgeable oversight of the general journal can increase the Districts control over its resources. Evaluation of the logical relationship of revenues to associated expenditures. Some revenues may depend on quantities of underlying materials or services transacted. For example, revenues from repairing another districts bus fleet can be analyzed for reasonableness against the expenditures incurred. Internal Audit Function staff can perform live labor tests, which seek to determine that all employees who are paid actively perform the services for which the District pays them. On a random basis the auditor should distribute paychecks. Checks are released only on presentation of proper identification. The supervisor may not pick up checks. A continuous record is maintained of all unclaimed wages. While the payroll certification process is designed to address these issues, observation of school districts over many years discloses that there are cracks in this system that need to be backstopped. Internal Audit Function can review bank reconciliations on a test basis. Bank reconciliation by an individual who is independent of the business office, who obtains bank statements directly from the bank, and who obtains book balances directly from the general ledger is an extremely important internal control. This control can be strengthened further by oversight from the Internal Audit Function. Invoices should be cancelled at the time of payment, as a control against duplicate payment. The Internal Audit Function can evaluate the completeness with which the District performs this task. Are summary reports that the District files traceable to detailed records? For example, do the totals reported on quarterly payroll tax returns agree with payroll registers? Do payroll certifications agree, in the aggregate, with payroll expense reported in expenditures? Revenues can be agreed to third party reports. For example, tax collections can be compared with the Tax Collectors report, and State and federal aid can be compared to summaries of electronic funds transfers. The Districts fixed asset inventory can be tested on a sample basis to assure that the assets still exist, and are in satisfactory condition. Comparing Treasurers Receipts to entries in the cash receipts book can help to assure that all resources that should be received are actually deposited by the District. If the District uses a non-business office person to open mail and log incoming receipts, those records can be compared to the cash receipts book, as well. Inquiring into daily procedures that may fall into dysfunctional patterns, such as inadequate physical security for unused blank checks and purchase orders, failure of the check signer to control the log and key to the check-signing machine and improper storage of investment securities, can protect District resources. The role of the Internal Audit Function can include a periodic audit of the check signing process to insure safety precautions for district checks and for the check signing device is maintained. The following safety precautions are suggested as policy framework and audit procedures, which should be verified by the Internal Audit Function: The board of education with the assistance of the business official and the chief administrative officer of the district should develop a written policy governing the use of the facsimile check-signing machine. This policy should include the following points: The treasurer should retain a key to the device and should not surrender or delegate that responsibility to any other individual. The Treasurers signature should not be embedded into a computer program or out of the physical control of the treasurer. The treasurer should be present and should control the affixing of his/her signature when checks are run. The check-signing machine should be maintained in a protected area. This may be done by locking the machine and placing it in a safe place and by removing the plate and placing the plate in a safe place. The treasurer will record the first and last number of checks run, the date of the run, the sequential number of voided checks within each run and place the signature of the treasurer on the check-signature register. The Internal Audit Function can audit the register. This audit should be conducted at intervals approximating the payroll periods and warrant period to verify the accuracy of the register against the machine's tallied counter. The signing of blank checks should be expressly forbidden. All void or spoiled checks should be marked and retained. Reconciliation's should be made promptly (if possible, reconciliation should be completed the same day that cancelled checks are received from the bank). Checks and the check-signing machine should not be available to unauthorized individuals. (If possible, these should be kept in a locked vault) If checks are written at a bank or BOCES using data processing equipment, the unsigned checks together with the corresponding warrant or payroll should be returned to the school district for reconciliation and signing. Under no circumstances should the bank or the BOCES retain the signature plate and key. Internal Audit Function Report to the Board of Education XE "Internal Audit Function:Reporting"  The Internal Audit Functions report to the Board of Education should identify three characteristics of each fraud risk, or risk of error, that is discussed: Overall implications for district internal controls Targeted response to specific risks Consideration of pervasiveness The nature of some risks suggests that the District should take a systemic approach in its corrective action plan. This type of risk has overall implications for District internal controls. For example, the Board may feel that appropriate solutions would be to obtain more training for District staff, or ensure that supervisors stress the importance of accuracy and avoiding carelessness. Some risks may cause the Board to feel that more investigation should be done to seek out other risks that the known risks imply might be present. Some risks are very specific, and require targeted responses. Some of the responses might be pointed at mitigating the specific risk, itself, such as by cross-training staff to reduce the danger that temporary illness of a key staff member might compromise the Districts operational ability. But targeted responses are not always aimed at the risk. For example, the discovery of a risk such as the observation that several invoices involving a particular functional area were paid without appropriate receiving reports might cause the Board to direct the Internal Audit Function to examine more invoice packets to see if what was perceived as a small risk might actually be larger. Failure to discover risks might prompt the Board to inquire whether the Internal Audit Functions testing procedures were comprehensive enough, or applied at correct times. When the Board considers the pervasiveness of risks, it is seeking to understand the upper limit on potential damage. For example, if the Internal Audit Functions testing discloses that the Title 1 Coordinator is not adequately familiar with federal grant requirements, and if the Title 1 Coordinator also supervises several other federal grants, inquiry might be initiated to determine the persons level of familiarity with the rules for the grants they manage, other than Title 1. The Internal Audit Function should provide the Board with a suggested road map to a corrective action plan for each disclosed risk, including: Clear description of the observed risks Outline of a plan for mitigation Proposal for a reasonable timeline in which the mitigation plan can be accomplished If the Internal Audit Function determines that general journal entries are not supported by complete documentation, the corrective action plan could be that administrative policy should require a support packet for each journal entry, containing the reason for the entry, documentation of the amount, and supervisory approval. Since the corrective action plan can be addressed by administrative policy, the accomplishment timeline could be immediate. If the Internal Audit Function determines that elective payroll deductions are not always supported by employee authorizations, the corrective action plan could be for the Superintendent to direct the Payroll Clerk to obtain signed employee authorizations for all elective payroll deductions. Consultation with the Payroll Clerk could enable the Internal Audit Function to report to the Board that the authorizations are all expected to be on file by the end of the month. Audit Committee XE "Audit Committee"  School accountability legislation requires each school district to establish an Audit Committee, except districts employing fewer than 8 teachers. The purpose of the Audit Committee is to oversee and report to the Board of Education on the annual audit, as well as assist with understanding and implementing corrective action plans. Audit Committees may be composed of the Board of Education as a whole. They must include three or more people, who may or may not be District residents or Board members. XE "Audit Committee:Appointment"  Several categories of people are ineligible to be on the Audit Committee: District employees Previous or current contractors to the District Owners of companies providing goods or services to the District Family member of an employee or contractor providing goods or services to the District The Board of Education needs to clearly enforce the concept that the Audit Committee reports to the Board, and no recommendations provided by the Audit Committee may substitute for any required review and acceptance by the Board. The Audit Committee is charged with specific duties, including: XE "Audit Committee:Duties"  Recommending the appointment of the external auditing firm Meeting with the external auditor prior to commencement of the audit Review and discuss the external auditors risk assessment Review the draft audit report and management letter Assist the Board in interpreting the draft audit report and management letter Recommending accepting the external audit report Review corrective action plans and assisting with implementation Monitor performance of the Internal Audit Function Some factors the Audit Committee may consider when it recommends an external auditing firm could include: XE "Audit Committee:Recommending audit firm"  Proper licensing of the auditor Experience of other school districts with this firm Quality of experience possessed by the firm and staff members assigned to the District Continuing education pursued by firm staff Results of triennial Peer Review of the audit firm Type of audit program used Whether the firms schedule for fieldwork is acceptable to the District Extent that the firm intends to request supporting work from District staff Cost The Audit Committees meeting with the auditor prior to commencement of the audit should include a discussion of the auditors plan for the audit, and the auditors risk assessment. The Audit Committee may read the proposed engagement letter, and drafts of the anticipated representation letters and audit opinions. The Audit Committee should alert the auditor to environmental changes, such as new people in key staff positions, known defalcations, or loss of a major taxpayer. The auditor should be able to describe the firms risk assessment, and explain in general terms how the risk assessment impacts audit planning. The Audit Committee should be aware that the auditor might not wish to provide great detail in this area, because it could compromise the requirement that audit testing be unpredictable by the auditee. The management letter is a free form document that is written uniquely for each audit. However, there are some elements that appear in many management letters, including XE "Audit Committee:Review management letter" : Discussion of emerging topics in school district accounting and auditing Specific communications required by professional standards Observations targeted specifically at District accounting procedures and internal controls When the Audit Committee assists the Board to review the audited financial statements, it may help to break the financial statement package down into its component parts. There are generally about eight parts of a financial statement package, depending on the circumstances XE "Audit Committee:Review financial report" : Managements discussion and analysis Independent auditors opinions Numeric portion of the financial statements Financial statement notes Supplementary information Federal award program data Extraclassroom Fund data Management letter Reviewing corrective action plans and assisting with their implementation can be one of the most valuable functions of the Audit Committee. The focus of the corrective action plans many times is directed more at reducing errors, or making them less likely, than at reducing fraud. There may be several corrective action plans, including ones for:  XE "Audit Committee:Review corrective action plan"  Independent audit Federal Single Audit Internal Audit Function report Examinations by the Comptrollers Office Performance reviews by federal or State program authorities Conclusion Whether or not to appoint a Claims Auditor is a decision that each Board of Education needs to make for their own school district. Appointment of the Internal Audit Function and Audit Committee is mandatory in most cases. In all events, the Board should remain intimately involved with their districts financial affairs, from the initial budget data, through analysis of actual results that are obtained. Appointment of highly ethical, inquisitive individuals, to whom broad verification duties are assigned, who are not otherwise involved in business office functions, who are given appropriate training, and who report regularly and directly to the Board of Education can increase the effectiveness of the Districts internal control system. One result of testing procedures performed by the Claims Auditor, Internal Audit Function and Audit Committee may be the detection of fraud and error. A more positive result would be providing clear documentation that District staff members involved in educational finance are professionally skilled and ethical people. Index  INDEX \e " " \c "2" \z "1033"  Audit Committee 17 Appointment 17 Duties 18 Recommending audit firm 18 Review corrective action plan 19 Review financial report 19 Review management letter 19 Claims Auditor 2 Appointment 4 Attestation 7 Decision to applint 3 Duties 5 Internal audit activities 2 Internal Audit Function 8 Appointment 9 Duties 9 Evaluating internal control 11 Reporting 16 Risk assessment 11 Risk evaluation 10 Types of risk 9  Purchasing Discovered ConditionClaims Auditor / Internal AuditorCorrective action planResults of corrective actionMonthly budget status reports disclose that purchase orders are sometimes being allowed to exceed available budgetary appropriations.Requests that budgetary transfer be made before the claim can be approved.The Purchasing Agent is re-emphasizing his/her check for an adequate available budgetary appropriation, prior to issuance of a purchase order. Building administrators are to refer to the budget status report for their building to ensure adequate budgetary appropriations. Where insufficient appropriations are indicated a budget transfer request form should accompany the purchase request. Supplies were ordered directly from vendor B by a staff. The Purchasing agent did not initiate the purchase and further vendor A, not vendor B was awarded the bid for the supplies purchased. A letter was sent by the Purchasing Agent to all staff members and all offending vendors stating that all purchases that were not initiated by the Purchasing Agent would not be paid by the district. The Board of Education amended its purchasing policy to reinforce compliance with the governing laws and regulations and the sole authority of the PA to obligate the district to a purchase. It was further stipulated that willful violation of this policy would result in the denial of payment by the district. Payments should be based on original invoices, not on packing slips or statements.The claim will be held until original invoice can be produced.Vendor was contacted & requested to provide both packing slips and the original invoice.The District paid the vendor upon receipt of the invoice, and the issue appears resolved.Equipment items were purchased that cost less than the $10,000 bid threshold, while the annual aggregate purchases of the same or similar items far exceeded the bid threshold.The Purchasing Agent shall ensure that all the same or similar items purchased during the school year that equal or exceed the bid threshold are grouped together for bidding purposes. Also inventory levels will need to be included with all purchase requests.It is hoped that the existence of this new control procedure will ensure compliance with the bid law and ensure a better system for inventory control. In the process of preparing the initial inventory, staff noticed that a digital camera costing approximately $400 and a glockenspiel costing approximately $1,800 and 23 portable computers costing approximately $25,300 had become misplaced.Purchasing agent will develop an inventory system that will ensure better control of the districts equipment.The BOE will develop policy requiring a beginning inventory for all classroom and department areas and end of year inventory submitted by responsible staff members that includes all pertinent information on the ultimate transfer, replacement or disposition of equipment. It is hoped that this will reduce the likelihood that such losses occur in the future.A 7-year installment contract for 9 small fax machines was submitted for audit and payment. The contract length seemed unreasonable. Further there was no evidence that the contract was authorized by the PA, approved by the voters or that the contract had been bid. The Claims Auditor will hold the claim until the reasonableness and legality of the contract can be supported. The purchasing agent referred the issue to the school attorney for resolution. Pending Travel and Conference Expenses Discovered Condition Claims Auditor / Internal AuditorCorrective action planResults of corrective actionSales tax added on to a restaurant bill for meals consumed on authorized business travel.The Claims Auditor reduced the meal reimbursement by the amount of the sales tax. The purchasing agent advised the Claims Auditor of Comptroller's opinion # 80-163 which states that sales tax added to a bill for meals consumed while on authorized business travel is reimbursable by the district.The meal voucher was approved, as submitted and no further action was required.Travel advances are not reconciled with actual expenses incurred. Advise staff that a refund is required to be made to the district for all expenditures not supported by original invoices. Designed new travel advance form: Section 1 summarizes the purpose of travel, place and amount. Section 2 reconciles the amount of the advance to invoices and cash returned after travel is completed. The new form is now filed in the voucher packet for the travel advance. The form was modified to advise that a refund from staff members to the District would be required for all expenditures not supported by original invoices.  Gift of Public Funds Discovered Condition Claims Auditor / Internal Auditor Corrective action planResults of corrective actionThe District sent a fruit basket to the District Clerk who was recuperating in the hospital. The claim is rejected, as it is an unallowable gift of public funds.Contributions are to be solicited from each Board member for such purchases The Board did not previously associate such purchases as a gift of public funds. The issue appears resolved.Request to approve $5,000 payment to staff member in support of community Football leagueThe claim is rejected.General fund appropriations will not be used to fund community Football leagueStaff member was informed that the school district funds will not be used to support community Football league Utilities Discovered Condition Claims Auditor / Internal Auditor Corrective action planResults of corrective actionVoucher packets for utility bills routinely do not show evidence of receipt of the utilities in the voucher packet.The Purchasing Agent will not approve voucher packets until there is documentation of receipt of goods or services attested to by a board appointed staff member.The Corrective Action Plan for this issue is in place, but still requires action by the Board to appoint specific individuals as authorized receivers before it can be fully implemented. Capital Discovered Condition Claims Auditor / Internal Auditor Corrective action planResults of corrective actionBids were solicited for the installation of an elevator, but the lowest bidder was not selected.Future Board resolutions accepting other than the lowest bid will include language that states the reason the Board determined not to select the lowest bidder. The elevator was purchased partly with federal grant funding. Since the lowest-bidding contractor appeared on GSAs Excluded Parties List System of suspended or debarred vendors, the District was unable to use that vendor.  Travel and Conference Expenses Discovered Condition Claims Auditor / Internal Auditor Corrective action planResults of corrective actionThe Superintendent is approving his own travel advances and expenses.Advise Board that poor internal controls exist when one is allowed to approve his/her own travel advances and expenses.Modify Board policy so that the delegation of authority to approve travel advances & expenses excludes those associated with the Superintendent. The Superintendent continues to approve the travel advances and expenses of staff, while the Board of Education retains authority to approve same expenses for the Superintendent.Separate vehicles are sometimes rented for each staff member attending a conference, possibly causing unnecessary District expense. Staff has been requested to be alert to the potential savings in this area. The Account Clerk will review all travel reimbursement requests to seek to reduce duplication of costs.An approximate $500 reduction in potential costs to the District has been achieved in the 3 months that this policy has been in effect. Utilities Discovered Condition Claims Auditor / Internal AuditorCorrective action planResults of corrective actionLong-distance telephone charges are regularly incurred without documentation of their benefit to the District.The Superintendent directed the Superintendent of Buildings and Grounds to arrange for District telephones to require either an access code card or routing through the central switchboard for long-distance calls. The Account Clerk will scan future phone bills for unrecognized cell and long-distance calls and follow up as deemed appropriate. The issue appears resolved. However the BOE requested that the Claims Auditor provide a list of all cell phones provided by the district and to include the specific plan purchased. The PA was directed to evaluate available cell phone plans, pre-paid phone cards and list the justification submitted when requesting a cell phone. This information will be used by the BOE in the development of a cell phone policy.  Federal Funds Discovered Condition Claims Auditor / Internal Auditor Corrective action planResults of corrective actionThe District's Title 1 Coordinator initiates most Title 1 expenditures, but the Business Official, raising the potential for lack of compliance with grant requirements, charges some expenses to Title 1.All future charges to the Title 1 project for equipment and supplies will be based on requisitions supplied only by the Title 1 Coordinator, who will scrutinize them for compliance with grant requirements. This issue appears resolved. Salaries and Payments to Retirees Discovered Condition Claims Auditor / Internal Auditor Corrective action planResults of corrective actionMedicare reimbursements contractually owed to retired staff members do not document the continued qualification of the retiree.The Account Clerk will send a positive confirmation request to each qualifying retiree, and will file the returned confirmation in the voucher packet.One retiree was concerned that the Districts requirement of an annual confirmation of continued qualification was not contractually allowable. District legal counsel advised that the District was entitled to confirm that the retiree was alive.Material discrepancies were identified between the salaries paid 6 custodial workers and the negotiated salary schedule. A repayment schedule has been agreed upon. The amount due the district will be deducted from the employee's paycheck based on the mutually agreed upon payment schedule. Period audits of payroll will be conducted.Banking and Investments Discovered Condition Internal AuditorCorrective action planResults of corrective actionThe Districts Bond and Note Register did not contain a record of debt parameters, or a copy of the BAN on which interest was paid.Amount of interest payment can not be verifiedThe firms management letter advised that the Bond and Note Register should be maintained up to date, showing the conditions necessary to compute payments on each outstanding bond and note, and supported with copies of the underlying debt instruments.The Bond and Note Register has been updated, and original cancelled notes and copies of unmatured notes are now filed with it.Capital Discovered Condition Claims Auditor / Internal AuditorCorrective action planResults of corrective actionThe prior year management letter provided to the District by its independent auditors advised that Capital Fund budget status reports should be prepared separately by individual project, but this recommendation has not been followed for current year expenditures, and it is not possible to determine from the account coding which project will be charged for each expense. The Superintendent has directed the Business Official to consult with the Districts financial advisors, to design a policy for these transactions, which meets both applicable law and prudent management concepts.The Districts financial advisors disagree with the Districts independent auditing firm, and advise that commingling of project budgets, revenues and expenditures is acceptable. Accordingly, this issue is not resolved. The Business Official and auditors agree that better budgetary control could be achieved by separating each project. Additionally, as a byproduct of pro-forma computations to separate the expenditures to date, the Business Official has determined that one of the Capital Projects may be overspent by approximately $77,000. Accordingly, the Superintendent and Business Official are discussing what policy approach to recommend to the Board.   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