1. Auditor of Public Accounts Update Bill Cole, Deputy Auditor Auditor of Public Accounts May 8, 2006

2. Program Topics NCAA Audits and Schedules NCAA Audits and Schedules Financial Reporting Financial Reporting Standards Update Standards Update

3. NCAA Audits and Schedules FY05 – First year of new agreed-upon procedures FY05 – First year of new agreed-upon procedures More coordination between Athletics, Finance, Foundations, and Auditors More coordination between Athletics, Finance, Foundations, and Auditors Schedule classification issues Schedule classification issues

4. NCAA Audits Finance should work closely with Athletics on the NCAA schedule Finance should work closely with Athletics on the NCAA schedule Foundations should be contacted early to provide “on behalf of” payments Foundations should be contacted early to provide “on behalf of” payments Report deadline remains at January 15 Report deadline remains at January 15

5. NCAA Schedule Entrance Conference done with Financial Reporting and Athletics Entrance Conference done with Financial Reporting and Athletics Schedules need to be done more timely in order to meet deadlines Schedules need to be done more timely in order to meet deadlines Auditors may be performing some work in advance of year end Auditors may be performing some work in advance of year end

6. NCAA Schedule EADA = NCAA = AE True or False ?

7. NCAA Schedule

8. Answer: False, the federally required EADA schedule should reconcile to the NCAA schedule which should reconcile to the Auxiliary Schedule as shown in the financial statements.

9. Other Clarifications Overhead Recovery Overhead Recovery direct vs. indirect allocation direct vs. indirect allocation Facilities & Administrative Support? Facilities & Administrative Support? Administrative Support Administrative Support scholarships scholarships academic advising academic advising

10. Other Clarifications On behalf payments On behalf payments Foundation Support Foundation Support Donations in exchange for ticket sales Donations in exchange for ticket sales Cars Cars Business use Business use Personal use Personal use

11. Financial Reporting Management’s Discussion and Analysis Management’s Discussion and Analysis Securities Lending and SNAP Securities Lending and SNAP Statement of Cash Flows Issues Statement of Cash Flows Issues Implementation of GASB 40 Implementation of GASB 40 Financial Statement Auditing Issues Financial Statement Auditing Issues

12. Management’s Discussion and Analysis (MD&A) Include better comparisons and analysis Include better comparisons and analysis Show variances in statement summaries Show variances in statement summaries Eliminate outdated information Eliminate outdated information Have available for audit review more timely Have available for audit review more timely

13. MD&A Example One The notable changes in revenues include an increase in grants and contracts of $3.5 million and other operating revenues of $3.2 million. Both student tuition and fees and auxiliary revenues are presented net of scholarship allowances. In both categories, the amount of revenue dedicated to scholarships increased, giving the appearance of decreasing revenues. The increase in student tuition and fee scholarships was approximately $1 million while the auxiliary enterprise increase in scholarships was approximately $1.3 million. The notable changes in revenues include an increase in grants and contracts of $3.5 million and other operating revenues of $3.2 million. Both student tuition and fees and auxiliary revenues are presented net of scholarship allowances. In both categories, the amount of revenue dedicated to scholarships increased, giving the appearance of decreasing revenues. The increase in student tuition and fee scholarships was approximately $1 million while the auxiliary enterprise increase in scholarships was approximately $1.3 million.

14. MD&A Example Two Operating revenues increased 4.0 % for fiscal year 2005. This is due primarily to a 4.8 % increase in total tuition and fee revenues. This reflects tuition and fee rate average increases of 5.3 %. Similarly, room and board rates increased an average of 6% accounting for most of the increased auxiliary enterprise revenue. Revenue for sponsored programs increased 7.2%. The federal government continues to provide substantial amounts for research programs, but that funding increased at a lower rate than the 14.3% in the prior year. Operating revenues increased 4.0 % for fiscal year 2005. This is due primarily to a 4.8 % increase in total tuition and fee revenues. This reflects tuition and fee rate average increases of 5.3 %. Similarly, room and board rates increased an average of 6% accounting for most of the increased auxiliary enterprise revenue. Revenue for sponsored programs increased 7.2%. The federal government continues to provide substantial amounts for research programs, but that funding increased at a lower rate than the 14.3% in the prior year.

15. Securities Lending and SNAP Securities lending does not have an effect on cash flow therefore SHOULD NOT run through the Statement of Cash Flows. Securities lending does not have an effect on cash flow therefore SHOULD NOT run through the Statement of Cash Flows. Show Collateral Held for Securities Lending as a separate line item on SNA and do not include in SCF cash total. Show Collateral Held for Securities Lending as a separate line item on SNA and do not include in SCF cash total.

16. Securities Lending and SNAP The State Non-Arbitrage Program (SNAP) is treated as an investment and should run through the Statement of Cash Flows. The State Non-Arbitrage Program (SNAP) is treated as an investment and should run through the Statement of Cash Flows. Bond proceeds should be shown as a gross amount even if it is immediately invested in SNAP. Bond proceeds should be shown as a gross amount even if it is immediately invested in SNAP.

17. Statement of Cash Flows Issues Timeliness of preparation Timeliness of preparation Documentation of preparation Documentation of preparation Reasonableness of amounts to other amounts in the statements Reasonableness of amounts to other amounts in the statements Expenditure matrix Expenditure matrix Purchases of capital assets Purchases of capital assets Bond proceeds and payments Bond proceeds and payments

18. Implementation of GASB 40 Effective for Fiscal Year 2005 Effective for Fiscal Year 2005 New disclosures for credit risk and interest rate risk New disclosures for credit risk and interest rate risk Compare disclosures among Universities Compare disclosures among Universities Footnote amounts may not agree to SNA, but should be reconciled Footnote amounts may not agree to SNA, but should be reconciled

19. Financial Statement Auditing Issues Financial statement preparation process needs to documented Financial statement preparation process needs to documented Internal control Internal control Sarbanes – Oxley Sarbanes – Oxley Succession planning Succession planning

20. Financial Statement Auditing Issues Statements and Footnotes Statements and Footnotes Clear trail from accounting system to statements Clear trail from accounting system to statements Adequate documentation available from the start of the audit Adequate documentation available from the start of the audit Use of the fluctuation analysis as part of the financial statement preparation process Use of the fluctuation analysis as part of the financial statement preparation process Invested in net assets, net of related debt Invested in net assets, net of related debt

21. Financial Statement Auditing Issues Scheduling and Specialties Scheduling and Specialties Research & Development – summer and fall Research & Development – summer and fall Student Financial Aid – summer and fall Student Financial Aid – summer and fall Payroll and Revenue – interim work Payroll and Revenue – interim work Acquisitions and Capital Assets – specialists’ schedules Acquisitions and Capital Assets – specialists’ schedules

22. Standards Update Impairment of Capital Assets GASB 42 Impairment of Capital Assets GASB 42 Proposed changes to SAS 60 Proposed changes to SAS 60 Proposed changes to SAS 61 Proposed changes to SAS 61

23. Impairment of Capital Assets (GASB 42) Effective for FY06 Effective for FY06 Capital assets should be considered impaired if both of the following conditions exist: Capital assets should be considered impaired if both of the following conditions exist: The decline in service utility is large in magnitude The decline in service utility is large in magnitude Event or change in circumstance is outside normal life cycle Event or change in circumstance is outside normal life cycle

24. Impairment of Capital Assets (GASB 42) Impairment can be caused by physical damage, legal or environmental factors, technological changes, changes in manner of use and construction stoppage. Impairment can be caused by physical damage, legal or environmental factors, technological changes, changes in manner of use and construction stoppage. Write down the value of impaired assets to their current value Write down the value of impaired assets to their current value May include buildings not in use or in a lesser use May include buildings not in use or in a lesser use

25. Proposed Changes to SAS 60 Proposed changes will increase the span of the control-related matters that should be reported by an independent auditor Proposed changes will increase the span of the control-related matters that should be reported by an independent auditor Material Weakness is expanded and Reportable Condition becomes Significant Deficiency Material Weakness is expanded and Reportable Condition becomes Significant Deficiency An audit adjustment is an indicator of a Material Weakness An audit adjustment is an indicator of a Material Weakness

26. Proposed Changes to SAS 60 Current Model Proposed Model Material Weakness Reportable Condition Significant Deficiency Verbal Issue Other Control Deficiency Other Control Deficiency

27. Material Weaknesses Strong indicators of a material weakness in internal controls: Ineffective internal control over financial reporting. Ineffective internal control over financial reporting. Restatement of previously issued financial statements. Restatement of previously issued financial statements. Audit adjustments to current financial statements. Audit adjustments to current financial statements. Ineffective internal audit function. Ineffective internal audit function.

28. Material Weaknesses Ineffective regulatory compliance function. Ineffective regulatory compliance function. Identification of fraud by senior management. Identification of fraud by senior management. Failure by management to correct a previous significant deficiency. Failure by management to correct a previous significant deficiency. An ineffective control environment with various control deficiencies. An ineffective control environment with various control deficiencies.

29. Proposed Changes to SAS 61 Proposed changes will require auditors expand their communications with the Board of Visitors or Audit Committee Proposed changes will require auditors expand their communications with the Board of Visitors or Audit Committee May require the use of closed sessions without management present May require the use of closed sessions without management present May require discussion of the scope of the audit in advance of the field work May require discussion of the scope of the audit in advance of the field work

30. New Communicated Matters How the auditor will address risk of material misstatement How the auditor will address risk of material misstatement Auditor’s approach to relevant internal control Auditor’s approach to relevant internal control Materiality in planning and executing an audit Materiality in planning and executing an audit Use of internal audit work and how external and internal auditors work together Use of internal audit work and how external and internal auditors work together

31. DOA Directive Comptroller’s Directive No. 1-06, “Financial Statement Template Preparation for Higher Education Institutions” should become available this Month.