Preparing for a State Audit

Preparing for a State Audit November 4, 2008

North Carolina State Education Assistance Authority Dr. Steve Brooks

Executive Director

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Preparing for a State Audit

Contact InformationCheryl Sauls

Quality Assurance Manager

North Carolina State Education Assistance Authority

P.O. Box 14103

Research Triangle Park, NC 27709-4103

Phone: (919) 248-4637

Fax: (919) 248-6637

Email: [email protected]

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• What words come to mind when you learn the Auditor will be arriving to conduct an on-site program review?

• Anxiety• Fear • Investigation• Money• Pulling documentation• Record Retention• Review

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Partnership

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Objective• Define Audit• Disclose the Purpose of a State Audit• Discuss the Types of Audits and Reviews• Discuss the Possible Programs to Review • Discuss Frequently Cited Audit Findings &

Observations• Discuss Best Practices• Discuss How to Guard Against Findings &

Observations• Wrap Up

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What is an Audit?• Audit originated from the Latin word auditus, “a

hearing,” referring to the hearing of oral evidence as one official would verify records with those of another.

• Audit is a formal, often periodic examination and testing of accounts or financial records of an individual, business, institution, organization, or government entity to verify the accuracy and completeness of the records or their compliance with another set of standards.

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Purpose

• To provide verifiable information to management as to whether or not their goals and objectives are being met.

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• Why the Emphasis?

WorldCom files largest bankruptcy ever

Results of the Emphasis:

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Sarbanes-Oxley Act

• Applies mainly to SEC companies– Purpose is to rebuild trust in America’s corporate sector

• Some aspects would benefit nonprofits– Audit committee composed of persons knowledgeable about

accounting

• Code of ethics policy• Whistleblower policy• Records retention policy

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North Carolina G.S. 143C-6-23 • G.S. 143-6.2 Effective 7/1/2005• G.S. 143C-6-23 Effective 7/1/2005• Includes non-profit and for profit non-governmental entities• Exempts local government agencies and state entities • Requires

– Conflict of interest policy– Funding agency to identify reporting requirements– Funds must be spent for appropriate purposes

• Incorporates cost principles for first time• Establishes Oversight Committee

OSBM OSC DHHSOSA AG

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Roles of Oversight Agencies

• Office of State Budget and Management– Responsible for rules administration

• Office of the State Auditor– Compile report to OSBM for all funds granted to non-

government entities– Review financial/audit data from grantees– Audit of agency monitoring practices

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Roles of Oversight Agencies

• Office of State Controller– Oversee agency disbursement

• Office of the Attorney General – Assist with recovery of funds, as needed

• Oversight committee– OSBM, OSC, OSA, Attorney General, Agency Representative

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New Rules – Summary

• Rules administration – OSBM– Establishes authoritative guidance in North Carolina

Administrative Code

• Designed to increase consistency of reporting • Applicable to grants• Grantee and subgrantee responsibilities • Establishes new reporting thresholds• State agency responsibilities

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Grantee & Subgrantee Responsibilities

• Spend state funds for specified purpose• Comply with reporting requirements to funding

agency and/or OSA• Maintain adequate records

– Open to examination by funding agency and OSA

• Hold subgrantee accountable

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State Agency Responsibilities

• Notify grantee of applicable reporting requirements• Register with OSBM’s Community Resources

Information System (state grant database)• Follow disbursement procedures established by

OSC and OSBM• Provide list of grantees receiving state funds to

OSA and OSBM • Perform monitoring and oversight functions to

assure accountability • Stop disbursements to those in non-compliance

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Types of Audits

• GAAP Audit– Generally accepted accounting principles audit– General purpose audit

• Yellow Book or GAGAS Audit– Required for grantees receiving more than $500,000

• A-133 Federal Compliance Audit– Required if $500,000 in federal expenditures– Can be substituted for “yellow book” audit under G.S. 143-6.2

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“Yellow Book” Audit

• Government Auditing Standards• Requires auditor to issue opinion concerning

– Internal Controls– Compliance

• Requires schedule of awards– Federal and state funds should be identified separately

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• A-133 Federal Compliance Audit

The OMB A-133 Compliance Audit is a large and extensive circular guide created by the Office of Management and Budget (OMB) which sets forth standards for obtaining consistency and uniformity among Federal agencies for the audit of States, local governments, and non-profit organizations expending Federal awards.

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Types of Reviews

• Compliance • Guaranty Agency • Investigative• Lender/Servicer • Program

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Programs to Review • Board of Governor’s Dental Scholarship Loans• Board of Governor’s Medical Scholarship Loans• Future Teacher’s of North Carolina• Golden LEAF• Health, Science, and Mathematics Loans• North Carolina Education Lottery • Millennium Teacher Scholarship Loans • North Carolina Legislative Tuition Grants• North Carolina Reach Program• North Carolina Student Incentive Grant Program

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Programs to Review • Nurse Education Scholarship Loans• Nurse Educators of Tomorrow Scholarship Loans• Nurse Scholars Program – Masters• Nurse Scholars Program – Undergraduate• Penn Family Scholarship• Physical Education – Coaching Scholarship Loan • Prospective Teacher Scholarship Loan • Principal Fellows Program • State Contractual Scholarship Fund • Teacher Assistant Scholarship Program

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Programs to Review • Increasing Medical Educational Opportunities

Grant• John B. McLeandon Scholarship• Optometry Scholarship Loan Program • Social Workers Educational Loan Fund• UNC Campus Scholarship • UNC-Need Based Grant Program• Etc.

– This list may not be all inclusive.

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Program Review Reference Sources

• Common Review Initiative Guide• Guaranty Agency Review Guide• Lender / Servicer Review Guide• Program Audit Compliance Guide• Program Rules & Regulations• Statutes• Etc.

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Program Records• Academic Transcript• Account Reconciliation • Applications • Award Letter • Certification Date• Cost of Attendance• Data Sheet• Disclosure Statements • EFT Procedures• High School Transcript• Organizational Chart• ISIR• Payment Roster• Promissory Note• SAP • Student’s Account Record• Refund Procedures

– Additional Documents as Required to Verify Information Submitted on an Application, Timely Processing of Disbursements, etc.

– This list may not be all inclusive.


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Contracts and Monitoring• Contracts that

– Define specifics: expected outcomes, source of funds, accounting information

– Requires reversion of unexpended funds upon termination – Spells out audit oversight

• Granting agency must perform monitoring and evaluations– Obtain performance measurements– Evaluate program results– Determine whether to continue – Implement sanctions for noncompliance

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Preparing for a State Audit What Is Monitoring?

On-going monitoring Observations Recording

Regular

Activities

Regular

Activities

On-going monitoring Progress check Performance

improvements

Regular

Activities

Regular

Activities

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Monitoring

• Done on regular and consistent basis

– Typically every two years

• Policies and processes should

– Ensure grant and scholarship terms adhered to

– Ensure grants and scholarships are handled appropriately

– Ensure records show source of funds

– Allow management to evaluate operational effectiveness

– Identify and report deficiencies• Include third party evaluations

– Based upon assessment of risks– Effectiveness of on-going

monitoring

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Monitoring Benefits– Analyzes progresses– Determines whether inputs are well utilized – Identifies problems – Assists in identifying solutions – Ensures activities are carried out– Assesses performance– Identifies areas of concerns or process

weaknesses– Improves accountability

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Noncompliance

• State agency must:

– Take action if grantee is in noncompliance • Communicate corrective action prior to

suspension of payments• Report unauthorized use of funds

– Attorney General will assist in recovery of state funds

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Findings vs. Observations

Findings:• Material problems supported by regulations,

rules or statutes Results in Citation and Required Action

Observations:• No authority in regulations, rules or

regulations for enforcement Make Recommendation

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Common Findings

• Applications completed after the Certification Date

• 140 (110%) Hour Rule • Funds expended after the end of the fiscal year• Lack of supporting documentation

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Common Observations

• Failure to reconcile program records• Lack of supporting documentation

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Best Practices

• Account Reconciliation

• Timely Posting of Funds

• Records Administration – Integrity of program records

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Control Activities

Seven Basic Control Activities

• Documentation• Approvals and authorization• Transactions accurately recorded• Appropriate reporting of transactions• Segregation of duties• Ensuring assets are safeguarded• Tracing accountability

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Wrap Up

• Review internal processes and procedures• Ensure pre-review work is timely and track progress• “Self-scrub” • Disclose known deficiencies to Lead Reviewer• Ensure post-review work is timely and track

progress• Discuss issues discovered internally and implement

necessary processes and procedures to address the issues

• Keep Lead Reviewer abreast of progress

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QUESTIONS?

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RESOURCES• Federal Student Aid Conference Guaranty Agency & Lender

Sessions Handouts • The IIA CIA Learning System • http://www.ncauditor.net/pub2• http://www.ncauditor.net/NonProfitSite/training/2006/Interna

lControl/Basics%20of%20Internal%20Control.ppt#51• http://www.ncauditor.net/NonProfitSite/training/2006/Interna

lControl/Basics%20of%20Internal%20Control.ppt#52• http://news.bbc.co.uk/2/hi/business/2756345.stm• http://www.whitehouse.gov/omb/circulars/a133/a133.html• http://www.yourdictionary.com/audit

http://www.ncauditor.net/pub2

http://www.ncauditor.net/NonProfitSite/training/2006/InternalControl/Basics%20of%20Internal%20Control.ppt#51%0Dhttp://www.ncauditor.net/NonProfitSite/training/2006/InternalControl/Basics%20of%20Internal%20Control.ppt%2352


