Auditing governmental entities is an important industry niche for many accounting professionals, and school districts are the largest category of state and local entities in terms of both total funding and number of employees. This makes them subject to a great deal of public scrutiny, resulting in complex compliance and reporting requirements.
School districts are the largest category of state and local entities. This makes them subject to a great deal of public scrutiny, resulting in complex compliance and reporting requirements.
In general, school district accounting and auditing is similar to that of other governmental entities, in that the same generally accepted accounting principles and auditing guidance apply. However, school districts also have unique characteristics and requirements that demand special attention. CPAs who audit school districts or are considering doing so in the future should consider these five tips for performing effective and efficient audits.
Start with the State Funding Formula
State funding is a significant revenue source in school districts across the United States. The funding formulas are complex and subject to frequent changes and vary by state. Pupil-based funding, generally referred to as foundation funding, is the most common method of allocating state funding to school districts.
When auditing a school district, understanding the primary drivers in the funding formula is critical for designing procedures to test the state funding revenues and any related amounts due to or from the state. The applicable state education agency (SEA) website is often a useful resource for information about the state funding formula.
Know the Purpose and Use of Activity Funds
Activity funds are unique to school districts and can vary greatly between states and even districts. They are generally used to account for activities such as athletics, fine arts, debate clubs, language clubs, yearbooks, and student newspapers. Due to repetitive abuses, state laws and district policies often dictate the use and accounting of these funds.
In general, districts usually have two types of activity funds—district activity funds and student activity funds. District activity funds are typically generated through fees for activities that are instructional in nature, such as athletics and fine arts programs. District personnel generally determine the use of these funds (subject to laws, regulations, and district policies), and the funds are generally included in the school district’s budget.
Student activity funds are typically generated through student fundraising efforts for student clubs and organizations. The students, with oversight by a school sponsor, determine the use of these funds (subject to laws, regulations and district policies), and the funds generally are not included in the school district’s budget. It is important to note, however, that even if activity funds are not included in the school district’s budget, they should be included in the financial statements. Furthermore, obtaining an understanding of the purpose and use of these resources is necessary for appropriate presentation.
Understand the Food Service Program
Most school districts operate a food service program and participate in U.S. Department of Agriculture (USDA) programs that provide cash and commodities for student meals and snacks. While the majority of school districts account for a food service operation in a special revenue fund, it is not uncommon to account for a food service operation in an enterprise fund.
If a fee is charged to students for food services, accounting principles permit—but do not require—treating the service as an enterprise fund. Some food service programs are financed, in large part, by such charges, but most programs are subsidized or financed entirely by funds from other levels of government, such as the state department of agriculture or the USDA.
Because school food service is similar to restaurant operation, the school district should have strong controls in place for point of sale user charges and cash receipts, as well as controls over proper food handling and waste.
Food service operations generally record inventory for purchased food, donated commodities, and paper goods. The amount of inventory is often immaterial, but federal and state regulations may require the auditor to perform specific inventory procedures.
In addition to USDA regulations, many states have laws and regulations surrounding school lunch programs. It is important to obtain an understanding of the relevant laws and regulations to ensure proper planning and performance of compliance tests.
Stay Current on Compliance Matters
SEAs generally have specific requirements concerning compliance tests of state laws and regulations, which typically apply to all audits regardless of the funding level. For example, there are often no minimum expenditure thresholds, as in single audits. Common areas requiring additional compliance testing include attendance, budgeting, student activity funds, procurement, nepotism, and conflicts of interest; however, auditors may encounter a wide variety of additional requirements, so becoming familiar with the specific requirements of the applicable state is critical.
Some state laws and regulations, such as those pertaining to budgets and student counts, may have a direct and material effect on the financial statements. Compliance with such laws and regulations should be tested in accordance with AU-C section 250, “Consideration of Laws and Regulations in an Audit of Financial Statements.” States may also require auditors to test compliance with state requirements that may not have a direct and material effect on the determination of financial statement amounts. For example, it is not unusual for auditors to obtain additional written representations from individual school board members concerning nepotism and conflicts of interest.
Audit and accounting manuals or audit programs published by the applicable SEA can be used to determine relevant requirements and are typically available on the SEA’s website. School districts are also often subject to Yellow Book and single audit requirements.
Utilize Tools and Techniques to Maximize Audit Efficiency
School districts receive many federal, state and local grants, resulting in numerous funds, a robust chart of accounts, and a high volume of transactions that make auditing and staying within the audit budget a challenge. Auditors will increasingly desire tools and techniques that maximize the efficiency of these engagements.
One such tool is data mining, a method of processing and analyzing extensive amounts of data, which typically requires the use of data extraction software and coordination with school district personnel to obtain access to the data stored in financial reporting systems. While there is an up-front investment involved in obtaining and learning to use the software, the return is a significant increase in audit effectiveness and efficiency.
Auditors should also obtain access to both general ledger data and accounts payable, personnel, and vendor databases. Analyzing and comparing data between these data sources is a powerful audit technique, allowing audit teams to design tests specific to the risks of the individual school district. Data mining can be especially useful for payroll and cash disbursements in school district audits.
Whether contemplating offering school district audits or looking to enhance the effectiveness of audit services currently provided, auditors should take advantage of specialized tools—particularly tailored practice aids that include school district audit programs, checklists, confirmations, and reports—to address the unique audit and accounting requirements of this important niche.
