School Finance: Accounting and Auditing

Compliance Supplement for Massachusetts School Districts: FY 2000 EOYR

1. Introduction and Scope

2. Audit Objective, Suggested Audit Procedures, and Reporting Compliance Requirements

3. Reporting

1. Introduction and Scope

   Every Massachusetts school district is required to, within nine months of the close of its fiscal year, arrange for and undergo an independent audit of its financial records, to include using the Department of Education Compliance Supplement, and submit the report of this audit to the Massachusetts Department of Education (Department). This requirement shall be satisfied if the school district's records are audited, to include using the Department of Education Compliance Supplement, as part of a general audit of all municipal financial records. The audit must be conducted by an independent public accounting firm based on the compliance requirements, audit objectives and suggested audit procedures contained in this Compliance Supplement for Massachusetts School Districts (Compliance Supplement). The auditor shall comply with professional standards included in "Standards for Audit of Governmental Organizations, Programs, Activities and Functions$quot; adopted by the Comptroller General of the United States in the conduct of the audit.

   Each city, town and regional school district is required to submit an End-of-Year Pupil and Financial Report (EOYR) to the Department on or before September 30 of each year. The EOYR must be consistent with Department Regulations and Guidelines. The EOYR consists of several schedules as follows:

   • Schedule 1 Revenue and Expenditure Summary
   • Schedule 2 Assessments Received From Member Towns or Cities or Regional School Districts
   • Schedule 3 Instructional Services By Grade Level
   • Schedule 4 Special Education Expenditures by Prototype
   • Schedule 7 Pupil Transportation Reimbursement
   • Schedule 8 Professional Development
   • Schedule 11 Pupil Membership Summary
   • Schedule 13 Staff Data By Major Program Area Instructional Programs
   • Schedule 16 Pupils - Attendance Data
   • Schedule 19 Annual School Budget

   Schedule 1 is the primary schedule reporting the results of operations for the fiscal year. Schedule 1 includes all revenues (Part I) and expenditures received or made by the district directly or indirectly (Part IIA), as well as those expenditures made by the city or town (Part IIB) or Federal impact aid, third parties, grants and special funds (Part IIC) in support of these educational programs for a specific fiscal year. Schedule 1 contains information by fund, source, program, function, and object. The Department utilizes this schedule for net school spending compliance, federal reporting, state aid, local contribution calculations and other needs. As such, it is critical that the amounts reported on Schedule 1 are accurate and verifiable.

   While Schedule 1 financial information is generally derived from the municipal or district accounting system, other data in the End of Year Report are generally prepared in part from sources other than the accounting system. Districts utilize various allocations, distributions, or assignment of costs to the EOYR schedules or report non-financial data. It is critical that these allocations, distributions, or assignment of costs are consistent with documented and reasonable methodologies and that non-financial data are supported by appropriate records or documented methodologies.

   SCOPE

   The purpose of this Compliance Supplement is to provide guidance in the conduct of an independent audit of a district's system for managing and reporting financial and non-financial information the district is required to report to DOE on the EOYR. The objectives of the Compliance Supplement are to determine whether:

   • Financial data reported on all EOYR schedules are traceable to the detail contained in the municipal or district accounting ledgers or records or to a documented methodology.
   • Non-financial data reported on all EOYR schedules are traceable to the district's records or to a documented methodology.
   • There are documented methodologies supporting the financial and other reported information contained in these schedules, whether these methodologies were followed, and whether the methodologies are reasonable.
   • Internal controls exist to provide reasonable assurance that the revenues, expenditures and other data are accounted for consistent with Department regulations and guidelines.

   This document describes the compliance requirements, audit objectives, and suggested audit procedures for Massachusetts School Districts. These requirements, objectives and procedures are intended to be consistent with the objectives and requirements of Part 3, Compliance Requirement L, Reporting Requirements of the March 2000 OMB A-133 Compliance Supplement. This document is written with the understanding that the internal control systems for Schedule 1 and other EOYR financial and other reported data are subject to the same tests as other municipal data.

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2. Audit Objective, Suggested Audit Procedures, and Reporting Compliance Requirements

   Audit Objective

   Determine whether required reports for Massachusetts School Districts include all activity of the reporting period, are supported by applicable accounting records, and are fairly presented in accordance with State requirements.

   Suggested Audit Procedures

   1. For all EOYR Schedules:

      1. Ascertain if the financial information were prepared in accordance with the required accounting basis (e.g., modified accrual plus encumbrances).

      2. Trace the amounts reported to accounting and other records that support the audited financial statements and verify agreement or perform alternative procedures to verify the accuracy and completeness of the reports and that they agree with the accounting records.

      3. Trace non-financial data to records that accumulate and summarize data.

      4. Perform tests of the underlying data to verify that the data were accumulated and summarized in accordance with the required or stated criteria and methodology, including the accuracy and completeness of the schedules.

      5. When intervening computations or calculations are required between the records and the schedules, trace reported data elements to supporting worksheets or other documentation that link the schedules to the data.

      6. Test mathematical accuracy of the schedules and supporting worksheets.

   2. Test the selected schedules for completeness.

      1. For financial data, review accounting records and ascertain if all applicable accounts were included in the sampled schedules (e.g., funds, functions, programs, grade levels, and state objects of expenditures).

      2. For non-financial data, review the supporting records and ascertain if all applicable data elements were included in the sampled reports.

   3. Obtain written representation from management that the reports provided to the auditor are true copies of the EOYR submitted or electronically transmitted to the Department of Education.

   Compliance Requirements - General

   Districts must use the standard financial reporting schedules contained in the End of Year Report. These schedules include financial and non-financial data. The financial information must be traceable to the accounting ledgers of the district or of the municipality or to a documented methodology. If a $quot;crosswalk$quot; exists between the municipal and district ledgers, this crosswalk should be documented. The non-financial information must be traceable to records or to a documented methodology that demonstrates the information was compiled from existing records. Each District must report income on the modified accrual basis and expenditures on the modified accrual plus encumbrance basis.

   Specific Requirements for FY2000 Audit

   The following reporting compliance requirements must be performed:

   Schedule 1

   1. Trace the amounts reported for general fund education expenditures from the Statement of Revenues, Expenditures and Changes in Fund Balances (or the total Schedule 1 expenditures) to the municipal accounting ledgers and to the district accounting ledgers. These amounts should agree. If a $quot;crosswalk$quot; exists between the municipal and district ledgers, obtain an understanding of the crosswalk and determine if the crosswalk is reasonable.

   2. Trace the amounts reported for a sample of DOE functions (i.e. teaching, principal) in Schedule 1 to the detail in accounting ledgers. These amounts should agree.

   3. Trace the sum of professional and other salaries in Schedule 1 to the payroll expenditure total in the accounting ledgers. These amounts should agree.

   4. Trace the sum of other expenditures in Schedule 1 to the non-payroll expenditure total in the accounting ledgers. These amounts should agree.

   5. Trace the amounts reported on Schedule 3 to the following DOE functions reported on Schedule 1: 2100 Supervisory; 2300 Teaching; 2400 Textbooks and Instructional Equipment; 2700 Guidance; and 2800 Psychological. These amounts should agree. Ascertain the methodology used to allocate, distribute or assign Supervisory, Teaching, Guidance and Psychological costs and determine if that methodology was utilized.

   6. Review expenditures for Extraordinary Maintenance (4300). Verify that this amount does not include salaries. Verify that these expenditures include applicable principal portions of a loan or the cost of a lease/purchase agreement. Verify that expenditures classified as a 4300 account must not exceed the per project dollar limit for extraordinary maintenance ($50,000). Trace amounts to the detail in the accounting ledgers.

   7. Trace total education revenues reported from the Statement of Revenues, Expenditures and Changes in Fund Balances (or from the municipal accounting ledgers and district accounting ledgers) to total Schedule 1 revenues. These amounts should agree.

   8. Trace the total school district revenue reported from federal grants, state grants, and revolving and special funds to the detail in district accounting ledgers. These amounts should agree.

   9. Trace the amounts reported for a sample of State Objects (professional salaries (01), other salaries (02) and other expenditures (04 - 06) along with a sample of DOE Programs (regular day, SPED, etc.) and a sample of DOE Functions (such as general administration 1100, 1200) to the detail in the accounting ledgers. These amounts should agree.

   10. Ascertain if the following DOE Functions are distributed, allocated or assigned to Programs (regular day, SPED, etc.). Trace the amounts reported by DOE Function to Programs to the accounting ledgers or to a documented methodology. These amounts should agree to the ledgers or to the methodology.

       • 2100 Supervisory
       • 2300 Teaching
       • 2400 Textbook & Instructional Equipment
       • 2700 Guidance
       • 2800 Psychological
       • 3300 Pupil Transportation
       • 6200 Civic Activities
       • 6800 Health Non-Public Schools
       • 6900 Transportation Non-Public
       • 9000 Payments to other Districts

   11. Trace the amounts reported for a sample of grade level totals in Schedule 3 to the detail in accounting ledgers and to the total in Schedule 1. These amounts should agree. Obtain a listing of teachers by grade level (salaries and FTEs) and compare to the total amount of dollars reported on Schedule 1 and FTEs reported on Schedule 13. These amounts should also agree.

   12. Ascertain the methodology used for assigning or allocating expenditures for fringe benefits to school district expenditures for Employee Benefits. Trace the reported cost to this methodology and to the detail in the accounting ledgers. These amounts should agree.

   13. Determine the expenditures reported as long-term School Construction debt for principal (8100) and interest (8200). Verify that bond anticipation notes are not included. Verify the reported totals to the Treasurer's debt schedule. Trace the reported amount to the detail in the accounting ledgers. These amounts should agree.

   14. Trace the expenditures for tuition payments: to other school districts in state (9100), to out of state schools (9200), to non-public schools (9300), to member collaboratives (9400), and assessments to member regional school districts (9500) to the detail in the accounting ledgers. These amounts should agree.

   15. For municipal expenditures that result in services directly related to the school committee, determine the methodology used to allocate, distribute or assign municipal expenditures to the district. Test the amounts reported using this methodology. These amounts should agree.

       Schedule 4

   16. Ascertain the methodology used to allocate, distribute or assign SPED costs to the prototype on Schedule 4. Test the amounts reported on Schedule 4 using this methodology. These amounts should agree.

   17. Trace the costs reported by prototype on Schedule 4 to the corresponding students (headcount and FTE) reported on Schedule 11. Check the consistency in reporting categories of prototypes in Schedule 4 to Schedule 11.

       Schedule 7

   18. For expenditures, trace the amounts reported for a sample of Programs (such as Regular Day, Bilingual, Occupational Day) along with a sample of lines (such as Within The District and Outside The District) to the detail in the accounting ledgers or determine the methodology that allocates, distributes or assigns transportation expenditures and trace the amounts reported to this methodology for:

       • Pupils transported at least 1½ miles by school transportation vehicles
       • Pupils transported at least 1½ miles by public utility
       • Non-reimbursable and SPED expenditures
       • Depreciation

       The amounts should agree to the ledger or to the methodology.

   19. For pupils, trace the amounts reported for a sample of Programs (such as Bilingual, Occupational Day) along with a sample of lines (such as Within The District and Outside The District) to the detail to a methodology that allocates, distributes or assigns transportation pupils or to the detail in the accounting ledgers for:

       • Pupils transported at least 1½ miles by school transportation vehicles
       • Pupils transported at least 1½ miles by public utility
       • Non-reimbursable and SPED expenditures

       The amounts should agree to the ledger or to the methodology.

       Schedule 19

   20. Determine whether the School District reports changes to the $quot;A.1 Appropriation By School Committee section of Schedule 19$quot; to DOE. Compare the final School Committee Appropriation to the Schedule 19 as filed/amended to determine if changes were reported.

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3. Reporting

   If, based on testing, the auditor in his or her professional judgment believes Schedule 1 and other EOYR financial and other reported data are reasonably verifiable and the methodologies are documented, the auditor will report the situation to the Audit Division and issue an Unqualified Opinion on Compliance and No Material Weaknesses - No Reportable Conditions Identified Report (see Report Example 1).

   If, based on testing, the auditor in his or her professional judgment believes Schedule 1 and other EOYR financial and other reported data are not reasonably verifiable or the methodologies are not documented, the auditor will report the situation to the Audit Division of the Department and issue a Qualified Opinion on Compliance and Reportable Conditions Identified Report (see Report Example 2).

   Upon receipt of a finding that the financial and other reported data or methodologies are not reasonably verifiable, the Department will direct the district to develop an action plan to rectify the situation within a period of time to be determined. This plan may ask the district to:

   • Develop an integrated accounting system.
   • Develop the documentation necessary to trace Schedule 1 to the financial statements and the accounting records.
   • Document the allocations, distributions, or assignments in support of Schedule 1 and other EOYR data.
   • Develop other requirements as necessary.

   EXAMPLE 1 -

   INDEPENDENT AUDITORS' REPORT ON COMPLIANCE AND INTERNAL CONTROL OVER COMPLIANCE APPLICABLE TO MASSACHUSETTS SCHOOL DISTRICTS - UNQUALIFIED OPINION ON COMPLIANCE

   The Honorable Mayor and Members of the City Council of the City of Blank, Massachusetts

   Compliance

   We have audited the compliance of City of Blank, Massachusetts, with the types of compliance requirements described in the Massachusetts Department of Education's Compliance Supplement applicable to Massachusetts School Districts for the year ended June 30, 2000. Compliance with the requirements of laws, regulations, contracts, and grants applicable to School Districts is the responsibility of City of Blank, Massachusetts' management. Our responsibility is to express an opinion on City of Blank, Massachusetts' compliance based on our audit.

   We conducted our audit in accordance with generally accepted auditing standards and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States and the Massachusetts Department of Education Compliance Supplement. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on Massachusetts School Districts programs occurred. An audit includes examining, on a test basis, evidence about City of Blank, Massachusetts' compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit department does not provide a legal determination on City of Blank, Massachusetts' compliance with those requirements.

   In our opinion, City of Blank, Massachusetts complied, in all material respects, with the requirements referred to above that are applicable to Massachusetts School Districts for the year ended June 30, 2000.

   Internal Control Over Compliance

   The management of City of Blank, Massachusetts, is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contract, and grants applicable to Massachusetts School Districts. In planning and performing our audit, we considered City of Blank, Massachusetts' internal control over compliance with requirements that could have a direct and material effect on its ability to accurately report year-end information in accordance with Massachusetts DOE requirements in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance.

   Our consideration of the internal control over compliance would not necessarily disclose all matters in the internal control that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that noncompliance with applicable requirements of laws, regulations, contracts, and grants that would be material in relation to a major federal program being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over compliance and its operation that we consider to be material weaknesses.

   This report is intended solely for the information and use of the audit committee, management, state funding agencies, and the Massachusetts Department of Education. However, this report is a matter of public record and its distribution is not limited.

   Date

   NOTES:

   1. The Compliance Supplement and the Report Letter should be modified for Regional School Districts, Regional Vocational-Technical Districts, etc.

   2. Non-reportable conditions relating to deficiencies in the design or operation of the internal control over compliance should be described in an accompanying appendix Management Letter.

   EXAMPLE 2 -

   INDEPENDENT AUDITORS' REPORT ON COMPLIANCE AND INTERNAL CONTROL OVER COMPLIANCE APPLICABLE TO MASSACHUSETTS SCHOOL DISTRICTS - QUALIFIED OPINION ON COMPLIANCE AND REPORTABLE CONDITIONS IDENTIFIED

   The Honorable Mayor and Members of the City Council of the City of Blank, Massachusetts

   Compliance

   We have audited the compliance of City of Blank, Massachusetts, with the types of compliance requirements described in the Massachusetts Department of Education's Compliance Supplement applicable to Massachusetts School Districts for the year ended June 30, 2000. Compliance with the requirements of laws, regulations, contracts and grants, applicable to Massachusetts School Districts is the responsibility of City of Blank, Massachusetts' management. Our responsibility is to express an opinion on City of Blank, Massachusetts' compliance based on our audit.

   We conducted our audit in accordance with generally accepted auditing standards and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States and the Massachusetts Department of Education's Compliance Supplement. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on Massachusetts School Districts occurred. An audit includes examining, on a test basis, evidence about City of Blank, Massachusetts' compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit department does not provide a legal determination on City of Blank, Massachusetts' compliance with those requirements.

   As described in the accompanying Schedule of Findings and Questioned Costs, City of Blank, Massachusetts, did not comply with requirements regarding (identify by compliance requirement reference number 1 - 20 ) that are applicable to its Massachusetts School Districts. Compliance with such requirements is necessary, in our opinion, for City of Blank, Massachusetts, to comply with requirements applicable to Massachusetts School Districts.

   In our opinion, except for the noncompliance described in the preceding paragraph, City of Blank, Massachusetts, complied, in all material respects, with the requirements referred to above that are applicable to Massachusetts School Districts for the year ended June 30, 2000.

   Internal Control Over Compliance

   The management of City of Blank, Massachusetts, is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contract, and grants applicable to Massachusetts School Districts. In planning and performing our audit, we considered City of Blank, Massachusetts' internal control over compliance with requirements that could have a direct and material effect on its ability to accurately report year-end information in accordance with Massachusetts DOE requirements in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance.

   We noted certain matters involving the internal control over compliance and its operation that we consider to be reportable conditions. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control over compliance that, in our judgment, could adversely affect City of Blank, Massachusetts' ability to administer Massachusetts School Districts in accordance with applicable requirements of laws, regulations, contracts, and grants. Reportable conditions are described in the accompanying Schedule of Findings and Questioned Costs as items [list related finding reference numbers, for example, 1-1, 5-2, and 20-1].

   A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that noncompliance with applicable requirements of laws, regulations, contracts, and grants may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Our consideration of the internal control over compliance would not necessarily disclose all matters in the internal control that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses. However we believe none of the reportable conditions described above to be material weakness.

   This report is intended solely for the information and use of the audit committee, management, state funding agencies, and the Massachusetts Department of Education. However, this report is a matter of public record and its distribution is not limited

   Date

   NOTES:

   1. The Compliance Supplement and the Report Letter should be modified for Regional School Districts, Regional Vocational-Technical Districts, etc.

   2. Non-reportable conditions relating to deficiencies in the design or operation of the internal control over compliance should be disclosed in an accompanying appendix Management Letter.

   3. If the Audit results in Findings including Reportable Conditions, the auditee should be advised to develop a response and initiate a corrective action plan which, if available, is included in the Audit Report. Otherwise, it should be sent to MA DOE, Audit Group within 30 days after the Audit Report is issued.