A Guide for Schools to Prepare for a First Audit

The first time preparing for an audit is usually a nail-biter. It can be even trickier for a post-secondary education institution. What do I need to do? What are they going to judge? Did I do anything wrong? These are just a few of the many questions running through most peoples’ minds when in this position. But the whole experience genuinely doesn’t need to be stressful. It all comes down to preparation, which is what this guide is all about.

First, what’s an audit, really?

If asked, most people respond along the lines of, “It’s when someone makes sure the numbers are right.” or “It’s when someone makes sure we didn’t do anything illegal.”  While these answers aren’t wrong, they don’t explain the full scope of what audits achieve. Financial statements free of material error and fraud are indeed an audit objective, but there’s more to it. 

More specifically, auditors review internal controls over financial reporting (when applicable), assess program effectiveness and operational efficiency, and conduct specialized tests focused on compliance with governmental or other regulatory requirements. As a result, much time is spent gathering information about controls, how they function and testing them – alongside ensuring that the financial statements are free of material misstatement.

Selecting the Right Professional Staff

When preparing for an audit, one of the most important steps is hiring the appropriate professional staff. Not all auditors and outside accountants possess the same qualifications. School and Title IV auditing and accounting involve many nuances and unique regulations.

An outside accountant may be highly skilled at tax preparation but that doesn’t mean they are a fit for auditing. Conduct thorough research and ensure that the auditor and outside accountant have relevant experience in this sector before hiring them. Also, ensure your auditor can conduct audits aligned to government accounting standards.

It’s also important to know that an auditor cannot also serve as the institution’s accountant. Many first-time auditees mistakenly expect the auditor to prepare or adjust the books, but independence issues prohibit this.

Define the Year-End

Most auditees schedule their audits based on the same year-end as their tax year reporting period. However, regulatory requirements may dictate a different year-end for audits. Determine the audit’s use – such as Title IV compliance or other regulatory submissions – to ensure the proper year-end is applied.

Common Items Needed

The types of information required for an audit depends on the size and complexity of the financial statements. However, several types of documentation are commonly used in most audits. These typically include: 

• Bank statements and reconciliations
• Accounts receivable and accounts payable schedules
• Fixed asset depreciation schedules
• Invoices for paid expenses
• Deposit records for revenue
• Payroll information
• Lease documentation

These examples are just some of the items auditors commonly request. For a more complete list, obtain a checklist to help facilitate the information-gathering process.

Obtain a Checklist

Most accountants and auditors live by checklists to guide their processes. Contact both the outside accountant and the auditor to obtain this comprehensive list of required items. Check in with the professional staff if items are unclear. Some items may not apply to some institutions, but don’t make assumptions either. Certain terms can be used interchangeably and still be applicable. The bottom line: if unsure, ask.

Student Information System (SIS) Selection

A school may have a SIS in place, often depending on how long it’s been in operation.  While very small schools may reasonably function without one, it’s recommended that all schools use one that fits their size. Schools unsure of which system is appropriate should seek guidance to explore available options.

Gathering Information

Once all previous steps are accomplished, it’s time to set up a meeting with the auditor, the outside accountant and the assigned school staffer responsible for preparing and providing the audit evidence. During this meeting, participants should clarify:

• Who will prepare the various support schedules to be tied into the balance sheet accounts
• Who will obtain source documentation for the auditor or outside accountant 
• What the timeline is for completing each task

Not everything will be determined in one meeting, so consistent communication is imperative to get things moving in a timely manner.

Beginning Balances

If this first audit is not for the school’s first year of operation, the auditor must scrutinize both the beginning and ending balances of the audited year to produce a clean opinion. This often confuses clients, as auditors must request schedules for balances as of January 1 and December 31 of the same year. Reviewing both balance records ensures accuracy at both ends of the year, supporting an unqualified opinion on the income and cash flow statements. Sometimes, this information is several years old, so a good system for retaining source documents for all income and expenses is important.

Fieldwork

No matter how prepared the school is for the audit, questions and requests will still arise during fieldwork. It’s important that all staff are available during this time for any required interviews or requests. While auditors understand that day-to-day operations can’t stand still for the audit, it’s imperative that all personnel set daily time aside for any audit needs.

Key Considerations

Preparation is the key to a smooth and successful audit. Hope alone doesn’t cut it. Properly communicate with all parties engaged and set realistic timelines. Most importantly, ask questions whenever uncertainty arises – assumptions are always risky. With deep expertise in Title IV compliance, Sikich helps institutions navigate audits with confidence.