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CHAPTER 9
PREPARING FOR THE FINANCIAL STATEMENTS AUDIT
OVERVIEW
For many organizations, the word “auditor” sends a message of negativity and panic; however,
the audit process can be virtually painless if you are ready and your staff is educated on the audit
process.
This section of the manual is designed to provide the user with an understanding of how to
prepare for a successful audit and, in addition, describes the roles of the independent auditor and
campus personnel in the audit process.
UNDERSTANDING THE ROLE OF THE INDEPENDENT AUDITOR
The role of the independent auditor is to examine, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
internal control over financial reporting. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation.
It is not the responsibility of the independent auditor to prepare the financial statements or the
footnote disclosures. It is also not the responsibility of the independent auditor to reconcile
accounting information or to compile data for analysis or for financial statement or footnote
disclosure. The independent auditor is available to assist with such matters, which are usually
considered to be outside of the scope of an audit.
It is the responsibility of the campus and audit teams to develop “ground rules” for the conduct
of the audit. The following summarizes some key responsibilities of the independent auditor:
 To provide a prepared by client (PBC) list of items that will be required for the audit in
advance of the start of fieldwork. The auditors will provide a PBC list (for both the financial
statement audit and the single audit); however, additional requests should be expected during
fieldwork based upon a review of the documents provided.
 To meet all deadlines set by the campus and audit teams.
 To plan and conduct the audit in a professional and effective manner.
 To be courteous to campus personnel and be mindful of their other work commitments.
 To communicate progress and any difficulties or issues encountered promptly and effectively
to members of the campus management.
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To communicate any additional work required in performing the audit that may result in
potential fee overages to the campus and systemwide management as soon as possible, and
no later than the systemwide exit conference.
Use utmost care to secure confidential and sensitive information, and return it to client
immediately upon completion of review.
UNDERSTANDING THE ROLE OF THE CAMPUS
Management of each campus is responsible for preparing the reporting package from the Yearend System (YES), including footnotes and management’s discussion and analysis (MD&A).
Further, management is responsible for the fair presentation of the financial statements in
conformity with U.S. generally accepted accounting principles.
The following summarizes additional responsibilities of the campus team:
 To be prepared for the audit (see further discussion in “Planning” section later on in this
chapter).
 To have all requested items on the PBC list, including the completed and approved reporting
package, and the campus’ comprehensive analytical review prepared in accordance with the
CO’s established audit timeline. The majority of the items on the PBC list must be ready
prior to the beginning of fieldwork. See sample schedules and PBC lists at the end of this
chapter for further guidance. See also the 20CY reporting package template in the YES.
 To provide a suitable work area for three to four auditors in close proximity to accounting
and financial reporting personnel. The work areas should include a phone and data line and
access to a fax machine.
 To communicate any difficulties or issues encountered during the audit process promptly to
either the audit manager or partner.
 To provide a central contact to the audit team.
 Mask confidential and sensitive information, whenever possible, prior to providing it to the
auditors, and ensure it is returned immediately upon completion of review.
 To meet all deadlines set by the CO, the campus and audit team. Refer to the CSU Audit
Master Timeline for complete listing of key dates.
PLANNING
One of the key elements of an efficient audit process is campus preparedness. Because of the
significant resources needed to complete an audit, it is essential that the campus plan properly for
the audit process. Campus staff that will need to be available should be notified of the timing
several months before audit fieldwork in order to ensure that they will be available. Key
personnel should not plan to take vacations during audit fieldwork or during the time
surrounding the submission deadline of the campus reporting package to the CO. In addition,
time should be set aside to prepare and review all of the audit schedules needed by KPMG (as
listed on the PBC List) prior to the start of fieldwork
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The independent auditor should make every effort to request and utilize schedules and reports
that are already prepared by campus personnel in the conduct of their monthly or annual closing
procedures. However, there are certain schedules that may be required to support financial
statement balances and/or disclosures that are unique to the GAAP financial reporting process.
If these audit requests have not been sent to you early enough for you to prepare, this should be
communicated to your audit manager or partner. If items included on the PBC List are not clear
to you, clarify these items with a member of your assigned audit team prior to their arrival for
performance of fieldwork.
Unless noted otherwise, all PBC items must be uploaded to SharePoint by the first day of
fieldwork. All schedules on SharePoint must be clearly labeled and cross-referenced to the
PBC list.
COMMUNICATION
Communication with your own staff as well as your audit team is critical. It is important that
you communicate issues, deadlines, and expectations in initial meetings with your campus
personnel and audit team. It is likely that your audit team will communicate expectations they
have for you as well. If they don’t, ask!!! Communicate with your audit team regarding how and
when audit adjustments will be discussed – all together at the end or throughout audit fieldwork.
Discuss with your audit team how staff should be contacted – through a central contact or
directly, whether they can be “dropped in on” or if appointments are preferred. Additionally, in
order to help facilitate an efficient audit process, weekly “hands-on” meetings with the campus
central contact and audit team are required to discuss such items as overall audit progress,
proposed audit adjustments to date, and address various issues as they arise.
CENTRAL CONTACT
Although it is very important that the responsibility for audit preparation be delegated to relevant
campus staff, it is key that one person from the campus acts as the central audit contact (GAAP
contact). This person should be responsible for ensuring that all the requested schedules are
completed properly and on-time. In addition, this person should be responsible for accumulating
all the audit schedules from the various preparers and reviewing them to ensure that these
detailed schedules agree to the general ledger and the financial statements. This person should
then centrally upload all schedules to SharePoint and accumulate all other supporting schedules
in a separate set of binders to be provided to the audit team on the first day of fieldwork upon
request. The GAAP contact should function as the audit liaison in working directly with the
audit team.
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AUDIT TERMINOLOGY
The terminology used by independent auditors may not be understood by the individuals
responsible for preparing audit schedules and thus they may be unable to provide the information
requested. Following are some key terms with their definitions used by independent auditors:
General ledger – The accounting system in which all account balances and changes in fund
balances are recorded.
Reconciliation – A procedure performed to ensure that one set of information agrees to another.
A reconciliation often maps how detailed information (i.e., a subledger, subsidiary system, or
other listing) agrees to the general ledger. A proper reconciliation provides a summary of
reconciling items, the nature of their balances and their proposed disposition.
Rollforward – A schedule prepared that reflects beginning balances, additions, deletions, and
the balance at year-end. The ending balances in the rollforward schedule should agree to the
general ledger and beginning balances should agree to the prior year audit report. This type of
schedule is typically requested for capital assets accounts, outstanding debt, net position, and
prepaid assets, if significant.
PBC list – The schedule of initial audit requests provided by the campus audit team, which are to
be prepared by campus personnel. PBC stands for “Prepared By Client.” Additional requests
should be expected throughout final fieldwork.
IRM PBC list – The schedule of initial audit requests provided by the KPMG Information Risk
Management audit team, which are to be prepared by campus IT personnel.
Subledger – A detailed listing of individual account balances (e.g., capital assets, student and
other receivables, and inventory). These listings should not be rollforwards of the accounts, but
rather a summary of the components of the ending balance or composition of each account on a
GAAP basis. For example, a listing that shows additions and deletions to an inventory account is
not a useful listing because it cannot be used to determine the composition of the ending balance.
Aging report – A type of subledger that groups account balances by the amount of time that has
passed since the balance originated (e.g., a receivable report that lists all accounts that are
current, 30-60 days past due, etc.). The total balance on this report should agree to the total
balance of the account on the general ledger.
Leadsheet – A summary of accounts and their outstanding GAAP balances that is included in
one line item on the financial statements (e.g., a listing of all cash accounts and their balances
that agrees in total to the cash balance presented in the financial statements).
Check register – A listing of all checks processed and disbursed in a certain period.
Methodology – Thought process or reasoning behind the development of certain financial
statement account balances, the recording of which requires management judgment or a selection
from alternative methods of accounting
Trial balance – A summary schedule of the general ledger, which includes the ending balances
of each type of account at year-end. For CSU audit purposes, the GAAP conversion template
prepared for each fund will be considered a trial balance. For PeopleSoft campuses, the GAAP
conversion template is Report CSUFS169 “Pre-Closing Trial Balance by Net Position Category,
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Leadsheet – Summary”. The legal basis account balances per the GAAP conversion template
must agree to the general ledger.
LIST OF CSU REPORTS COMMONLY USED DURING THE AUDIT AND GAAP CONVERSION
PROCESS
SAM 06 – Provides budget amounts that are used for the schedule of State Appropriations
revenue in the General Fund and to record adjustments for State Appropriations receivable.
SAM 07 – Pre-closing or post-closing trial balance used to prepare legal basis balance sheet
accounts that support the GAAP conversion template. Commonly referred to as the general
ledger for the audit process.
SAM 99 – Provides State Controller’s Office (SCO) balances available for General and Capital
Outlay funds. This report is utilized to verify that the GAAP receivable balance for State
Appropriations has been recorded accurately.
CSUGL012 – CMP/CSU/GAP Ledger Comparison
CSUFS166 – Statement of Revenues, Expenses, and Changes in Net Position
CSUFS167 – Operating Expenses Summary
CSUFS168 – Statement of Net Position
CSUFS169 – Pre-Closing Trial Balance by Net Position Category, Leadsheet - Summary
CSUFS170 – Leadsheet - Detail
CSUFS171 – Leadsheet - GAAP Adjustments
Other reports that have proved valuable for preparation of the GAAP conversion template and
audit process are the following:
 A locally developed report for payments made and received and amounts receivable from
and payable to “related parties” for footnote disclosure purposes.
 The H46 report generated from the Customer Information Retrieval System (CIRS) database
or the standard reports generated from the CMS Human Resources module to analyze
vacation accruals for GAAP purposes. (For only those campuses not using the Absence
Management System )
The June 30th report from ECSI, third party loan service provider, regarding Perkins and
Nursing student loans receivable balances. This report can be used to determine entries needed
for accrued interest income and allowances for doubtful accounts. This report should also be
used to verify that the year-end GAAP balances for Perkins and Nursing loans receivable have
been accurately recorded.
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INTERNAL CONTROL DEFICIENCIES AND COMMUNICATION PROCESS
STATEMENT ON AUDITING STANDARDS (SAS) NO. 115, COMMUNICATING INTERNAL CONTROL
RELATED MATTER IDENTIFIED IN AN AUDIT
Under SAS No. 115, a significant deficiency and material weakness are defined as follows:
 A significant deficiency is a deficiency, or a combination of deficiencies, in internal control
that is less severe than a material weakness, yet important enough to merit attention by those
charged with governance.
 A material weakness is a deficiency, or combination of deficiencies, in internal control,
such that there is a reasonable possibility that a material misstatement of the entity’s financial
statements will not be prevented, or detected and corrected, on a timely basis. A reasonable
possibility exists when the likelihood of the event is either reasonably possible or probable.
Deficiencies that are indicators of a material weakness are as follows:
□ Identification of fraud, whether or not material, on the part of senior management;
□ Restatement of previously issued financial statements to reflect the correction of a
material misstatement due to error or fraud;
□ Identification by the auditor of a material misstatement of the financial statements under
audit in circumstances that indicate that the misstatement would not have been detected
by the entity’s internal control; and
□ Ineffective oversight of the entity’s financial reporting and internal control by those
charged with governance.
EVALUATING DEFICIENCIES IDENTIFIED DURING THE AUDIT
The auditor is required to evaluate the severity of each deficiency in internal control identified
during the audit to determine whether the deficiency, individually or in combination, is a
significant deficiency or a material weakness. The severity of a deficiency depends on:
1) the magnitude of the potential misstatement resulting from the deficiency or deficiencies; and
2) whether there is a reasonable possibility that the entity’s controls will fail to prevent, or
detect and correct a misstatement of an account balance or disclosure.
The severity of a deficiency does not depend on whether a misstatement actually occurred.
MAGNITUDE OF POTENTIAL MISSTATEMENT
Factors that affect the magnitude of a misstatement that might result from a deficiency or
deficiencies include, but are not limited to, the following:
 The financial statement amounts or total of transactions exposed to the deficiency
The volume of activity (in the current period or expected in future periods) in the account or
class of transactions exposed to the deficiency
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In evaluating the magnitude of the potential misstatement, the maximum amount by which an
account balance or total of transactions can be overstated generally is the recorded amount,
whereas understatements could be larger.
REASONABLE POSSIBILITY OF MISSTATEMENT
Risk factors affect whether there is a reasonable possibility that a deficiency, or a combination of
deficiencies, will result in a misstatement of an account balance or disclosure. The factors
include, but are not limited to, the following:
 The nature of the financial statement accounts, classes of transactions, disclosures, and
assertions involved
 The susceptibility of the related asset or liability to loss or fraud
 The subjectivity, complexity, or extent of judgment required to determine the amount
involved
 The interaction or relationship of the control with other controls
 The interaction among the deficiencies
 The possible future consequences of the deficiency
REPORTING PACKAGE
In accordance with the CSU Audit Master Timeline, the campus’ completed reporting package
must be submitted on August 24, 2015. With the exception of the statement of cash flows and
other postemployment benefits obligation (which must be included in the reporting package by
September 8, 2015), and auxiliary organizations information (which must be included in the
reporting package by September 23, 2015), there should be no outstanding items related to the
reporting package submitted on day one. In the event that the campus has a specific open item or
issue that has not yet been reflected in the reporting package, the campus must communicate that
fact to KPMG along with the submission of the reporting package. The specific issue, relevant
facts and circumstances, and the reason why it is not yet reflected in the reporting package must
be documented by the campus in writing and provided to KPMG along with the reporting
package.
All proposed adjustments to the reporting package that are identified by either the campus or
KPMG subsequent to day one are subject to evaluation under SAS No. 115. These adjustments
include both recorded (corrected) and passed (uncorrected) adjustments as well as omissions and
other errors in presentation and disclosure. All adjustments will be included on the Summary of
Audit Misstatements.
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COMMUNICATION PROCESS
The Summary of Control Deficiencies (SCD) document is used by KPMG to accumulate all
deficiencies in internal control identified during the audit. KPMG’s evaluation process for each
deficiency in accordance with SAS No. 115 is documented on the SCD.
KPMG will review the draft SCD with the campus on a weekly basis throughout fieldwork as
part of the weekly status reporting to the CO. The final SCD must be reviewed and signed-off
by the campus GAAP coordinator and Vice-President, Business and Administration.
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REVISION CONTROL
Document Title:
CHAPTER 9 – PREPARING FOR THE FINANCIAL STATEMENTS AUDIT
REVISION AND APPROVAL HISTORY
Section(s)
Revised
Attachments
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Summary of Revisions
The following were new/updated for FY14-15 audit:
 Comprehensive Analytical Review Scope
 KPMG Engagement Team Phone List
 PBC lists
 Various PBC schedules were modified to include CSU Funds
Revision Date
April 2015
GAAP Manual | Preparing for the Financial Statements Audit | June 30, 2015