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University of California
Audit and Service Plan
For the Year Ending June 30, 2002
University of California
January 24, 2002
To The Regents’ Committee on Audit
The purpose of this document is to discuss our year 2002 audit and service plan. In this plan, we
discuss current year developments at the University, as well as risk factors and professional and
regulatory changes which will impact our audit.
This document is intended to serve as a basis for further discussion as we refine and formalize our
audit approach. We welcome any comments on this document that you might have at our March
meeting. In the interim, should you have any questions, please contact Mike Schini at 408.817.4478.
Very truly yours,
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University of California - Table of Contents
• Introduction and Current Developments
• Assessing Risk
• Our Audit Approach
• How We Plan to Work with the Committee on Audit
• Senior Service Team
•
Audit Timing
Note: This document is intended solely for the use of the Committee on Audit and the Management of the
University.
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University of California
We are pleased to present our audit and service plan for the year ending June 30, 2002. In our current year
planning, we considered the results of our recently completed audit, organizational and operating changes, as well
as regulatory and other professional matters that might affect the University. Some of the more significant factors
that we have considered in our plan are as follows:
Reporting changes – during the year ending June 30, 2002, the University will make significant changes to its
external financial reporting to conform with the requirements of new Governmental Accounting Standards Board
(GASB) Statements Nos. 34, 35 and 38, as it applies to footnote disclosures. These new Statements will
dramatically change how the University’s financial statements present the financial position and results of
operations. The principal changes will involve reflecting depreciation expense, presenting a classified statement of
financial position, categorizing the previously used fund balances into net asset categories and including both a cash
flows statement and a management discussion and analysis. The University is in the process of implementing the
requirements of the new GASB Statements throughout the campuses and system-wide financial reporting process.
We believe that the University’s proactive efforts will allow the University to close its books and report in a timeframe
consistent with prior years.
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University of California
Regulatory changes - while there are always regulatory issues to deal with, the level of new initiatives related to
reporting and accounting for sponsored programs has diminished compared to recent years. Although the
government continues to make changes in regulations, we do not anticipate the current year to have many farreaching changes, but rather modifications and clarifications to existing regulations.
Industry trends - higher education has not been as affected by the change in the economy as have many other
sectors such as technology, with the notable exception of the decline in the equity markets. Relative to the
downturn in the equity markets, we anticipate spending additional time in the current year reviewing the
investment valuations. Moreover, potential effects on donors’ ability to fulfil pledges will also be considered in
reviewing the allowances for unrecoverable pledges.
In the healthcare area, the University continues to expend resources and efforts to assist the medical centers
achieve appropriate operating results. The issues faced by the medical centers are not unique to the University,
and are reflective of both industry issues and healthcare trends in California. From an audit standpoint, we plan
to continue with our close communication between the campuses and medical centers’ audit teams to
understand how these business issues are considered in the audit of the financial statements. We will also
consider the potential effects of these issues on the consolidated financial statements of the University.
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University of California
Changes in the Accounting Profession – as a result of recent developments surrounding the failure of Enron,
eleven Congressional committees, the Securities and Exchange Commission, the Department of Justice and
several state boards of accountancy have now launched investigations. While it is too early to know exactly what
happened, it is clear that many critics are questioning key components of the U.S. capital markets. While we
await for changes in the reporting, disclosures or roles accounting firms may take at clients,
PricewaterhouseCoopers has already made certain commitments to eliminate any future questions by the public
regarding integrity issues of the accounting profession.
In an effort to address concerns over the appearance of a conflict of interest between auditing and consulting,
PricewaterhouseCoopers is moving forward with an initial public offering this Spring of PricewaterhouseCoopers
Consulting. We also support prohibiting the provision of large-scale information technology design and
implementation services and internal audit services by auditors to their audit client as this can indeed give an
appearance of a conflict to the audit process. We note that we have not recently performed either of these
services for the University and have no plans to do so. Utilizing our industry and technical knowledge and
creativity to assist our clients does not appear to be contrary to the audit function to most people.
In addition, we believe the accounting standard setting process must be overhauled. We advocate replacing the
current, cumbersome standard setting process with a single, private sector standard setting organization whose
goal is to establish principle-based accounting standards. These standards should focus on the substance of
transactions and be consistent with providing financial information that is transparent, understandable and written
in plain English.
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University of California
Beginning this fiscal year, we will issue an annual report to our clients on our financial performance, quality
practices and initiatives and other relevant matters. In addition we will add three outside, independent Directors
to our Global Board. These outside Directors will be charged with the responsibility of overseeing our auditing
quality, independence and objectivity.
We will also share our partner evaluation and compensation policies with client audit committees. Audit
committees need to have complete trust and confidence that our audit partners are rewarded for audit
performance. Lastly, for fiscal year 2003, we will develop an Annual Engagement Contract with the Committee
on Audit that will lay out in detail our role in supporting audit committees as they discharge their fiduciary
responsibilities.
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University of California
Changes in Government Audit Standards – in January 2002, the General Accounting Office announced certain
changes to the independence requirements for Government Auditing Standards. The new standards deal with a
range of audit independence issues, the most significant change relates to the rules associated with nonaudit, or
consulting services. The new standards are effective for audit for periods beginning after October 1, 2002.
The new independence standards for nonaudit services is based on two overarching principles: auditors should
not perform management functions or make management decisions; and auditors should not audit their own
work or provide non-audit services in situations where the amounts or services involved are significant or
material to the subject matter of the audit. The new standards are more restrictive than those of the AICPA and
require documentation as to why any nonaudit services do not violate the overarching principles.
We have reviewed the new independence requirements and will ensure we are compliant with them.
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University of California
Other areas of emphasis - in addition to the consideration of industry and regulatory trends discussed above, we
will also plan to place a continuing emphasis on certain other areas, which have also been the focus of the
University initiatives. Those areas are as follows:
Information Technology
The University continues to implement new technology. In connection with our current year audit, we will review
the technology initiatives that the University has underway with the goal of understanding those that might impact
financial statement processes such as procurement, revenue and the like. We will also review security issues
that arise from new systems efforts. As the University operates in an open computing environment, security will
always be an area of concern, and we will update our understanding of the University’s current procedures.
Taxes
As part of the audit, we meet periodically with University management to discuss changes in tax regulations
which may impact the University and to discuss IRS audit initiatives. We will continue to have ongoing dialogue
on tax matters to identify areas of concern.
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University of California - Assessing Risk
We have developed our current year audit plan that builds upon our knowledge of the University and that is
focused on concentrating on the areas of greatest risk from a financial statement viewpoint.
The more significant areas of audit risk considered in our audit plan include sponsored research, investments,
medical centers as well as the decentralized nature of the University’s operations. Although, as we have
discussed, there are fewer regulatory and industry specific changes in these areas during the current year as
compared to past years, sponsored research, state funding, and investments continue to have the most
significant impact on the University’s financial statements.
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University of California - Assessing Risk
Sponsored research presents perhaps the most pervasive audit risk area from a financial statement perspective
due to the volume of research and the complex regulations related to its administration. Moreover, the
complexity of federal regulations has increased over the years. While the University has made good progress
over the years in implementing new regulations, there are ongoing audit initiatives as well as changing
interpretations.
During the year 2002, we will continue to work with management to complete the audit under OMB Circular A133. Although there were not any material weaknesses in controls or material instances of non-compliance
identified in the prior A-133 audit, the audit did disclose a few instances of non-compliance. We will continue to
focus on these areas, as well as understand the current status of national initiatives. We will consider the
potential impact of control and compliance issues identified in the A-133 audit on the financial statements. During
the current year, we will place special emphasis on the follow-up of prior comments, including those in the main
letter as well as those made in less formal communications.
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University of California- Assessing Risk
Investments are another area of significant audit risk. The University has a large investment portfolio which
includes some complex and alternative investments. While the University has developed controls and policies
governing its investments, audit and control risks exist due to the liquid nature of investments in general, as well
as the continued volatility of the financial markets. Our audit approach includes the use of a specialized team of
professionals who are knowledgeable in investments and investment issues. During the current year, we will
update our understanding of the control environment, investment strategies and policies, as well as be alert to
any system or other changes. As mentioned previously, we will consider the effects of recent declines in the
financial markets on the valuations of investee companies.
An additional area of emphasis during the current year will be in the area of healthcare. As we are the auditors
of the medical centers, we will be cognizant of healthcare issues that could have an effect on the University on a
consolidated basis. Healthcare, like sponsored research, is a very complex area subject to extensive regulation.
While the changes in regulation have slowed in higher education, it should be noted that extensive new
regulations in healthcare, including HIPPA, are in a phase-in period, and these will impact the University as well
as the medical centers.
These risk factors and others are considered in developing our audit plan, which is directed primarily toward
opining on the financial statements of the University, taken as a whole. While we may provide commentary on
various elements of the internal control structure, it should be noted that these comments are compiled only in
the context of the financial statement audit.
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University of California - Audit Approach
Phases of our Audit
Our audit is conducted in three principal phases as depicted on the following page. Consistent with prior years,
we plan to place maximum reliance on the University’s systems to reduce the level of year end testing required.
Our testing of internal controls will occur in the Spring, with our substantive work on year end balances occurring
in August/September. The phases of our audit and the execution of our plan build in the areas of risk that we
have assessed.
Liaison with Internal Audit
In connection with our audit, we liase and interact with Internal Audit. We will review the reports that Internal
Audit has issued throughout the current fiscal year and will modify our workplan accordingly.
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University of California - Audit Approach
Planning
Planning Activities
Tasks
• Client acceptance and
continuance
• Mobilization
• Control environment
• Information about
business/industry
• Audit strategy
• Audit program
• Task plan
• Communication
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Execution
Audit Risk Assessment
Audit Testing Plan
Integration of Computer
Technology
Tasks
• Controls reliance and
substantive testing
• Other audit procedures
review
Completion
Finalize the Audit
Tasks
• Reporting
• Evaluating
performance
• Final procedures
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University of California - Our Audit Approach
Fraud and Illegal Acts
Our audit is designed primarily to opine on the presentation of the University’s financial statements in accordance
with Generally Accepted Auditing Standards and Government Auditing Standards. These audits are based upon
selective testing of transactions. Audits are not designed with a primary emphasis on detecting fraud or
violations of laws or regulations. Audits are subject to the limitation that existing material errors or fraud or other
illegal acts having a direct and material financial statement impact may not be detected. Therefore, we cannot
ensure that errors, fraud or other illegal acts, if present, will be detected. However, we will communicate to you,
as appropriate, any detected illegal acts, material errors or evidence that fraud may exist.
Government Auditing Standards
As a recipient of federal funds, the University is subject to an audit under Government Auditing Standards (GAS).
An audit under these standards includes procedures and tests which are beyond those required in connection
with an audit under generally accepted auditing standards. The additional requirements under GAS include tests
of compliance with applicable laws and regulations and obtaining an understanding of the control environment
relative to federal awards. Although we perform additional procedures under GAS, our audit is based upon
selective testing of compliance, and does not consider compliance with all laws and regulations; it also does not
provide an opinion on the University’s internal control system, thus, this audit may not meet the needs of all
potential users of the financial statements.
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University of California - How We Plan to Work with the
Committee on Audit and Management
During 2001, we met with management and the Committee on Audit to discuss our audit and emerging issues. We
worked jointly with management in dealing with many areas, including changes in presentation of the financial
statements and the other impacts of the new GASB Statements.
In the current year, we plan to continue our regular scheduled meetings with the Committee on Audit, Vice
President, Assistant Vice President, Internal Audit as well as continued interaction with management at the
campuses and medical centers. These meetings would be in addition to our contacts with others at the University,
Offices of Extramural Funds, Athletics, the National Laboratories and other departments.
We will also be available, as desired, for other informal meetings on emerging issues.
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University of California - How We Plan to Work with the Audit
Committee and Management
Your basic team will be unchanged-- Mike Schini will continue as your client service partner. Assisting him will
be Riva Mirvis, who will serve as review partner, Gary Garbrecht, who will serve as the lead partner on the
medical centers, and Elaine Garvey and Rick Wentzel, who will continue to serve as the primary audit managers.
In addition, this team will be supported by specialty partners in various functional areas – Ted Wilm in the area of
investments, Ed Schonfeld for taxes, and Brian Brown in the information systems area.
There are also other partners and managers who will support the University audit team through their
responsibilities of being the lead contacts at the campuses and medical centers.
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University of California - Senior Service Team
Mike Schini
Engagement Partner
Riva Mirvis
Concurring Partner
Retirement Plans
Taxes
Financial
Statements
Investments
Government
Compliance
Information
Systems
Medical
Centers
Peggy Arrivas
Partner
Ed Schonfeld
Partner
Mike Schini
Partner
Ted Wilm
Partner
Mike Schini
Partner
Brian Brown
Partner
Gary Garbrecht
Partner
Margaret Cason
Manager
Bob Kolbe
Director
Elaine Garvey
Rick Wentzel
Managers
Vik Dalvi
Senior
Rick Wentzel
Manager
Brad Yamasaki
Manager
Elisabeth Lippuner
Manager
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University of California – Audit Timing
Exhibit II
2002
F EB
MAR
APR
MAY
JUN
JUL
2003
AUG
S EP
OC T
N OV
D EC
JAN
F EB
P LA N N IN G A N D U N D ER S TA N D IN G
Be availab le t o manag ement , t he Aud it Co mmit t ee, and
The Reg ent s t hro ug ho ut t he year.
Review Int ernal Aud it Dep art ment p lan and any s ummary
aud it rep o rt s
Perfo rm a d et ailed review o f t he vario us ad minis t rat ive
info rmat io n s ys t ems .
M eet wit h Univers it y manag ement t o co nfirm t he aud it
p lan and ag ree o n t iming
Co ns ult wit h Univers it y manag ement t hro ug ho ut t he year
o n current b us ines s and acco unt ing and financial
rep o rt ing is s ues
A U D IT
Perfo rm t he int erim p has e o f o ur aud it wo rk, which
includ es t es t o f co nt ro ls co ncent rat ing o n t he fo llo wing
majo r areas :
- Purchas es
- Payro ll
- Co nt ract s and Grant s
- Gift s
- Plant
- Inves t ment s
Select io n o f it ems fo r early co nfirmat io n
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University of California – Audit Timing
FEB MAR APR MAY JUN
Exhibit II
2002
JUL AUG SEP
O CT NO V DEC
2003
JAN FEB
AUDIT (continued)
Plan and perform the year-end audit, completing all major
audit procedures for the following major audit areas
prior to the anticipated opinion date:
-
Sponsored Research
Gifts
Investments, including investment income
T uition and fees
Plant
Student loans
Meet with University management to discuss the interim
and year-end audit and operating results
REPO RTING
Issue financial statement audit report
Prepare final management letter
RELATED SERVICES
Perform Medical Center audits
Perform NCAA audits
Perform Retirement Plans audits
Review compliance and debt agreements
Perform Federal A-133 audit
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University of California – Audit Timing
FEB
MAR APR MAY JUN
2002
JUL AUG SEP
Exhibit II
O CT NO V DEC
2003
JAN FEB
POST -ENGAGEMENT REVIEW
Review with management, the Audit Committee and
T he Regents the results of our audit
Plan for subsequent audits which will focus on areas
of greatest risk and further increase audit
effectiveness
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University of California – Reports Issued
Exhibit III
The reports that will be issued in connection with this engagement include:
•
University of California general purpose financial statements
•
University of California A-133 report
•
Five individual Medical Center reports
•
Five individual NCAA reports
•
Bond Indenture Audits
•
UC Retirement System report
•
Report to Regents
•
Campus and Regents Management Letters
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University of California – Audit Fees
Base Audit
Expenses
Scope increases:
Additional NCAA Audit
Total
Other Items:
Implementation of new GASB standards
Bond Offerings
Actual
2000
Actual
2001
Proposed
2002
$ 1,800,000
218,000
$ 1,701,200
187,800
$ 1,788,600
199,100
2,018,000
1,889,000
1,987,700
2,018,000
14,000 #
1,903,000
14,800 #
2,002,500
50,000
50,000
Total
Exhibit IV
$ 2,068,000
150,000
11,000 ##
161,000
$ 2,064,000
118,200
20,000 ##
138,200
$ 2,140,700
Standard rates have increased 6% each year based upon the original proposal. Actual base audit costs have
decreased from 2000 due to the integration of the UCSF Medical Center
# UC Riverside has moved to Division I for athletics and an NCAA audit is now required annually.
## These fees were billed in FY 2001 as separate engagements and were not included in the overall audit fee.
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