Unit 6 Auditing School Account Books

Introduction
The earlier units covered five major areas within the general subject of management of school funds. These included the identification of sources of school funds, concepts and skills in budgeting for school income and expenditure, the mobilisation of financial resources, the management and control of school expenditure and good practices in school book keeping.

In this unit, we will analyse the objectives and types of school accounts auditing and discuss the stages in the process involved.

Individual study time: 5 hours

Learning outcomes
By the end of this unit you should be able to:

§ explain the reasons and purposes for auditing accounts
§ describe your expectations of the school accounts auditor
§ list the types of school auditing, the records and books of accounts used for audit purposes
§ respond to audit queries
§ read an audit report.

Reasons and purposes of auditing school accounts
Auditing school accounts is the final stage in the process of managing school funds. At the end of each financial year or budget period the school head has a statutory responsibility to prepare and present to the financial authority (MOE or Governing Body) an audited financial report.

This should give a true and fair view of the financial position of the school.

Activity 6.1
Seek out and study the relevant financial regulations, principles and practices of the Ministry of Education.

Comments
Financial accountability is one of the major responsibili­ties of the school head in conjunction with the governors / trustees where they exist. Government statutes include sections outlining the financial principles and practices which heads must follow to achieve accountability for the funds they collect and receive to run their schools.

The Ministry of Education also issues financial regulations from time to time whereby audited accounts of a given financial period must be submitted to facilitate financial decisions on, for example, allocation of grants, giving loans.

The main objective of auditing is to enable the auditor to form an opinion on the accuracy of the financial statements prepared by the school for a given period. Auditing also helps the head improve the school's accounting system. The secondary objective of auditing is to detect or prevent errors. Auditing therefore enhances the head's skills in financial management and evaluates his or her performance.

Activity 6.2
Without looking at Units 3‑5, write simple definitions of the following common terms in accounting:

Accounts Journal
Account Books Financial Statement
Bank Reconciliation Receipt Book
Balance Sheet Store Ledger
Budget Voucher
Cash Book Ledger
Cheque Vote Book
Invoice Asset Register

Now go back to the appropriate sections and check on your answers.

Auditing is a process whereby all accounts of the school are examined and evaluated in detail by a competent auditor in order to determine and report on the financial standing of the school for the period under review. A school audit of financial statements also establishes the credibility of the accounting records as specified in the statutory accounting principles and practices. To understand the audit process you should know the common
books in accounts which are the key records used in auditing.

Reflect for a while on why auditing of school accounts is necessary and consider which accounts books and records are relevant for audit purposes.

The auditor officially examines and verifies the books of accounts and writes a final report which gives a true and fair view of the financial status of the school. Once the books of accounts have been examined and verified, the findings reflect the fact that the financial transactions were made and recorded according to accepted principles and practices.

Qualified auditors are the only ones authorised to examine and verify the books of accounts of any formal organisation. They are skilled in the tech­niques of auditing and they are governed by international professional ethics.

Expectations of the school accounts auditor
A school head has a statutory responsibility to prepare and submit financial statements which give a true and fair view of the financial standing of the school. As you have already learnt, that can only be achieved through auditing the school accounts.

In this section you will learn about:

§ the professional and personal qualifications of an auditor
§ the process involved in engaging a school accounts auditor
§ the relationship between an auditor and the school
§ the information required for audit purposes.

Activity 6.3
What do you understand by the phrase 'a true and fair view' of the financial standing of the school? Give examples.

In Guyana, auditing of school finances is carried out by the audit office of the Ministry of Education. Auditing of school accounts must be done with care and skill. The auditor must be professionally trained and qualified with an indepen­dent mental attitude about the school. He or she must have reputable and known personal qualities which would support his/her opinion about the school financial statements.

If you are asked to engage an auditor, say in a board school, the contract must state clearly the tasks expected, the terms of payment and date when the report must be completed and submitted to the school or the board where there is one. The auditor should not have any vested interest in the school.

After signing the contract the school head must submit to the auditor all accounts, records and books to facilitate his/her work. In addition, you should include all relevant evidence to enable the auditor to draw conclu­sions on the state of the school accounts. You should also be ready to give oral evidence and to allow any inspection of assets which the auditor may consider necessary. A thorough knowledge of the school's financial environ­ment, for example, regulations, principles and practices, mechanisms of control and the school budget, on the part of the head will greatly enhance the work of the auditor. Auditors are in a highly privileged position and have statutory rights to demand such information and explanations as they consider necessary for the purpose of auditing.

Activity 6.4
Do some additional research on auditing practice by doing one or more of the following:-

§ Pay a visit to one of the auditing firms or audit section of the Ministry of Education and find out about the routine functions of the staff in the section or firm.
§ Study the general procedures used in auditing a small company's accounts. This will give you some general knowledge on the subject of auditing.
§ Research the topic of auditing company and school accounts on the internet.
§ Study a leaflet issued by an auditing firm
§ Discuss the matter with your Head or DEO if you are a Head.

Types of auditing
There are two types of auditing.

Internal auditing
Internal auditing is usually a management activity and is a service intended to ensure regular and frequent checking on a school's financial transactions and records. An internal auditor is normally an employee of the school, for example a deputy head, whose main role is to supervise the accounts staff to ensure efficiency in the day to day management of the school finances. It also serves to check whether all financial transactions have taken place according to budget, to set procedures, and following management policies. The objectives of internal auditing may differ from school to school, but the general aim is to promote efficiency in the school's financial control and management.

Some schools are small and internal auditing may be more difficult due to lack of personnel. In any case, the school head is directly involved in authorising and approving expenses and signing cheques and therefore it is essential that someone oversees this process.

External auditing
This gives an independent report on the financial performance of the school in accordance with the terms of the contract agreed with the school. The focus of external auditing is on establishing the truth and fairness of the accounts. It gives added credibility to unaudited financial statements and records of the school's financial transactions and confirms their compliance to the statutes.

Consider the nature of your own financial transactions in your current sphere of responsibility and reflect on the advantages and disadvantages of an official audit.

Comments
It has been noted already that internal auditing is to ensure regular and frequent checking of the financial transactions of the school. A schedule for internal auditing should indicate and outline the objectives, the procedures to be followed, the frequency and the methods of communicating or reporting the information to management.

An internal audit report should point out areas of weakness and strength in the accounts records and books and draw the attention of management to any irregularities in the transactions. Information from internal auditing must be reliable, complete and available on call to enable the head and the board to make quick decisions where necessary.

The functions of internal auditing and external auditing may seem to overlap but it should be noted that the former is a management measure to ensure daily efficiency in managing school funds, while the latter evaluates the adherence to the accepted principles, practices and statutory provisions of management in financial transactions. However, internal auditing if prop­erly done will cut down on the cost of external auditing and greatly enhance the process.

Records and books of accounts for external auditing

The Head of a school depends on financial statements as a basis for financial decision‑making. Accounts and records are therefore very signifi­cant to the auditor who reviews the school's systems of accounting to give his/her professional opinion about the state of the accounts of the school.

Although many auditing procedures are designed to test accuracy in accounting and to reveal manipulations which would conceal the true finan­cial situation, the main aim in applying such procedures is to prove that the accounts are acceptable and to give a true and fair view of the school's financial standing, not to find faults.

The auditor's report is reached by a process of examining and evaluating all documents or evidence pertaining to the financial transactions of the school. In a school, books of accounts are usually written and kept by the head or the school secretary.

A primary record in the school's financial statements is the general ledger. This consists of figures and records from various journals which give the daily records of the financial transactions in the school.

A cash book, where the daily cash income and expenditure is recorded, forms one of the primary sources of evidence that the auditor examines in the process of auditing. It states the date, the cash received or spent, a full description of what is bought and the actual cost of the items bought, details of the payment voucher and number of the cheque. A petty cash voucher may also be used along with the cash book. Almost all assets, liabilities, income and expenses clear through the cash account and the auditors will spend time carefully examining the cash book to establish the validity and reliability of other financial statements.

Payment vouchers, purchase invoices, receipts books, asset registers and cheque books are primary documents which must be submitted to the auditor for verification, inspection and evaluation before a report is written and an opinion is given on the school's accounts.

Bank reconciliations and bank statements, which compare the balance in the bank with that shown in the school's records, can reveal book keeping errors either by the bank or by the school secretary as well as unauthorised with­drawals. These should be submitted along with other documents for auditing.

Activity 6.5
1) Study a sample of a cash book and list all the information that is found or recorded in it.
2) Give reasons for keeping a petty cash voucher book in your school.
3) Read the case study below and trace the steps to be taken to record all the transactions. Explain why each step is important.

Case study

Mr Mercurius, Head of the Science Department in EBB Multilateral School, submitted a requisition to the Headteacher to buy chemicals for the end of term examinations. He contacted three suppliers in Georgetown and New Amsterdam to ascertain the best price and made the order on the school’s local purchase order form No. 7865. He obtained a supplier's invoice No. 0658 indicating the quantity of the items:

1) 10 tins of sulphur costing $5,000 each
2) 10 tins of potassium costing $7,000 each.

The invoice was submitted to the school accounts clerk who checked vote No. 031 on educational materials and has confirmed that there is a balance of $200,000 ­which is sufficient to cover the cost of the chemicals.

The suppliers delivered the chemicals in the quantities indicated on the order. The materials were accompanied with a supplier's invoice dated 29th February, indicating the details of the materials and the cost of each item.

Mr Ali, the storekeeper and Mr Mercurius checked and found the materials in order as per the local purchase order, the delivery note and the supplier's invoice. The chemicals bought were recorded in the Science Store Ledger on folio No. S/10/009

All invoices were received and recorded by the accounts clerk in the journal or ledger. The Headteacher authorised payment for the chemicals and payment instructions were given to the school secretary. A payment voucher No. 5465 dated 31st March was made out and the Head endorsed it. The voucher gave quantities of what had been purchased and gave the total cost as $120,000 (one hundred and twenty thousand dollars) only. A cheque No. 02568 for that amount was written on 6th April, payable to ACPY, the suppliers. A cash receipt No. 136 dated 9th April was issued by the suppliers on 13th April.

Comments
You have already learnt that a cash book is a very important book of accounts because all cash income and expenditure go through it. The auditor therefore, spends quite a lot of time and care in examining the cash book. Wrong or inadequate entries, plus omissions made in a cash book, will greatly affect the auditor's opinion on the state of the school books.

You should also note that before any entries are made in the cash book, all other documentary evidence of the transactions like vouchers, invoices, receipts must be checked and certified to ensure that all procedures and regulations were followed and no errors were made.

A thorough knowledge of how a cash book is written will enhance your internal financial control and it will enable you to understand and appreciate the purpose of auditing school accounts.

Reading an audit report

Activity 6.6
Try to obtain a recent audit report: from your school or any other small organisation. There are many examples on the internet if you cannot find one.

1) List the main features in its format (schedule).
2) Analyse its contents briefly.
3) Point out its weaknesses if any.

An audit report should be clear, constructive and concise. The auditor will point out in writing to the authorities:

§ any weaknesses /strengths in the accounting system of the school
§ deficiencies in the financial control system
§ inadequacies in the financial policies and practices
§ non‑compliance with accounting standards and legislation.

The report also explains any implications of the above points and gives advice or recommendations for improvement. The auditor should give in clear terms his/her professional opinion on the state of the accounts. One of the main schedules in an audited report is the balance sheet. This is a summary statement of all assets and liabilities of the school by the date of the report in reference. However, an audit report should also have the following components:

§ a title, that is, Auditors Report
§ a statement as to whom addressed, for example, The School Senior Leadership Team, The Board of Governors, the Regional Education Department or the Ministry of Education
a description of the scope of the audit, showing the books examined and the tasks executed by the auditor according to the contract and audit standards
§ the auditor's opinion on the state of the school accounts
§ the auditor's address
§ the date of the report.

The auditor's opinion can be unqualified, qualified or adverse depending on the state of the books of accounts and any other evidence the auditor may have examined and evaluated. An unqualified opinion is positive and satisfactory and a qualified opinion indicates that the auditor has some reservations about the state of the school's accounts. An adverse opinion might, for example, be that regulations have not been followed, that security of cash is lax, that receipts have not been issued or perhaps that the cash book has only been completed once a week. Such issues will all impact on the auditor’s opinion of the state of financial management in the school. Generally, the report will list recommendations for improvement which the headteacher must put in place before the next report.

Responding to audit queries

If you have already been involved in the auditing of your school accounts, consider what queries the auditors may have raised about your books of accounts and about any other submissions you made.

You have already learnt that the primary objective of an audit is to enable the auditor to determine the accuracy of the school's financial accounts. You have also learnt that the auditor gives his / her opinion on whether or not the accounts give a true and fair view of the financial standing of the school.

A secondary objective of the audit is to detect errors in the accounts and advise the head or the board on how to improve the book keeping standards.

Audit queries can be raised where errors have been made in the records. These can be due to a wrong entry or an omission of some vital information. When an error is located by the auditor (s)he raises a query to the head seeking an explanation. For example, (s)he may raise a query where the trial balance does not agree with the statements of accounts.
In response the head can take any of the following steps:

submit further information to the auditor on the queried items
let the auditor inspect the assets and stores
go over the trial balance with the auditor checking:
the totals
lists of debtors and creditors
transfer or entry of all the accounts books to the trial balance
all figures in the trial balance.
go over the cash book and over all other financial documents and statements to locate errors, comissions or any evidence of fraudulent payments that may have been made in the transactions.
consider making adjustments by reviewing assets against liabilities.
consider writing off bad debts.

A trial balance summarises the effect of all financial transactions on the school accounts and it helps you and the auditor to get a preliminary view of the accounts before a balance sheet is written and an audit report is finalised.

Where you, as the school's financial manager, fail to answer all the queries satisfactorily, the auditor will present what is termed as a qualified audit report. This is a report where the auditor has been unable to obtain all the information and explanation he or she considers necessary for the audit.

Summary
The questions below give you a brief summary of the various stages involved in the auditing of school financial statements. These correspond generally with the topics which you have covered in this unit. The summary diagram is also based on questions which you may pose to yourself to make a checklist of what you have learnt from the unit.

THE SCHOOL HEAD AS FINANCIAL MANAGER

1) Do I have the relevant financial statements for auditing?
§ Always keep accounts books
§ Follow statutes and financial regulations strictly

2) What accounts books do I submit for auditing?
§ Budget statements
§ Book of accounts
§ All financial statements

3) What will the auditor expect?
§ Full knowledge of financial regulations and accounting procedures
§ Full submission of accounts books
§ Co-operation

4) What type of audit will the auditor present?
§ An unqualified report, a qualified report or an adverse report

5) What are the auditor’s recommendations?
§ Will give a “true and fair view”
§ Need for observing accounting principles and practices in future
§ Need for better internal mechanisms to ensure efficiency

6) What queries are raised and how should I respond?
§ Cash on accounts does not balance with cash at bank
§ Carry out a check of assets, bank statements and cash books
§ Discuss with auditors the balance sheet and whole report

7) What action can I or the board, if there is one, take?
§ Correct the accounts
§ Send copies to authorities
§ Keep copy of report