Special Districts are subject to an annual audit (C.R.S. 29-1-601, et seq.) that must be submitted to the Office of the State Auditor (OSA) by July 31 annually, unless an exemption is filed by March 31. Exemptions are available for governments with smaller budgets ($500,000 or less) and require a compilation instead of an audit.

For those who require an audit, here are some tips on how to be best prepared to make your 2011 audit as smooth as possible.

Engaging your auditor
At this point, you should have already selected an auditor or be in the process of selection. If not, look for an auditor who:

• Understands the Colorado Special District rules and requirements
• Commits to reasonable deadlines for an appropriate fee
• Provides great value and helpful insight about new issues
• Has a good track record, references and good peer review history

If you don’t know how to find an auditor, talk to your management service provider, other districts, or the Special District Association for some suggestions.

Once you select an auditor, expect to sign an engagement letter outlining fees, expectations and certain standard disclosures. If you have questions or concerns about a firm’s engagement letter, talk to your legal counsel, but most firms use relatively standard language.

If this is your first audit (or a first audit with a new firm), expect your auditor to request some basics, like copies of any advance and acquisition agreements, service plan, bond documents, organizational documents, etc. In subsequent years, auditors should have these items on file.

Preparing for your audit
An auditor’s role is to test the information you provide. The most effective audits (and therefore, the least expensive) are those where you and your service provider are well prepared. Making sure that the following are complete before your audit begins goes a long way toward making the process run smoothly:

• Discuss with returning auditors any errors or logistical problems that occurred in the prior year to try to eliminate those headaches.
• Establish a clear understanding about:
  • the timing of materials to be delivered
  • availability of you and your staff to respond
  • deadlines for board presentations and delivery if earlier than the OSA deadline.
• Ask for a list of items you are expected to prepare (often called a “PBC” list for “prepared by client”) from your auditor so there is a clear understanding of your responsibilities. Prior year or other examples are often available if there is any doubt about an item.
• Confirm your understanding of who is responsible for drafting your financial statements, management discussion and analysis (MD&A) and any other documents. Will you be preparing these or will you need the assistance of your auditor?
• Prepare your trial balance, ensuring that all accounts are reconciled through year end, which means:
  • Tying out balances to bank statements, bond reports, etc.
  • Providing supporting detail for amounts in prepaids, infrastructure or other assets and liabilities where possible
• Discuss with your auditor any of the following early in the process:
  • Substantive changes in responsibilities, such as new personnel or service providers
  • Any unusual transactions or concerns, including fraud, that you may have
  • Substantive changes in your operations or planned changes including those that might already have contractual or other commitments associated
• Discuss whether there are any new rules that need to be addressed or that may impact your financials (see below).

Completing Your Audit
Upon completion of your audit, your goal is a clean or unqualified report. In some circumstances, an auditor may modify their report because of disclosures or other decisions that may still be acceptable to the OSA and other users (for example, some Districts exclude MD&A in their presentation, which is otherwise required supplementary information), resulting in a report modification.

You should also receive communication about the auditor’s responsibilities and other matters in a board or management letter.

To complete your engagement, your auditor will ask you to sign certain representations about the information provided to confirm their understanding of significant matters and to assure themselves of the completeness and accuracy of your response.

Be Prepared for New Audit and Accounting Standards
Regulatory or other changes can surprise you on occasion. Two changes that will generally impact your audit for December 31, 2011, include the adoption of three audit standards (SAS 118–120) and one accounting standard, GASB Statement No. 54 (GASB 54).

Audit Standards
SAS 118–120 generally address the auditor’s responsibility for supplemental information in the categories of Other Information in Documents Containing Audited Financial Statements (SAS 118), Supplementary Information in Relation to the Financial Statements Taken as a Whole (SAS 119) and Required Supplementary Information (SAS 120). These standards are effective for audit periods beginning on or after December 15, 2010 (so generally, for your December 2011 audit period).

From the District’s perspective, the key things to be aware of are that the engagement letters you sign will likely change to reflect a change in language on expressing the opinion and to clarify management’s responsibilities with regard to any supplementary information, assuming that the auditor opines on this data. The auditor’s adoption of these standards is unlikely to result in any substantive work for the District and only some minimal additional effort on the part of the auditor.

Accounting Standard
GASB 54, Fund Balance Reporting and Governmental Fund Type Definitions, on the other hand, could be more substantive to your 2011 audit. GASB 54 attempts to provide clearer fund balance classifications that can be more consistently applied and clarifies the existing governmental fund type definitions.

This standard was effective for all periods beginning after June 15, 2010 (so essentially any entity with a June 30, 2011, or later year end). You should discuss the impact of this standard on your financials early in your audit engagement as the impact could be a minor change in disclosures and presentation, or potentially a more substantial change in the presentation of your fund balances depending on the nature of your District.

Final Thoughts
The most important thing you can do to have a successful audit is to have an open line of communication with your auditor. While it’s easy to think of an audit as a chore, try to embrace it as a supporting activity for your fiduciary responsibilities and an opportunity to learn from someone who may be working with several other Districts. Auditors can offer suggestions for your financials and potentially for your operations.

The first duty of every auditor is to the public, but any good auditor also wants to have a healthy relationship with their client and ultimately, to provide you with an important service in the best manner possible. Completing your audit does not need to be an unpleasant experience—with a little planning and good cooperation, you can receive good value from the work of your audit firm.

Travis is managing partner of the Colorado offices of BKD CPAs & Advisors. Contact the author at twebb@bkd.com.

BKD, LLP is the top-tier U.S. CPA and advisory firm that delivers its experience and service with a deep understanding of your business, your needs and what it takes to improve your business performance. BKD’s approximately 2,000 personnel, including approximately 250 partners, are based in 29 offices serving clients in 50 states. To learn more, visit www.bkd.com.