DEBT GENERAL: Debt obligations are any loan, negotiable notes, time-bearing warrants, bonds or leases. A Short-Term debt obligation has a duration of 12 months or less. A Long-Term debt obligation's duration is considered more than 12 months. School districts usually borrow money on a long-term basis to finance capital asset construction or infrastructure improvements, although borrowings may also occur for other needs. There are numerous policies and guidelines that must be adhered to when issuing and managing debt and if breached in any aspect, financial integrity may be compromised. AUDIT OBJECTIVES: 1) Comprehensive policies and procedures have been established for issuing and managing short-term and long-term debt; 2) The District is in compliance with all applicable regulations; 3) Debt obligations and related expenses are authorized; 4) Debt obligations which includes all notes payable, long-term debt, finance lease obligations, and other debt equivalents are properly recorded; 5) Relevant debt restrictions/requirements are being followed; 6) Debt is properly classified between current and long-term portions, required disclosures have been made, and is presented on the Financial Statements in accordance with financial reporting requirements. AUDIT PROCEDURES: 1) General a) Obtain: i. District Policies and Procedures, ii. Job Descriptions and Organizational Chart, iii. Related information on Laws and Regulations,
DEBT iv. Prior audit reports, and v. Reports from external auditors, the Texas Education Agency, and any other oversight agency. b) Review policies and procedures to determine adequacy. Ensure that all relevant policies and procedures have been communicated to appropriate personnel. c) Review prior examination reports to determine whether corrective action has been implemented for noted deficiencies. 2) Existence or Occurrence a) Obtain a schedule of notes payable, long-term debt, finance lease obligations, and related interest, including: i. Issue date, ii. Maturity date, iii. Face amount, iv. Interest rate, v. Collateral, vi. Principal balance at the beginning of the period, vii. Current-period additions and payments, viii Principal balance at the end of the period, ix. Accrued interest and unamortized premium/discount at the beginning of the period, x. Current-period expenses and payment, and xi. Accrued interest and unamortized premium/discount at the end of the period. b) Confirm authorization in the Board minutes for new debt. c) Confirm debt with the financial institutions. i. Terms of the debt, ii. Restrictive covenants, and iii. Other pertinent conditions. d) Obtain copies of new debt agreements and review terms, conditions, and restrictive covenants.
DEBT e) Determine if any assets are pledged in connection with the debt obligation. f) Obtain a summary of all leases in force. For all finance leases indentified determine that the related obligations are properly recorded. 3) Completeness a) Compare confirmed information from the financial institutions to amounts and information obtained from the District. b) Trace ending blances to the general ledger. c) Test the arithmetical accuracy of the analysis. d) Review data submitted and detailed in the Texas Bond Review Board and compare to the District data. Note any discrepancies. 4) Valuation or Allocation a) Obtain a schedule of accrued interest expense for each category of debt. i. Trace the total of individual amounts to the general ledger, and ii. Recompute the amount of interest accrued, based on the date through which interest was paid and the applicable interest rate. Compare to schedule. b) Ensure that interest expense calculations match the amounts shown on official bond offering statement or other long-term debt agreements. c) Obtain and examine cash disbursement record (usually the check paid) evidencing the most recent payment of interest. d) Examine related accounting records and determine whether the selected debit/ credit is valid, appropriate, and authorized. Determine whether the selected entry was properly recorded in the correct period. e) Evaluate the reasonableness of adjustments made in preparation of the Financial Statements.
DEBT 5) Presentation and Disclosure of Debt and Interest Accounts in the Financial Statements a) Obtain a schedule of amounts due to be repaid in the next five years under the terms of the debt agreements (including, seperately, amounts due under capitalized leases and/or unconditional purchase obligations, if any). Test the summarization of the schedule and re-compute, on a test basis, the amounts. b) Determine whether disclosures of long-term debt and finance leases are properly made in the financial statements, including the following: i. Interest rates, maturities, restrictive covenants, and other significant features of the debt obligations, ii. Discounts and premiums reported as direct deductions from or additions to the face amounts of the debt, iii. The combined aggregate amounts of debt maturities for each of the five years following the balance-sheet date, iv. Appropriate disclosures for finance lease obligations, and v. Nature and amount of collateral, liens, and security agreements. 6) Compliance a) Read the provisions in loan and debt agreement and determine whether the District is in compliance with loan covenants and other significant provisions of the agreement. b) Determine that the accounting policies and methods of recording debt are appropriate and applies consistently. c) Select a sample of disbursements and test transactions to ensure that all guidelines are being followed. d) The District has met the record retention requirements (as long as the bond is outstanding + 3 years) i. Documentation evidencing the expenditure of bond proceeds, ii. Documentation relating to any investment of bond proceeds, and iii. Documentation regarding any private use and all sources of payment and security with respect to the bonds.
DEBT 7) Arbitrage Arbitrage is the ablility to obtain tax-exempt bond proceeds and invest the funds in a higher yielding taxable securities, resulting in a profit. With only a few exceptions, these profits must be remitted to the U.S. Department of Treasury. a) Determine if District tax-exempt bonds have been invested in taxable securities. b) Determine how the District calculates and monitors compliance with federal arbitrage regulations. c) Obtain arbitrage rebate liablility calculations for the most recent fiscal year and test amounts reported. d) Ensure that payments, if any, are remitted timely to the U.S. Department of Treasury. (The rebate calculation must be done annually but payments are only required every 5 years.) 8) Bond Refunding The process of retiring or redeeming an outstanding bond issue at maturity by using the proceeds from a new debt issue (usually the new issue is at a lower interest rate than the refunded issue). a) Determine whether the District refunded any debt within the past year. b) Review policies and/or procedures in place for refunding bonds. c) Confirm authorization in the Board minutes for refunding Bonds. d) Review accounting entries to determine if refunding was recorded in accordance with GAAP. e) Analytically review and determine whether refunding resulted in an improved cash flow and/or reduced overall debt obligations.