University of California Audit and Service Plan For the Year Ending June 30, 2002 pwc

University of CaliforniaAudit and Service Plan

For the Year Ending June 30, 2002

University of California

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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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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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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 far-

reaching 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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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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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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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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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 A-

133. 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 Activities

Tasks•Client acceptance and continuance

•Mobilization•Control environment• Information about business/industry

•Audit strategy•Audit program•Task plan•Communication

Audit Risk AssessmentAudit Testing PlanIntegration of Computer Technology

Tasks•Controls reliance and substantive testing

•Other audit procedures review

Finalize the Audit

Tasks•Reporting•Evaluating performance

•Final procedures

Planning Execution Completion

University of California - Our Audit Approach

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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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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.

University of California - How We Plan to Work with the Committee on Audit and Management

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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.

University of California - How We Plan to Work with the Audit Committee and Management

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University of California - Senior Service Team

Bob KolbeDirector

Ed SchonfeldPartner

Taxes

Elaine GarveyRick Wentzel

Managers

Mike SchiniPartner

FinancialStatements

Vik DalviSenior

Ted WilmPartner

Investments

Rick WentzelManager

Mike SchiniPartner

GovernmentCompliance

Brad YamasakiManager

Brian BrownPartner

InformationSystems

Riva MirvisConcurring Partner

Mike SchiniEngagement Partner

Medical Centers

Gary GarbrechtPartner

Elisabeth LippunerManager

Retirement Plans

Peggy ArrivasPartner

Margaret CasonManager

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University of California – Audit Timing Exhibit II

2002 2003FEB MAR APR MAY J UN J UL AUG SEP OCT NOV DEC J AN FEB

PLANNING AND UNDERSTANDING

Be available to management, the Audit Committee, and

The Regents throughout the year.

Review Internal Audit Department plan and any summary

audit reports

Perform a detailed review of the various administrative

information systems.

Meet with University management to confirm the audit

plan and agree on timing

Consult with University management throughout the year

on current business and accounting and financial

reporting issues

AUDIT

Perform the interim phase of our audit work, which

includes test of controls concentrating on the following

major areas:

- Purchases

- Payroll

- Contracts and Grants

- Gifts

- Plant

- Investments

Selection of items for early confirmation

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2002 2003FEB MAR APR MAY JUN JUL AUG SEP O CT NO V DEC JAN FEB

AUDIT (continued)

Plan and perform the year-end audit, completing all majoraudit procedures for the following major audit areasprior to the anticipated opinion date:

- Sponsored Research- Gifts- Investments, including investment income- Tuition and fees- Plant- Student loans

Meet with University management to discuss the interimand 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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2002 2003FEB MAR APR MAY JUN JUL AUG SEP O CT NO V DEC JAN FEB

POST-ENGAGEMENT REVIEW

Review with management, the Audit Committee andThe Regents the results of our audit

Plan for subsequent audits which will focus on areasof greatest risk and further increase auditeffectiveness

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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 Exhibit IV

Actual Actual Proposed2000 2001 2002

Base Audit 1,800,000$ 1,701,200$ 1,788,600$ Expenses 218,000 187,800 199,100

2,018,000 1,889,000 1,987,700 Scope increases:

Additional NCAA Audit 14,000 # 14,800 #Total 2,018,000 1,903,000 2,002,500

Other Items:Implementation of new GASB standards 50,000 150,000 118,200 Bond Offerings 11,000 ## 20,000 ##

50,000 161,000 138,200

Total 2,068,000$ 2,064,000$ 2,140,700$

# 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.

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

Documents

University of California Audit and Service Plan For the Year Ending June 30, 2002 pwc