Financial Transaction Substantiation
Prior to reading the standard on Material Transactions Substantiation, it is beneficial to review the below sections to gain foundational information:
- Accounting Fundamentals Section
- Financial Statements Section
- Closing Standards and Procedures - Closing Standards Section
This section discusses the elements of the financial transaction substantiation process and how it is conducted internally within Indiana University. Information presented below will outline requirements for transaction support, documentation required to substantiate a transaction, and requirements and best practices related to this process.
Transaction substantiation is key to ensuring the accuracy of the University financial statements and compliance with external regulatory requirements. Transaction substantiation at IU, refers to detailed original source documentation and/or work papers that support financial transactions. The supporting documentation or substantiation should be detailed enough that a person without extensive knowledge of the transaction can review the support, understand the nature of the transaction, and tie it back to the general ledger detail. Auditors request documentation that supports financial transactions showing why and how a transaction was completed in order to ensure the accuracy, completeness and compliance with all local, state and federal requirements. In order to ensure all fiscal officers and transaction initiators are familiar with the requirements for financial transaction substantiation, examples of appropriate support to provide are discussed below.
Substantiating financial transactions is an important tool for account management and preparation for external audits. Reviewing financial transactions helps identify transaction errors, inaccurate balances, improper spending, embezzlement, and highlights other negative activity, such as theft or fraud, before balances are finalized for a period-end close. Failure to detect these errors may lead to issues concerning internal controls or the accuracy of the financial statements which impacts future funding from government organizations, creditors, or donors.
In order to ensure the integrity of an entity’s financial reports, it is important that each entity substantiate financial transactions at the time they are initiated and review material transactions on a quarterly basis. By substantiating transactions at the time of entry and reviewing on a quarterly basis, the university can produce reliable and accurate financial statements free from material misstatement that could result in false conclusions. This is important for the university’s externally audited consolidated financial statements as well as internal management reporting for decision making.
Documentation is a critical aspect of substantiating financial transactions. To meet the transaction substantiation requirements, documentation should stand alone in answering the questions of: Who, What, Where, When and Why?
Properly identifying and substantiating transactions involves:
- Determining and gathering the appropriate supporting documentation (i.e. contracts, written agreements, schedules and invoices) for each transaction
- Ensuring transactions are substantiated, supported and answer all of the who, what, where, when and why questions
- Having the documentation readily available for audit or other purposes
Every financial transaction at Indiana University is required to have substantiation. Examples of types of transactions that need to be substantiated include; accounts receivable, accounts payable, contract and grants, unearned revenue, and state appropriations. Standard procedures should be in place to ensure entities are reviewing transactions and maintaining the appropriate documentation according to the schedule for financial records in the University document retention policy. The substantiation process at the account line-item level typically comprises the following steps:
- Identify the transaction that needs to be substantiated. It is the responsibility of the document initiator to provide and maintain document substantiation.
- Gather appropriate documentation. Each transaction is required to have the following:
- A copy of the original source document such as an agreement, contract or grant documentation, analysis conducted, calculations completed, emails, memos, receipts, etc. that supports the transaction).
- The KFS document number (i.e, invoice, cash receipt, ACH).
- An appropriate storage index which is retrievable by KFS document and date in the event of an audit. Fiscal officers are responsible for ensuring that substantiation is maintained for their accounts. Examples of Who, What, When, Where, & Why Questions as it relates to documentation
- Who: Who completed the transaction and was involved in the transaction? What parties? Anyone outside of IU?
- What: What was the reason for the transaction?
- Where: Where did the transaction originate from if not KFS? Was it from an outside system?
- When: When did activity that caused transaction take place? For example, when were services provided or items purchased? Is the activity taking place over multiple reporting periods or fiscal years?
- Why: Why was the entry booked the way it was? For example, was there a specific methodology or calculation completed to support the transaction amount. The detailed calculation should accompany the documentation. Why was this account and object code used? It should be evident from the documentation why a particular account and object code were used.
This section outlines general requirements and best practices related to transaction substantiation. Following the requirements and best practices outlined below will help to avoid audit errors, financial misstatements, and fraud and allow users to gain a better understanding of their entity’s financial health.
- Every financial transaction at Indiana University is required to have substantiation.
- The fiscal officer is responsible for having all financial transaction substantiation available for audit and other purposes.
- The fiscal officer is responsible for the accuracy, reliability, and completeness of all financial transactions on their account.
- Compile the transaction substantiation at the time the transaction is initiated.
- Review financial transactions on a monthly basis and have the required substantiation on file for review.
- Prior to approving any document, validate the transaction by reviewing supporting documentation to verify the transaction is necessary and appropriate.