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Prerequisites

Prior to reading the standard on Material Transactions Substantiation, it is beneficial to review the below sections to gain foundational information:

  1. Accounting Fundamentals Section
  2. Financial Statements Section
  3. Closing Standards and Procedures - Closing Standards Section

Preface

This section discusses the elements of the material transactions substantiation process and how it is conducted internally within Indiana University. Information presented below will outline requirements for transaction support, the documentation required to substantiate a transaction, and requirements and best practices related to this process.


Introduction

Material transactions substantiation is key to ensuring the accuracy of the University financial statements and compliance with external regulatory requirements. Material transaction substantiation at IU, refers to detailed documentation and/or work papers substantiating line-item transactions that exceed the $5 million threshold (NOTE: the threshold does not apply to document total amounts, but to individual 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 material transactions substantiation, examples of appropriate support to provide are discussed below.


Importance and Impact of Material Transactions Substantiation

Substantiating material transactions is an important tool for account management and preparation for external audits. Reviewing material 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 individual donors.

In order to ensure the integrity of an entity’s financial reports, it is important that each entity review and substantiate material transactions on a quarterly basis. By reviewing and substantiating material transactions as part of the quarterly closing procedures, 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.


Identifying and Substantiating Material Transactions

Documentation is a critical aspect of substantiating financial transactions. Examples of types of transactions that need to be substantiated include; accounts receivable, accounts payable, contract and grants, unearned revenue, and state appropriations. Please see the Financial Transaction Substantiation standard for more information. Standard procedures should be in place to ensure entities are appropriately substantiating material transactions. Fiscal Officers are responsible for ensuring that material transactions are substantiated.

To meet the material transaction substantiation requirements, documentation needs to answer the questions of: Who, What, Where, When and Why?

Properly identifying and substantiating material transactions involves:

  • Reviewing line-item detail transactions for amounts $5 million and above at the time the transaction is submitted.
  • Determining and gathering the appropriate supporting documentation (i.e. contracts, written agreements, schedules and invoices) for each material transaction. Ensuring transactions are substantiated, supported and answer all of the who, what, where, when and why questions.

All material transactions must have a Material Transactions Coversheet attached to the KFS document or a reference to a UCO approved process narrative index number when the transaction is submitted.

Material Transactions Coversheet

A Material Transactions Coversheet is required to be completed and attached to the KFS transaction document for any non-routine. A Material Transaction Coversheet is also required for any routine transaction that does not have a completed and approved process narrative on file in UCO. In order to complete the Material Transaction Coversheet, the initiator, the initiator of the KFS transaction document, should gather a copy of the source documentation. This documentation will be needed to complete the Material Transaction Coversheet.

Financial Process Narrative

For Material Transactions that are routine, a process narrative should be completed and approved by UCO. For additional information on Process Narratives and the process for completing them, please refer to the Financial Process Narrative IU Accounting Standard . When the financial process narratives are considered complete, the department will receive an assigned index number of the process narrative. This index number can be referenced in the Material Transaction Coversheet along with any specific supporting documentation. It is important to note that financial process narratives are required to be reviewed by the department and updated on an annual basis for audit purposes or as changes to processes occur.

Income/Receivable Transaction Substantiation

A distribution of income and expense document was completed in May 2021 claiming receipts from the EFT account and appeared on the material transactions report. The total document amount was $6,722,727.00, broken out into line item amounts of $650,000 and $6,072,727. Only the line item of $6,072,727 will need to have substantiation attached to the document.

Material Transaction to Substantiate

Organization Name Transactions Ledger Entry Description Transaction Post Date Object Code Amount of Revenue Recorded
Org 123 XYZ Revenue 5/4/2021 1481 $6,072,727.00


Documentation Attached to the Transaction

  1. A completed Material Transaction Coversheet.
  2. A copy of the original XYZ contract related to XYZ Revenue.
  3. A copy of the KFS DI document.
  4. The statement of receipts and disbursements from XYZ company with specific dollar amounts per university and tied to the KFS DI document.

Expense Transaction Substantiation

A distribution of income and expense document was completed in September 2020 moving scholarship expenses from the main scholarship account to departmental accounts throughout the university in which the expense belongs. The total document amount was $5,868,526.29, broken out into line item amounts of $155,805, $360,793.87 and $5,351.927.42. Only the line item of $5,351,927.42 will need to have substantiation attached to the document.

Material Transaction to Substantiate

Organization Name Transactions Ledger Entry Description Transaction Post Date Object Code Amount of Revenue Recorded
Org 456 Allocation of ABC at Sept29 9/29/2020 5880 $(5,351,927.42)


Documentation Attached to the Transaction

  1. A completed Material Transaction Coversheet.
  2. A copy of the SIS report listing the scholarship recipients and the amount of each scholarship awarded with any critical data redacted.
  3. A copy of the KFS DI document.
  4. An account reconciliation.

Deferred Software Agreement Transaction Substantiation

A general accounting adjustment document was completed in June 2020 to move the fiscal year 2021 Allocation of ABC costs from an expense object code to a deferred charges object code since the agreement was to begin 7/1/2021. The total cost of the ABC agreement $6,200,000 was deferred until fiscal year 2021 and will need to have substantiation attached to the document.

Material Transaction to Substantiate

Organization Name Transactions Ledger Entry Description Transaction Post Date Object Code Amount of Revenue Recorded
Org 789 Defer XYZ Agreement 6/2/2020 8400 $6,200,000.00


Documentation Noted on the Document

UA-XXX has approved process narrative XX on file with UCO.


Requirements and Best Practices

This section outlines general requirements and best practices related to performing material 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.

Requirements

  1. Every financial transaction at Indiana University is required to have substantiation.
  2. Compile the transaction substantiation at the time the transaction is initiated.
  3. Substantiation detail for every financial transaction over $5M is required to be attached to the document in KFS.
  4. The fiscal officer is responsible for having all financial transaction substantiation available for audit and other purposes.
  5. The fiscal officer is responsible for the accuracy, reliability, and completeness of all financial transactions on their account.


Best Practices

  1. Review financial transactions on a monthly basis and have the required substantiation on file for review.
  2. Prior to approving any document, validate the transaction by reviewing supporting documentation to verify the transaction is necessary and appropriate.