Accounting & Audit Update

Accounting and Audit Update December 3, 2013

Keith A. Solomon [email protected]

Alexander K. BuchholzAudit [email protected]

mailto:[email protected]

2

Agenda• Accounting Update– Lease accounting (exposure draft)– Going concern (exposure draft)

• Auditing Update– Clarity standards update– Fraud guidance– Management letter – OMB Circular A-133 updates– Other items

Accounting and Audit UpdateDecember 3, 2013

3

Lease Accounting (exposure draft)

General concepts• Both operating and capital leases will be recorded on the

balance sheet• Presently, operating leases are recorded on the income

statement only and disclosed in the notes• The change in accounting is based on a convergence project

between the FASB and the International Accounting Standards Board


4

Lease Accounting (exposure draft)

• The proposed guidance would bring all leases on the balance sheet

• The leases would be segregated into Type A (similar to capital leases) and Type B leases (similar to real estate leases)

• The lease definition would be based on the “right of use of an asset”

• There is an exception for leases that are less than one year• The FASB received 630 comment letters from preparers of

financial statements • No definite date has been set, but deliberations will likely

continue well into 2014


5

Going Concern and Liquidation Basis of Accounting (exposure draft)

• Going concern and liquidation basis of accounting—previous FASB project on risks and uncertainties– Split into two projects• Liquidation basis of Accounting ASU 2013-07 issued in

April 2013 – Apply liquidation basis accounting when plan approved and

likelihood that the plan will be blocked is remote

• Going concern proposed ASU issued in July 2013 – Covers how to assess going concern and when to make

related disclosures


6

Going Concern and Liquidation Basis of Accounting (continued)

• Current state– Auditors are responsible for assessing uncertainties

surrounding GC presumption– No guidance exists in ASC

• Proposed model– Each reporting period, management would assess ability

to meet obligations as they become due– Disclosures made when it is more-likely-than-not the

entity will not meet its obligations in 12 months, or known/probable that it will not meet obligations in 24 months


7

Going Concern and Liquidation Basis of Accounting (continued)

• Proposed model– Does not consider the mitigating impact of plans

that management would take that are outside the normal course of business in assessing if disclosure is required (a lot of judgment involved)

– For SEC filers, if the likelihood reaches probable, declare that substantial doubt regarding going concern exists

– Two of Seven Board members voted against the proposed ASU


8

Audit Update


9

Clarity StandardsThe Clarified Standards - effective for the December 31, 2012 audits

and forwardSome reminders of changes from the previous audit guidance:• AU-C-210—Terms of Engagement—must agree on terms of audit with management and

TCWG, determine that FRF is appropriate. Cannot accept engagement when know a disclaimer will be issued. Exception, is Limited Scope EB plan audit

• AU-C 250 – Consideration of laws and regulations – the auditor should perform procedures to identify instances of non compliance with laws and regulations in response to assessed risk of material misstatement

• AU-C 265 – Communicating internal control matters – include in management letters the potential effects of significant deficiencies and material weaknesses

• AUC-510—Required to obtain evidence about whether opening balances are misstated, including the appropriateness and consistency of accounting policies

• AU-C 600 – Group Audits – Expands the scope and includes specific procedures for group engagements (previously, guidance was in AU 543 “Part of Audit Performed by Other Independent Auditors”


10

Fraud Guidance

Who is responsible for the prevention and detection of Fraud?

• Management and those charged with governance

Responsibilities of Management:• Place a strong emphasis on fraud prevention• Make a commitment to create a culture of honesty and

ethical behaviorResponsibilities of those charged with governance:• Reinforce management by active oversight by those charged

with governance


11

Fraud Guidance (continued)

Where is the auditor’s guidance on Fraud?• The guidance is included under AU-C section 240,

Consideration of Fraud in a Financial Statement Audit• Topics covered include:– Insights into the environment that can lead to fraud– Evidence to look for in a GAAS audit that may indicate

fraud– Types of additional procedures that can be used to

determine if fraud exists


12

Fraud Guidance (continued)

Some Examples of Circumstances That Indicate the Possibility of Fraud:

• Unavailability of other than photocopied or electronically transmitted documents when documents in original form are expected to exist

• Significant unexplained items on reconciliations• Inconsistent, vague, or implausible responses from management or

employees arising from inquiries or analytical procedures• Unusual discrepancies between the entity's records and confirmation

replies• Large numbers of credit entries and other adjustments made to

accounts receivable records


13

Management Letter

What is the guidance for the management letter?• The guidance is included under AU-C section 265,

Consideration of Fraud in a Financial Statement Audit• Establishes standards and provides guidance on

communicating matters related to an entity's internal control over financial reporting identified in an audit of financial statements

• Control deficiency– Design deficiency– Operation deficiency


14

Management Letter (continued)

What is the management letter guidance?• Types of observations

– Deficiency– Significant Deficiency – Material weakness

• Indicators that a deficiency is a material weakness include the following:– Identification of fraud– Restatement of previously issued financial statements– Identification of a material misstatement by the auditor where indications

are that the misstatement would not have been detected by the entity’s controls

– Ineffective oversight of the entity’s financial reporting and internal control by those charged with governance


15

Management Letter (continued)

• Significant deficiencies or material weaknesses are required be communicated in writing to management and those charged with governance.

• The communication must also include previously reported significant deficiencies and material weaknesses that have not yet been resolved.

• The written communication should be made by the report release date, which is the date the auditor grants the entity permission to use the auditor's report in connection with the financial statements.

• Otherwise the communication should be made no later than 60 days following the report release date.


16

A-133 Audit FundamentalsA-133 Overview• Entities subject to A-133 will either have a single audit or a program specific audit:

– A single audit is performed by an independent auditor in accordance with Government Auditing Standards and includes an audit of the entity’s financial statements as well as federal programs.

– A program specific audit is an audit of an entity’s compliance with direct and material compliance requirements as they relate to an individual federal program.

• The provisions of Circular A-133 apply to not-for-profit institutions that are recipients or subrecipients of Federal Financial Assistance and expend $500,000 or more in federal awards in a fiscal year.

• An institution can receive federal awards either directly from a federal agency or indirectly, through a state/local government or another not-for-profit, in which case they would be called a subrecipient.


17

A-133 Audit Fundamentals• The audit reporting submission due date is the earlier of 30

days after the receipt of the auditor's reports or nine months after year end (section 320).

• A data collection form (SF-SAC) must be submitted electronically by the auditee, with sign-off by auditor, to the Federal Audit Clearinghouse (FAC) (section 320(b)).


18

A-133 Audit Fundamentals

Management’s Responsibilities:• Management is responsible for:

– Identifying Federal Awards – Classifying them by Federal Program and by CFDA number– Listing all Federal Programs and amounts expended on the

Schedule of Expenditures of Federal Awards– Understanding and complying with all federal laws and

regulations

• Note: If management cannot identify Federal Awards or prepare the SEFA, consider this as a possible significant deficiency or material weakness


19

14 Compliance Requirements

• Activities allowed and unallowed • Allowable costs and cost principles • Cash management • Davis Bacon Act • Eligibility • Equipment and Real Property Management • Matching, Level of Effort and Earmarking • Period of Availability of Funds • Procurement, Suspension and Debarment • Program Income • Real Property Acquisition and Relocation Assistance • Reporting • Subrecipient Monitoring • Special Tests and Provisions (unique to program)


20

Common Findings

• Common audit findings noted during A-133 Audits: – SEFA does not reconcile to the general ledger– SEFA has incorrect CFDA Numbers– SEFA incorrectly identifies State funding as Federal – Federal dollars are not spent in accordance with grant

contracts or the compliance supplement– Controls are not adequate for Subrecipient Monitoring– Missing supporting documentation for Eligibility– Suspension/debarment – Entity uses debarred/suspended

vendors (System for Award Management website: http://www.SAM.gov)


http://www.sam.gov/

Yellow Book 2011

• The main change in the 2011 Yellow Book relates to independence, especially when performing nonaudit services

• The Yellow Book requires auditors to evaluate and document the skill, knowledge and experience of member(s) of management who will accept responsibility to oversee any non-audit services performed by auditors.

Accounting and Audit UpdateDecember 3, 2013 21

22

Future Developments

• Audit resolution and oversight resources would be concentrated on higher dollar, higher risk awards.

– Entities that expend less than $750,000 in federal awards would not undergo a Single Audit (increased from $500,000)

– Changes to the Major Program Determination Process - Type A/B Threshold – Among other changes, the Proposed Guidance raises the minimum threshold for Type A/B program determination from $300,000 to $500,000.

– More detail will be required to be reported in auditor findings. The questioned cost threshold for reporting will be increased from $10,000 to $25,000.

– Percentage of Coverage Changes – The percentage of coverage required in a single audit would be reduced from the current 50% (normal) and 25% (low-risk) to 40% (normal) and 20% (low-risk)

– Other changes such as: 1. Reduction in compliance requirements from 14 to 6 2. The criteria for Type A programs to qualify as high-risk are being revised.3. The number of high-risk Type B programs that must be tested as major programs would be reduced

from at least one-half to at least one-fourth of the number of low-risk Type A programs. Additionally, small Type B programs would be considered those that are a flat 25% of the Type A/B program threshold.


23

The Current Economy• Auditors need to understand the economic conditions facing the industry in

which an entity operates, as well as the effects of these conditions on the entity itself.

• External factors, such as interest rates, availability of credit, consumer confidence, overall economic expansion or contraction, inflation, and labor market conditions, are likely to have an effect on an entity’s business.

• Auditors should evaluate whether changes have occurred since the previous audit that may affect their reliance on any information obtained from their previous experience with the entity.

• These changes may affect the risks and risk assessment procedures applicable to the current year’s audit.


24

Common Peer Review Findings

• In general, in order to be admitted to or retain their membership in the AICPA, members who are engaged in the practice of public accounting in the United States are required to be practicing as partners or employees of firms enrolled in an approved practice-monitoring program.

• Why does one undergo a peer review?– Public interest in the quality of services provided by public accounting firms (accounting, auditing, and

attestation services).– Firms indicate that peer review contributes to the quality and effectiveness of their practices (stewardship

theory). – Most state boards of accountancy require their licensees to undergo peer review. – Other regulators require peer review in order to perform engagements and issue reports under their

standards.

• The most common findings in recent peer reviews are as follows:– Lack of disclosure of the date through which subsequent events have been evaluated– Lack of disclosure of open tax years– Lack of documentation of expectations for analytical procedures– Lack of documentation around risk assessment procedures– Engagement letters not updated for current engagement


25

Auditing and Attestation Updates (Issuers)

Auditor’s Reporting Model• In August 2013, the PCAOB proposed a new auditing standard to enhance the auditor’s

reporting model. – Would retain the pass/fail model and the basic elements of the current auditor's report.– Would require the auditor to communicate a wider range of information specific to the

particular audit:• Communication of critical audit matters as determined by the auditor;• Enhancements to existing language in the auditor's report related to responsibilities

for fraud and notes to the financial statements; • Addition of new elements to the auditor's report related to:

– auditor independence;– auditor tenure; – the auditor's responsibilities for, and the results of, the auditor's evaluation of

other information outside the financial statements.


26

Questions


Accounting & Audit Update

Business

Transcript of Accounting & Audit Update