“Internal Controls, GASB Update and Some fun with Auditing · 2016-03-23 · internal control. ·...
Transcript of “Internal Controls, GASB Update and Some fun with Auditing · 2016-03-23 · internal control. ·...
“Internal Controls, GASB Update and Some fun with Auditing ”
Internal control is a process designed to provide reasonable assurance regarding the achievement of objectives
· Effectiveness and efficiency of operations· Reliability of financial reporting· Compliance with applicable laws and regulations
Key Points Concerning Internal control
· People at every level of an organization affect internal control.
· Effective internal control helps an organization achieve its operations, financial reporting, and compliance objectives.
· Internal control can provide only reasonable assurance - not absolute assurance - regarding the achievement of an organization's objectives.
Internal Control ProcessFive Interrelated components:
The Organization's operating environmentGoals and objectives and related risk assessmentControls and related policies and procedures – Control ActivitiesInformation systems and communication methodsActivities to monitor performance
Control Environment
The control environment is the control consciousness of an organization; it is the atmosphere in which people conduct their activities and carry out their control responsibilities.The control environment is greatly influenced by the extent to which individuals recognize that they will be held accountable.
Risk Assessment
Determine Goals and ObjectivesThe central theme of internal control is (1) to identify risks to the achievement of an Organization's objectives and (2) to do what is necessary to manage those risks.
Operations objectives. Financial reporting objectives. Compliance objectives.
Identify Risks after Determining Goals
Risk assessment is the identification and analysis of risks associated with the achievement of operations, financial reporting, and compliance goals and objectives. This, in turn, forms a basis for determining how those risks should be managed.A risk is anything that could jeopardize the achievement of an objective.It is important that risk identification be comprehensive
Risk Identification
Higher Risk Transaction TypesCash, Payroll, Non-Vendor PaymentsConfidential Information
Quantitative & Qualitative costsLoss of Public Trust Violation of LawsCost of Property, Equipment and Inventory
Risk Analysis
Assess the likelihood (or frequency) of the risk occurring.Estimate the potential impact if the risk were to occur; consider both quantitative and qualitative costs.Determine how the risk should be managed; decide what actions are necessary.
Characteristics for Fraud
MotivationSituational pressures
OpportunityAccess to a situation where fraud can be perpetrated
Personal Characteristics.Willingness to commit fraud
Control Activities
Control activities are actions, supported by policies and procedures that, when carried out properly and in a timely manner, manage or reduce risks.Preventive and Detective Controls.
Control Activity Examples
Approvals, Authorizations, and Verifications (Preventive)Reconciliations (Detective).Reviews of Performance (Detective).Security of Assets (Preventive and Detective).Segregation of Duties (Preventive).
Control Activities – Information Systems
General Controls. Apply to the entire information system
Application Controls.Computer Programs and processes
Information and Communication
Information and communication are essential to effecting control; information about an organization's plans, control environment, risks, control activities, and performance must be communicated up, down, and across an organization.
MonitoringMonitoring is the assessment of internal control performance over time; it is accomplished by ongoing monitoring activities and by separate evaluations of internal control such as self-assessments, peer reviews, and internal audits.
They understand the extent to which operations objectives are being achieved.Published financial statements are being prepared reliably.Applicable laws and regulations are being compiled.
Internal Controls - SummaryThe Organization's operating environment
Starts at the Top - effectively communicatedAppropriate action
Goals and objectives and related risk assessmentDocumented and review annuallyAssess Risk - especially if there are changes
Controls and related policies and procedures – Control ActivitiesGood Segregation of DutiesLimit Management Override
Information systems and communication methodsConsistent - formal and informal
Activities to monitor performanceReview and monitor – especially if Segregation is limited or not cost effective
GASB UPDATE
THIS YEARGASB 54 - -Fund Balance ReportingGASB 59 – Financial Instruments (Omnibus)
June 30, 2012GASB 57 – Agent Multiple Employer Omnibus – OPEB (par. 8 only)GASB 64 - Derivative Instruments: Application of Hedge Accounting Termination Provisions – an amendment of GASB Statement No. 53
On or Before June 30, 2013GASB 60 – Service Concession ArrangementsGASB 61 – Financial Reporting Entity GASB 62 – Pre 89 CodificationGASB 63 – Financial Reporting of Deferred Outflows of Resources. Deferred Inflows of Resources, and Net Position
On or Before June 30, 2014Updated Pensions / OPEB?
GASB UPDATE
GASB.ORGExposure DraftsJournal EntriesCompleted Projects
GAO.GOVNewsletter Yellow Book
Macpage Newletter
GASB 54 – Fund Balance Reporting and Governmental Fund Type Definitions
Effective for Financial Statements for periods beginning after June 15, 2012Purpose: This project originated after the completion of the financial reporting model project, growing from concerns that some financial statement users were unclear about the distinctions between reserved and unreserved fund balances and the relationship between reserved fund balances and restricted net assets.
GASB 54 – Fund Balance Reporting and Governmental Fund Type Definitions
Gone -Reserved and Unreserved Fund BalanceReporting Designations
New - Classified Fund BalanceNonspendableRestrictedCommittedAssignedUnassigned
Fund Type Definitions
General FundSpecial Revenue FundsCapital Projects and Debt Service fundsPermanent Funds
Conversion to GASB 54Review Current Fund StructureIdentify Revenue StreamsEvaluate Fund Types Used Now and Under GASB 54 Review / Establish Funds / Definition of Fund Balance PoliciesDefine Differences Between Commitments and Assignments Review Internal Controls to Track Changes in Commitments and AssignmentsConversion of Historical Data, MD&A
GASB 59 – Financial Instruments Omnibus
Relatively Narrow Scope covering and cleaning up other GASBs
Removes fair value exemption for unallocated insurance contractsClarification of a 2a-7-like investment poolClarifies interest rate risk disclosure requirements that apply to bonds and certain bond mutual funds Four Practice issues under Statement 53
GASB 60 - Service Concession Arrangements (SCA’s)
SCA are a type of Public / Private or Public / Public Partnership
Transferor Government Operator
Criteria:Transfer from a government to an operatorRight and Obligation is conveyed to provide public services through the use and operation of a capital asset in exchange for significant considerationOperator collects feesTransferor is entitled to residual interest after SCA endsTransferor has ability to modify / approve services operator provides – rates, prices
GASB 61 – Financial Reporting Entity
Modifies fiscal dependency criteria to add there must be financial benefit / burden between potential component unit and governmentClarifies equity interest in joint ventures Criteria for Blending Component Units
GASB 62 – Pre 89 CodificationBackground: GASB Statement 34, paragraph 17 provides that FASB and AICPA pronouncements issued on or before November 30, 1989, should be applied to the reporting of governmental and business-type activities "unless those pronouncements conflict with or contradict GASB pronouncements." This means that financial statement preparers are currently required to identify which provisions within the FASB and AICPA pronouncements are applicable to them. Furthermore, this requirement generally is open to interpretation by financial statement preparers regarding what provisions in the FASB and AICPA pronouncements are considered conflicting and contradictory.
GASB 62 – Pre 89 CodificationOver the years, the GASB staff has answered numerous technical inquiries regarding the application of FASB and AICPA pronouncements issued on or before November 30, 1989. However, the staff responses are fact- and circumstance-specific and, therefore, have not been disseminated to the GASB's constituents. The project would benefit preparers and auditors by clearly identifying which FASB and AICPA pronouncement provisions to apply to state and local governments.
GASB 63- financial Reporting of Deferred Outflows of Resources , Deferred inflows of Resources and
Net position
New Statement of Net AssetsChanges Name from Statement of Net Assets to Statement of Net Position
Adds Two New Financial Reporting AreasDeferred outflows – consumption of net assets applicable for future periods Deferred inflows - acquisition of net assets applicable for future periods
Should be Read in Conjunction With:Exposure Draft Reporting Items Previously Recognized as Assets and LiabilitiesConcepts Statement #4, Elements of Financial Statements
New Look
Assets +Deferred Outflows of Resources –Liabilities –Deferred Inflows of Resources =Net Position
Required Descriptive Disclosures of Deferred Items
GASB 63
GASB only used the example of Fair Value hedging of Derivatives for Outflow and Deferred Concession Arrangement for Inflows to go along with GASB 64 and GASB 60.Left it up to Judgment on DeterminationThus the issuance of the exposure draft ..Effective for Periods beginning after December 15, 2011
Exposure Drafts
Accounting and Financial Reporting for Pensions—an amendment of GASB Statement No. 27Financial Reporting for Pension Plans—an amendment of GASB Statement No. 25Pension Accounting and Financial Reporting(Comment Deadline: September 30, 2011)Go to GASB Website
ConceptsThe GASB is proposing to define a pension plan. Basically, a pension plan is a trust or other fund the purpose of which is to accumulate and manage assets for the payment of pension benefits when they come due.
Contributions to the plan from the employer government or other entities are irrevocable, meaning that once the government transfers resources to the plan, it cannot get them back. The sole purpose of the assets in the plan is to provide pensions under the benefit terms. Assets in the plan are protected from creditors of (1) the employer government, (2) other contributing entities, (3) the plan administrator, and (4) the plan members (for defined benefit plans).
ConceptsPensions are a form of compensation, like salaries, which governments provide to their employees in return for work. Consequently, like salaries, the costs and obligations associated with pensions should be recorded as they are earned by the employees, rather than when contributions are made by the government to a pension plan or when benefit payments are made to retirees. GASB defines a liability as “a present obligation to sacrifice resources that a government has little or no discretion to avoid.”
ConceptsTo meet that obligation, most governments contribute to a pension plan to accumulate resources that will be used to make future payments when they come due. The GASB considered a government’s obligation to provide pensions in light of the definition of a liability, looking both at the overall obligation and the net obligation (the overall obligation minus the assets accumulated in the plan). GASB concluded that generally a government (the employer) that provides pension benefits to its employees is responsible for the net obligation and would report it as a liability in its financial statements. This liability would be called the net pension liability.
ConceptsExposure Draft Contains the method of Calculating the liability and required Disclosure information and RSI Information.Possible Ramifications for Cost-Sharing Multiple-Employer Pension Plans.Expense Recognition - ImmediatePrior Periods - Cumulatively Restated
Amended GASB 25 & 27Adds Two New Statements
Statements of Plan Net PositionStatements of Changes in Plan Assets
Notes to Basic Financial StatementsConcentrations of InvestmentsReserves – Descriptions, AuthoritiesSensitivity Test on Employer Liabilities (shift in discount rate)Assumptions on Discount Rate
Determination of Investment Rate RSI
10 Year Schedules
Fun with Auditing Clarity Project
International Standards converge with US Standards Clarification of Should and Must
New Opinion LetterRisk Assessment
Understanding / Documenting Controls Matching Controls with Related Risk Different Materiality Levels Based on Controls and Risk
Guidelines on Reporting Findings
Fun with Auditing Changes to Additional Information in the Financial Statements.
SAS 118 (Sec 720) – Other Information in Audited Financial StatementsSAS 119 (Sec 725) – Supp Information In Relation to FS taken as a WholeSAS 120 (Sec 730) – Required Supplementary Information
Basically Information included with the Financial Statement - and Required Information included with the Financial Statements
Fun with Auditing Service Organization Control (SOC) Reports
Old SAS 70Control Reports Expanded into 3 types (options)
Level 1 (SOC 1) – minimum - Internal control over financial reporting Level 2 (SOC 2) – Restricted Use – Federal RequestLevel 3 (SOC 3) – General Use - Public
Questions & Comments
This presentation is intended as a tool to assist the attendees of the Maine Utility Financial Officers Current Business Issues conference in understanding Internal controls , Auditing and GASB updates. The information contained in this publication was from the University Of California, Understanding Internal Controls and the GASB website and should be read in conjunction with GASB Statement s and related other Statements issued by GASB and should not be used for any other purposes without the expressed consent of Macdonald Page & CO LLC.