GOVERNMENTAL ACCOUNTING, AUDITING AND FINANCIAL REPORTING Larry FinneyJUNE, 2014.

GOVERNMENTAL ACCOUNTING, AUDITING AND FINANCIAL

REPORTING

Larry Finney JUNE, 2014

OVERVIEW

• Introduction• Accounting Principles Generally Accepted

in the USA (GAAP)-governmental• Reporting model• Financial Reporting Entities

• Annual financial reporting• Basic and Government-wide Financial

Statements• CAFR• Compliance

2

OVERVIEW

• Financial Audits• Financial Audit Standards• External Financial Audits• The Single Audit• The Auditor’s Reports• Procurement “audit”• Management letter/communication to

those charged with governance

3

INTRODUCTION

• Types of governments (2012 data-not including territories)• 1 federal• 50 states• 3,031 counties• 12,880 school districts• 35,879 municipalities• 38,266 special purpose districts• 90,107 in total

4

INTRODUCTION

• Types of governments in SC (2012 data)• 1 state• 46 counties• 83 school districts• 270 municipalities• 279 special purpose districts• 679 in total

5

INTRODUCTION

• Government employment (2012 data)

Government # employees Annual payroll

Federal 2.8 million $16.9 billion

States (nationally) 4.3 million $20.2 billion

State-SC 78 thousand $291.6 million

Local (nationally) 11.9 million $50.8 billion

Local-SC 180 thousand $621 million

6

INTRODUCTION

• Government finance (2005-06 in thousands)

State and local (nationally)

State and local (SC)

Revenues $2,739,938,115 $34,676,115

Expenditures $2,507,378,945 $34,234,040

Debt outstanding $2,200,892,115 $32,158,974

Cash/investments $4,790,640,089 $50,763,744

Cash unrestricted 25% 33%7

INTRODUCTION

• Key concepts• Risk versus reward• Reliable-timeliness, accuracy,

completeness, propriety, materiality• Financial information

analysis

decisions/actions8

INTRODUCTION

• Key concepts• Event/decision = financial consequence

9

INTRODUCTION

• Key concepts• Fiscal Accountability-”responsibility of

governments to justify that their actions in the current period have complied with public decisions concerning the raising and spending of money in the short term (one year or one budget cycle).”

10

INTRODUCTION

• Key concepts• Operational

Accountability-”governments responsibility to report the extent to which they have met their operational objectives efficiently and effectively, using all resources available for that purpose, and whether they can continue to meet their objectives for the foreseeable future.”

11

INTRODUCTION

• Goal of any organization• Maximize value to stakeholders

• Governments-provide required services to users as efficiently and effectively as possible in order to minimize resources needed

• Private sector-increase value of stock or business for long-term

• Who are stakeholders in government?

12

THE BEGINNING

• What was the profession of the man who first developed double-entry bookkeeping?

13

THE BEGINNING

• Accounting Principles Generally Accepted in the USA (GAAP)• Minimum standards• MFOA…GFOA• MFOA sponsored the NCMA…NCGA…GASB• FAF oversees FASB and GASB

• Independent

14

GAAP

• GASB• 7 members• Only chairperson is full-time• Aided by GASAC (Governmental

Accounting Standards Advisory Council)• Consultative body of many groups• GFOA, AICPA….

• Only takes majority vote to establish standards

15

GAAP

• GASB• Jurisdiction over state and local governments and

other entities that meet at least one of:• Officers are popularly elected• Controlling majority of members is appointed by officials

of at least one state or local government• Government can dissolve the entity and net assets go

back to that government• Has power to enact and enforce a tax levy• Has ability to directly issue federally tax exempt debt

16

GAAP

• Hierarchy-Established by SAS 69

Authority Level

GASB AICPA/Other

Level 1 Statements/interpretations

Level 2 Technical bulletins Audit guides, SOPs (cleared by GASB)

Level 3 EITF consensus positions Practice bulletins

Level 4 Implementation guides Audit guides, SOPs (not cleared), prevalent pract.

Level 5 Concepts Statements FASB, textbooks…

17

FUND ACCOUNTING

• Fund Accounting and Reporting• fiscal responsibility

• Government-wide financial reporting• operational accountability

18

FUND ACCOUNTING

• Funds• fiscal and accounting “entity”• self-balancing set of accounts • records cash and other financial resources,

related liabilities and equities/balances• and changes (revenues and expenditures)• segregated for the purpose of carrying on

specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations

19

FUND ACCOUNTING

• Funds• How many funds can you have?• Only minimum number necessary• Guidance

• Required by law• Sound financial administration

• Accounting fund versus financial reporting fund

20

FUND ACCOUNTING

• Funds• Governmental

• General• Special revenue• Debt service• Capital projects• Permanent

• Proprietary• Enterprise• Internal service

• Fiduciary• Pension (and other employee benefit) trust• Investment trust• Private-purpose trust• Agency 21

FUND ACCOUNTING

• Measurement focus-describes the types of transactions and events that are reported in a fund’s operating statement• Economic resources-what transactions or

events have increased or decreased the fund’s total economic resources during the period (change in net assets)?

• Current financial resources-what transactions or events have increased or decreased the resources available for spending in the near future (may or may not change fund balance)?

22

FUND ACCOUNTING

• Measurement focus• Governmental funds-current financial resources• Proprietary and fiduciary funds-economic

resources• Agency funds-no accounting for operations, so no

measurement focus

23

FUND ACCOUNTING

• Measurement focus• Examples of differences

• Debt issuance• Debt principal payments• Capital asset acquisition or construction• Many others

• Note: the long-term net effect is the same!

24

FUND ACCOUNTING

• Basis of accounting-the timing of recognition of transactions and events• Tied to a fund’s measurement focus• Full accrual-recognize increases and decreases

in economic resources as soon as the underlying transaction or event occurs

• Revenues recognized as soon as they are earned• Expenses recognized as soon as a liability is incurred• The timing of the cash flows does not matter

25

FUND ACCOUNTING

• Basis of accounting-the timing of recognition of transactions and events• Tied to a fund’s measurement focus• Modified accrual-recognize increases and

decreases in financial resources only to the extent that they reflect near-term inflows or outflows of cash

• Revenues recognized as soon as they are collectible to pay liabilities of the current period; when they are available to finance expenditures of the current period

• Expenditures recognized when they are to be liquidated in the current period with available financial resources

• The timing of the cash flows does matter

26

FUND ACCOUNTING

• Basis of accounting-the timing of recognition of transactions and events• Governmental funds-modified accrual• Proprietary and fiduciary funds-full accrual

27

FUND ACCOUNTING

• Basis of accounting-the timing of recognition of transactions and events• Examples of differences

• Revenue recognition• Compensated absences• Long-term liabilities• Many others

• Note: the long-term net effect is the same!

28

FUND ACCOUNTING

• What is considered “available” or “collectible within the current period or soon enough thereafter to be used pay liabilities of the current period”?• There is some discretion, but it should be

consistent year to year and reasonable• Should not be too rigid that it distorts normal

revenue patterns• Usually see either 30 or 60 days

29

FINANCIAL REPORTING ENTITY

• Primary government• State and general-purpose local

governments (county, municipality, and most school districts)

30


• Primary government• Special purpose if:

• Elected governing body• Separate legal status• Fiscal independence

• Budget• Tax levy or setting of rates or charges• Issuance of debt

31


• Component unit• Legal separate entity that a primary

government must include in its financial statements to be GAAP compliant

• Entity can only be component unit of one government

• Three tests-any one of following:• Board appointment• Fiscal dependence• Nature and significance of relationship

32


• Component unit• Board appointment-all three criteria

• Substance over form• Appointed members must exercise operational

control (at least voting majority)• Any one of following:

• Primary government impose its will• Financial benefit through access to assets• Financial burden-finance deficits or debt obligation

33


• Component unit• Fiscal dependence

• Primary government board may arbitrarily override the financial decisions of the other entity regarding its

• Budget• Tax levy or setting of rates or charges• Issuance of bonded debt

34

Financial Reporting Entity-GASB #61

Fiscal Dependency• GASB #61:

• Fiscal dependency based on the current guidance

PLUS:

• Ongoing relationship of financial benefit or burden also necessary:

• PG entitled to or can otherwise access resources.• PG obligated to finance deficits or provide financial

support.• PG obligated in some manner for debt. 35


• Component unit• Nature/significance of relationship

• Omission of the second entity’s financial statements from the primary government’s would render the primary government’s financial statements misleading

• GASB #61 clarified that the nature/significance of the relationship is meant to be financial in nature

36


• Component unit• Blended vs. discretely presented• Blended criteria:

• Shared governing body• Substantially the same; voting majority of

component unit makes up voting majority of primary government

• additionally requires that (1) the primary government and the component unit have a financial benefit or burden relationship or (2) management (below the level of the elected officials) of the primary government have operational responsibility for the activities of the component unit

37


• Component unit• Blended criteria:

• An obligation (other than secondary) to repay a component unit’s debt entirely, or almost entirely, from a resource stream of the primary government.

• Exclusive or almost exclusive benefit to the primary government

• Provides services/other almost entirely to primary gov’t

• Otherwise should be discretely presented

38


• Component unit• Presentation in financial statements• If separately issued financials, explain how

to obtain in primary government notes• Blended

• Funds become as those of primary gov’t• General fund of component unit?

39

Financial Reporting Entity-GASB #61

Blending for Single-Column BT Activities

• Two options:• Consolidate the component unit data into

a single column presentation, while including combining information in the notes to the financial statements.

• Display the blended component unit as a separate column and then provide a combined primary government total column. 40


• Component unit-Presentation in financial statements• Discretely presented-one of three ways

• Separate columns for major individual component units with aggregate column for nonmajor

• One single column for component units on government wide statements and detail in combining section

• Condensed financial statements included in notes of primary government

41

GOVERNMENT FINANCIAL REPORTING

• Financial statements• Comprehensive annual financial report

(CAFR)• Popular annual financial reports

42


Basic Financial Statements

Required Supplementary Information

Combining and Individual Fund Statements and Schedules

Government-wideFinancial statements

Management’s discussion and analysis

Depends on fund types and funds

Fund financial statements

Original and Final Budget to Actual Comparison

Other

Notes to the financial statements

Other

STANDARD FINANCIAL STATEMENTS

43


• CAFR• Add following to standard financial

statements• Introductory section• Statistical section

• CAFR checklist

44


• Popular Reports• Voluntary• Simple• Highlights• Creative• If want to include auditor opinion, it must

be different opinion

45

Combining and individual fund statements and schedules

• The first level-most detailed• All fund types and all funds• These are the financial statement and

schedule categories to which most of the trial balance accounts are coded

• Governmental funds are modified accrual

• Proprietary and fiduciary funds are full accrual 46


• Balance sheets/Statements of net assets• Order of liquidity• Unrestricted versus restricted

• Revenue and expenditure/expense statements• Operating versus non-operating• Other financing sources• Contributions• Extraordinary and special items

47


• Revenue and expenditure/expense statements• Extraordinary Items are transactions or other

events that are both unusual in nature and infrequent in occurrence.

• Special Items are significant transactions or other events within the control of management that are either unusual in nature or infrequent in occurrence

48


• Budgetary comparison schedules for all other governmental funds with legally adopted annual budgets (other than the general fund and major special revenue funds)

• These statements and schedules ultimately “roll up” to the basic financial statements (so make sure there are totals that tie to the BFS)

49

THE BASIC FINANCIAL STATEMENTS

• Basic fund financial statements• This is where Boards/Councils and Commissions

generally pay the most attention• Still modified accrual for governmental and full

accrual for proprietary and fiduciary• Separate statement for governmental versus

proprietary versus fiduciary• Individual columns for major funds

• Non-major are combined into one column• Internal service funds are combined into one

column

50


• Basic fund financial statements• The balances should “roll up” from the

combining and individual fund statements and schedules

51


• Budgetary Comparison Statements• Original budget• Final budget (after amendments)• Actual• Variance (optional unless CAFR)

52


• Budgetary Comparison Statements required for• General fund• Major special revenue funds• If budgetary basis is different from GAAP

• Show budget on budgetary basis• Then reconcile to GAAP

53


• Reconciliations• Moving from modified accrual to full accrual for

governmental funds• Balance Sheet reconciles to the Statement of Net

Assets and the Statement of Revenues, Expenditures and Changes in Fund Balances reconciles to the Statement of Activities

• Generally no reconciliations for proprietary funds• Every adjustment must be accounted for in the

reconciliation

54


• Reconciliations• Explanations must accompany the

adjustment amounts• Can provide detail on reconciliation or• Can provide detail in notes

• Balance sheet amounts are cumulative• Income statement amounts are for the

current year

55


• Reconciliations• Balance sheet fund balances total to

statement of net assets total for net assets• Total of changes in fund balances from the

statement of revenues, expenditures and changes in fund balances to governmental activities’ changes in net assets from the statement of activities

56


• Reconciliations• Reconciling items represent adjustments

that must be made to individual trial balance accounts in order to arrive at government-wide financial statement balances and amounts

57


• Government-wide financial statements• Full accrual basis• Statement of Net Assets

• Includes long-term assets (capital assets is most common) and long-term obligations (debt and compensated absences are the most common)

• Statement of Activities• Unique format

58


• Notes to the basic financial statements• Full accrual and modified accrual basis• Disclosure checklists are key and must be

completed (we will review examples):• Basic• GFOA• ASBO

• In addition to checklists, if an amount or description is not clear in the statements, consider disclosure

59

THE COMPLIANCE SECTION

• Required for governmental entity whether must have single audit or not

• If single audit required:• SEFA• Two reports• Prior year findings• Schedule of findings and questioned costs

60

THE COMPLIANCE SECTION

• If single audit not required and no federal expenditures:• One report• Prior year findings (if single audit in prior

year)• Schedule of findings and questioned costs

61

MANAGEMENT’S DISCUSSION AND ANALYSIS

• “Management’s”• Must have basic financial information• Comparative (need to understand

reasons for significant increases and decreases from the prior year)

• GASB 34 says only required information-see handout

62

MANAGEMENT’S DISCUSSION AND ANALYSIS

• Who will read this?• A lot of people will try to understand the

MD&A who won’t understand the financial statements!

• So use this MD&A wisely

63

OTHER INFORMATION

• Title pages• Names versus departments• Which names to include?

• Table of contents• Compare titles• Check page numbers right before printing

• Certificate(s)• Organization chart

64

OTHER INFORMATION

• Letter of transmittal• GFOA provides guidance• Should not be any duplication with MD&A

65

THE STATISTICAL SECTION

• Unaudited!• Only needed if issue CAFR• If issue early, probably have to get

statistics yourself• If issue late, get help from a

government who has already issued

66

AUDITING STANDARDS

• Statements on Auditing Standards (SASs)• issued by the Auditing Standards Board

(ASB), the senior technical body of the AICPA designated to issue pronouncements on auditing matters applicable to the preparation and issuance of audit reports

67

AUDITING STANDARDS

• Auditing Standards Board• Mission-Its mission is to serve the public

interest by developing, updating and communicating comprehensive standards and practice guidance that enable practitioners to provide high-quality, objective audit and attestation services to nonissuers in an effective and efficient manner.

68

AUDITING STANDARDS

• Auditing Standards Board• 19 Members• Most from public accounting, but some

from academia, Government Accounting Office and other organizations

69

AUDITING STANDARDS

• SAS #1• Responsibilities and functions• Training and Proficiency • Independence• Due Professional Care

70

AUDITING STANDARDS

• SAS #1• GAAP• Consistency in applying GAAP• Dating the report• Using other auditors

71

AUDITING STANDARDS

• SAS #12-Inquiry of lawyers• SAS #25-Quality control standards• SAS #32-Disclosures• SAS #39-Audit sampling• SAS #45-Related parties• SAS #54-Illegal acts• SAS #56-Analytical procedures

72

AUDITING STANDARDS

• SAS #58-Types of reports• SAS #59-Going concern• SAS #65-Internal auditors• SAS #72-letters for underwriters• SAS #84-communications between

successor and predecessor auditors

73

AUDITING STANDARDS

• SAS #85-Management representations

• SAS #95-The 10 General Standards• SAS #99-Consideration of fraud• SAS #101-Fair Value• SAS #104/111-Risk, Audit

Evidence, Internal Controls

74

AUDITING STANDARDS

• SAS #114-Communication with those charged with governance

• SAS #115-Communication of internal control related matters

• SAS #117-Compliance matters• SAS #119/120-Supplementary

information• SAS #122/126-Finishes clarity

project 75

AUDITING STANDARDS-THE BIG 10

• General Standards• 1. The auditor must have adequate technical

training and proficiency to perform the audit.• 2. The auditor must maintain independence in

mental attitude in all matters relating to the audit.

• 3. The auditor must exercise due professional care in the performance of the audit and the preparation of the report.

76

AUDITING STANDARDS-10 GENERAL

• Standards of Field Work• 1. The auditor must adequately plan the work and must

properly supervise any assistants.• 2. The auditor must obtain a sufficient understanding of the

entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures.

• 3. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.

77


• Standards of Reporting• 1. The auditor must state in the auditor's report whether the

financial statements are presented in accordance with generally accepted accounting principles.

• 2. The auditor must identify in the auditor's report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.

• 3. When the auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in the auditor's report.

78


• Standards of Reporting• 4. The auditor must either express an opinion regarding the

financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor's report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefor in the auditor's report. In all cases where an auditor's name is associated with financial statements, the auditor should clearly indicate the character of the auditor's work, if any, and the degree of responsibility the auditor is taking, in the auditor's report.

79

EXTERNAL AUDITS

• Background• financial statements are representations

by management about financial transactions

• With each representation management is making certain assertions

80

EXTERNAL AUDITS

Management Assertion Framework

Classes of Account Presentation

Transactions Balances and Disclosures

Occurrence Existence Occurrence and

rights and obligations

Completeness Rights and Completeness

obligations

Accuracy Completeness Classification and

understandability

Cutoff Valuation and Accuracy and

allocation valuation

Classification 81

EXTERNAL AUDITS

• Background• The auditor’s role is to provide

reasonable assurance to financial statements users so that they can make decisions using these statements because they are materially correct• We estimate materiality based on what

might cause a reader to make a different decision-and that depends on the user!

82

EXTERNAL AUDITS

• Background• The auditor’s role is to provide

reasonable assurance to financial statements users so that they can make decisions using these statements because they are materially correct•So what is material to you?

83

EXTERNAL AUDITS

• Background• Therefore, the goal of the audit process

is to gather the evidence necessary for the appropriate opinion to be issued as to whether the financial statements are materially correct•Direct evidence from substantive

procedures• Indirect evidence from the testing of

controls

84

EXTERNAL AUDITS

• Background• Primary direct evidence from

substantive procedures• Review of supporting documentation• Analytical review and inquiry• Confirmation with third parties• Verify with other information outside the

District

85

EXTERNAL AUDITS

• Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated (SAS 107)

86

EXTERNAL AUDITS

• Audit risk-issue unmodified opinion when it should be modified

• Three events must occur:• Material misstatements• Employees, in the normal course of

their duties, fail to correct the misstatements

• The auditor fails to detect the misstatements

87

EXTERNAL AUDITS

THE AUDIT RISK MODEL• AR= (CR x IR) x DR

(CR x IR)=RMM

• AR=audit risk• CR=control risk (controlled by entity)• IR=inherent risk (controlled by entity)• DR=detection risk (controlled by auditor)

• Test of details risk and analytical procedures risk

• RMM=risk of material misstatement88

EXTERNAL AUDITS

• End result/product• Opinion on financial statements• Opinions for single audit• Findings in compliance section• Management letter• Presentation to Board

89

SINGLE AUDIT

• Federal program compliance audits of recipients of federal awards

• OMB Circular A-133 is primary document (it references other applicable circulars)

• If you pass awards through to other entities-subrecipient monitoring

• Focus on expenditures, not revenues90

EXTERNAL AUDITS-OPINION

• Let’s review: • Standard audit opinion for a CAFR• Compliance section• Management letter• Presentation to Board

91

GOVERNMENTAL ACCOUNTING, AUDITING AND FINANCIAL REPORTING Larry FinneyJUNE, 2014.

Documents

Transcript of GOVERNMENTAL ACCOUNTING, AUDITING AND FINANCIAL REPORTING Larry FinneyJUNE, 2014.