Interpreting the Audited Financial Statements

Transcription

1 Financial Management Program Interpreting the Audited Financial Statements John G. Hulsey, CGFM 1

2 Learning Objectives At the end of this class, you should be able to - Recite audit requirements Discuss elements of audit reports Navigate an external financial statement Discuss how to interpret your government s financial data 2

3 Audits 3

4 Role of the Audit Audits provide Accountability and transparency Compliance with laws and regulations Compliance with generally accepted accounting standards Objective information to management and officials to use in decision making 4

5 State Law - Audit Requirement Georgia law requires all Regional Commissions to publish financial statements within six months of the close of the fiscal year Report must conform to Generally Accepted Accounting Principles (GAAP) 5

6 State Law - Audit Requirement Audit must be performed in accordance with Generally Accepted Auditing Standards (GAAS) Generally Accepted Government Auditing Standards (GAGAS) 6

7 Auditing Standards Hierarchy 7

8 GAAS v. GAGAS Generally Accepted Auditing Standards Private Sector Financial Statement Audits Generally Accepted Government Auditing Standards Federal Government State & Local Governments 8

9 Independent Auditor s Report State that audit performed in accordance with GAAS and GAGAS 9

10 GAGAS Single Audits must be conducted in accordance with Generally Accepted Government Auditing Standards Issued by United States Government Accountability Office 10

11 Basis for Auditor s Test of Controls over Financial Statements and Federal Compliance Single Audit Requires auditor to Gain an understanding of controls over federal compliance requirements to support a low assessed level of control risk over major programs Issue Report and Schedule of findings Generally Accepted Government Auditing Standards (GAGAS) GAO Added requirement that auditors consider safeguarding controls and controls over compliance with laws and regulations Requires auditor to issue a Report including related findings. Generally Accepted Auditing Standards (GAAS) AICPA Requires auditor to Obtain and understanding of internal controls over financial reporting sufficient to plan audit and to determine whether they are operating as intended Report oral or written significant deficiencies and material weaknesses 11

12 Relationship between GAAS & GAGAS Both comprise: 1. General Standards 2. Standards of Field Work/Performance 3. Standards of Reporting 12

13 Government Auditing Standards Government auditing standards are divided into: General standards Performed by a person with adequate technical training and proficiency Independence Due professional care Field work standards Adequately planned and supervised Understanding internal controls Obtain competent evidential matter Reporting standards States whether the financial statements are in accordance with GAAP Identify inconsistencies, if any Informative disclosures Expression of opinion 13

14 Reporting Differences The independent auditor always issues a report on the fair presentation of the financial statements regardless of whether the audit is conducted in accordance with GAAS or GAGAS. In a GAGAS audit, the independent auditor also issues a report on internal control and compliance. 14

15 GAGAS Require Opinion on whether financial statements are presented fairly in all material respects with Generally Accepted Accounting Principles (GAAP) Report on internal controls over financial reporting and on compliance with laws, regulations, contracts and grant agreements with material effect on financial statements 15

16 Meet objectives Security of assets Preserve integrity Compliance Several valuable reasons for Internal Controls Prevent errors Protect employees Checks and balances Establish standards 16

17 Audit Report Requirements Unmodified Opinion (Clean) 17

18 Audit Report Requirements Modified Opinions Qualified Opinion states financial statements present fairly except for followed by a description of the issue Adverse states financial statements do NOT present fairly Disclaimer opinion cannot be rendered 18

19 Audit Report Requirements Reports on internal control and compliance with laws, regulations, and provisions of contracts or grant agreements 19

20 20

21 Independence Auditors must be independent of the government Independence of mind exercise objectivity Independence in appearance absence of circumstances that would cause a third party to question independence Work must be impartial and unbiased 21

22 Does Not Threaten Independence Routine activities performed by auditors that relate directly to the performance of an audit, such as providing advice and responding to questions as part of an audit, are not considered nonaudit services under GAGAS Providing advice to the audited entity on routine business matters Educating the audited entity on matters within the technical expertise of the auditors 22

23 Does Not Threaten Independence Preparing financial statements from government s trial balance if management accepts responsibility for them Proposing entries to management Posting entries to the trial balance approved by management 23

24 Preparation of Accounting Records Auditor independence impaired when the auditor Changes journal entries without management approval Approves transactions Changes source documents without management approval 24

25 Auditor Competence Knowledge of GAGAS Knowledge of the government environment GAAP Generally Accepted Accounting Principles as established by the Governmental Accounting Standards Board GAAS Generally Accepted Auditing Standards as established by the AICPA 25

26 Auditor Competence Certified Public Accountants licensed to practice Continuing Professional Education (CPE) every 2 years consisting of at least 24 hours that specifically relates to government auditing or the government environment 26

27 Auditor Competence An additional 56 hours of CPE directed at maintaining audit competence is required for those for in-charge auditors External peer review every three years to determine auditor has quality controls in place 27

28 Audit Concepts How often should my government bid audit services? Government Finance Officer Association recommends every 5 years Ideally a new auditor would be chosen Lack of competition of qualified audit firms may make choosing a new firm difficult Should require current auditor in addition to other interested firms to submit proposals 28

29 EXTERNAL FINANCIAL STATEMENTS 29

30 MD&A Management Discussion & Analysis Annual Financial Report Government Wide Financial Statements Fund Financial Statements Notes to the Financial Statements Required Supplementary Information (other than MD&A) 30

31 CAFR: Comprehensive Annual Financial Report Annual Financial Report PLUS: Introductory Section Statistical Section Annual Financial Report 1) MD&A 2) Govt. Wide Financials 3) Fund Financial Statements 4) Notes to Financials 5) Required Supplementary Info. CAFR 1) Introductory Section 2) Statistical Section 31

32 CAFR Requirements The Comprehensive Annual Financial Report (CAFR) is the government s official annual report CAFR is divided into 3 required sections 1. Introductory 2. Financial 3. Statistical One optional section Single audit (May be reported in separate document with references to the CAFR) 32

33 CAFR Introductory Section CAFR Financial Section CAFR Statistical Section Report cover and title page Auditor s report Demographic data and trend analysis Table of Contents MD&A Letter(s) of transmittal Basic financials Other material deemed appropriate Other required supplementary information Fund statements and schedules 33

34 Auditor Responsibility 34

35 Letter of Transmittal 35

36 MD&A Introduce basic financials and provide an analytical overview Required to present MD&A BEFORE basic financial statements Based on currently known facts, decisions or conditions Includes comparative data Great overview of the statements 36

37 MD&A 37

38 Basic Financial Statements 38

39 Fund Structure Governmental Category Proprietary Category Fiduciary Category General Fund Special Revenue Fund Capital Projects Fund Enterprise Fund Internal Service Fund Private Purpose Trust Fund Investment Trust Fund Pension Fund Debt Service Fund Permanent Fund Agency Fund 39

40 Perspectives for Analyzing Financial Statements Perspective Near-term financial position Net position Economic condition Significance Are regular inflows sufficient to cover regular outflows? Are there sufficient liquid resources to meet unexpected events and developments Is the government s net position improving or deteriorating? Is the government s net position likely to improve or deteriorate in the future? 40

41 Sources of Information for Different Purposes Perspective Near-term financial position Net position Economic condition Principal source of information within the CAFR Fund financial statements Government-wide financial statements Statistical section 41

42 Government-Wide Statements Government as a whole, no fiduciary activities Separate columns for Governmental and Business-Type Activities of the primary government and component units Economic resources measurement focus and accrual basis of accounting 42

43 43

44 44