Risks and Issues in Financial Statement and Single Audits

Transcription

1 Risks and Issues in Financial Statement and Single Audits UT Arlington 3 rd Annual CPE Event August 14, 2013 AICPA Professional Ethics Division 498 investigations completed in a two year period 226 of these were governmental and not for profit entities Most often, these errors occurred due to a lack of: Experience Specific continuing professional education Errors could have been detected by a QC review 2 Failure to Obtain Sufficient Evidence Opinion on the financial statements was not supported Seen in all areas of the audit, especially in regards to: Testing of compliance requirements Use of out of date audit programs and checklists Improper use of dual purpose testing Lack of an understanding of the difference between internal control and compliance testing 3 1

2 Audit Deficiencies Inadequate documentation seen in all areas of the audit Auditor failed to utilize or customize an audit program Auditor failed to comply with Government Auditing Standards CPE requirements Yellow Book 80 hours in a two year period, with a minimum of 20 hours per year 4 Why the name Yellow Book? 5 Why the name Blue Book? 6 2

3 Financial Statement Deficiencies Expenses not reported by their functional classification Such as major classes of program services and supporting services Indirect expenses not allocated Donated services are reported that do not meet the requirements of GAAP 7 Financial Statement Deficiencies Donor imposed restrictions Nature and amount related to temporarily or permanently restricted net assets not disclosed Fair value disclosure (FASB No. 157) Omitted completely or disclosure contains errors Most common disclosure problem seen by AICPA Management s discussion & analysis Missing required elements or not presented as required 8 Financial Statement Deficiencies Revenues/expenditures Not classified properly by fund and source (revenues) or by function and character (expenditures) Interfund activity Balances and transactions were not eliminated nor was their purpose disclosed Interfund receivables/payables do not balance with respect to discreetly presented component units 9 3

4 Financial Statement Deficiencies Prior period adjustments Disclosure of nature, reason, and amount not made Effect of the change for all periods presented not disclosed Liabilities and debt service Terms and rates of long term liabilities and debt service requirements for future years were not disclosed Disclosure of subsequent events were not made 10 Auditor s Report Improper audit report date Failing to re date or dual date a reissued report Report dated before obtaining sufficient evidence Required supplementary information/supplementary information Failing to indicate the character of the examination and degree of responsibility taken in respect to these 11 Auditor s Report Summarized information Failing to opine on the prior year summarized information and include required disclosures SAS No. 115 The verbiage of the report did not comply with this standard Frequent problem despite the age of the SAS 12 4

5 Auditor s Report Opinion units and departures not specified The GAS ( Yellow Book ) report lacked specification of the opinion units in the first paragraph Departures from the standard report were not indicated Omitted required opinion and report wording Reports required under Yellow Book and the Single Audit Act of 1984 Prevalent in report on financial statements referring to Yellow Book report 13 Single Audit Issues Failure to identify and test all major programs Failure to combine programs with similar Catalog of Federal Domestic Assistance numbers Improper clustering of programs 14 Single Audit Issues Failure to identify and test all major programs Using an improper threshold due to: Failing to update preliminary determination with final balances Improper entity low risk assessment with resulting % of coverage missed Failure to consider loans in major program determination Failure to audit amounts on the Schedule of Expenditures of Federal Awards (SEFA) 15 5

6 Single Audit Issues Improper Type A/Type B dollar threshold used Incorrectly identifies on the Schedule of Findings & Questioned Costs There continues to be a lack of education about this threshold $500,000 is confused as the threshold for determining a major program Per the Federal Audit Clearinghouse, this is a pervasive problem 16 Single Audit Issues Missing information in the SEFA CFDA number Name of federal agency Name of pass through entity and identifying number assigned by the pass through entity Total expenditures for each federal program Notes to the SEFA describing significant accounting policies used to prepare it 17 Government Finance Officers Association 18 6

7 2011 Program Results Texas College/University 15 Council of Government 7 County 47 Enterprise Fund 29 Municipality 183 Employee Benefit 10 School District 60 Special District 18 State 1 19 Common Errors Introductory Section Cover Governments should indicate on the cover the state in which they are located Transmittal letter Should be dated no earlier than the date of the report of independent auditors 20 Common Errors Introductory Section Table of contents The titles of the statements and schedules in the report should agree to those listed in the Table of Contents MD&A Amounts discussed should agree to those presented in the financial statements Discussion should explain the underlying reasons for significant changes rather than focusing solely on the size of the change Careful on use of terminology (i.e. expenses vs. expenditures; net assets (net position) vs. fund balance) 21 7

8 Common Errors Basic Financial Statements All basic financial statements Each of the statements should include a reference to the notes Nonmajor governmental funds should be used rather than other governmental funds Statement of activities Except for interest and unallocated depreciation, expenses related to governmental activities should be classified by function rather than by object of expense Expenses associated with the issuance of debt should not be included (will change once GASBS No. 65 is implemented) Capital assets should be disclosed by major asset class (i.e. capital leases) 22 Common Errors Basic Financial Statements Statement of net assets (net position) Unearned revenue should be used and not deferred revenue Governmental balance sheet and statement of revenues, expenditures, and changes in fund balance Governmental funds that report more than 10% of the total governmental funds assets, liabilities, revenues, or expenditures and more than 5% of the combined total of governmental and enterprise funds for the same element, have to be reported as a major fund 23 Common Errors Basic Financial Statements Proprietary fund financial statements If the government has no debt related to capital assets, the government should use the caption: Net Assets, Invested in Capital Assets With implementation of GASBS No. 63, this caption will become: Net Investment in capital assets 24 8

9 Common Errors Basic Financial Statements Notes to the financial statements Narrative explanations of combining and individual fund statements and schedules describing the nature and purpose of the funds should be included Additions to long term debt disclosed in the notes should agree to the Proceeds from the Issuance of Debt presented in the fund financial statements Depreciation expense charged by function should agree to current year increases to accumulated depreciation 25 Common Errors Basic Financial Statements Notes to the financial statements Specify action to establish, modify, or rescind fund balance commitments; disclose body or official authorized to assign fund balance (GASBS No. 54) Disclose increases and decreases to compensated absences rather than the net change; also, disclose amount due within one year (even if an estimate must be made) 26 Common Errors Other Supplementary Info. Schedule of delinquent taxes receivable Should agree to property tax receivable per governmental funds balance sheet 27 9

10 Common Errors Statistical Section Principal taxpayers, principal employers, demographic and economic information If the information for the period nine or ten year prior to the current period is not available, then include data from the earliest year from which information is available and disclose the reason for the exception Property tax levies and collections Total tax collections as a percentage of the annual levy should not exceed 100% 28 Common Errors Statistical Section Changes in fund balances governmental funds Debt service as a % of noncapital expenditures use the amount of capital outlay from the reconciliation of government wide financials to fund financials; also, bond issuance costs and fees should not be included (principal and interest only) Outstanding debt by type Should only include long term debt instruments, not all long term liabilities (i.e. compensated absences) 29 Guadalupe R. Garcia, CPA lupe.garcia@whitleypenn.com Follow us on 10