Audit Season Review
Presented By
William Blend, CPA, CFE
Audit Season Review
 GASB Standards Implementation
 Group Audit Standards
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Meme (pron.: meem)
 "an idea, behavior, or style that spreads from person to
person within a culture.“
 An “internet meme” is a concept that spreads rapidly
from person to person via the Internet usually in a
humorous way, largely through Internet-based E-mail,
blogs, forums, image boards, social networking sites,
instant messaging, and video streaming sites, such as
YouTube - from Wikipedia
3
Success Baby
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Fiscal Year End 2013
Accounting Standards
 GASB 60 – Accounting and Reporting for SCA’s
 GASB 61 – The Financial Reporting Entity: Omnibus
 GASB 62 – Codification of Pre-Nov. 30, 1989 FASB and
AICPA Pronouncements
 GASB 63 – Reporting Deferred Outflows, Inflows and Net
Position
 GASB 65 – Items Previously Classified as Assets and
Liabilities
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GASB 60
GASB Statement No. 60
Accounting and Financial Reporting for
Service Concession Arrangements
 A type of public-private or public-public partnership
 Parties: Transferor, Operator, Customer/User
 Benefits:
 Leverage existing infrastructure for cash
 Get facilities built, but transfer some of the risks
 Provide services in a more efficient manner
8
Scope: What is an SCA?
ALL of the following criteria must be
met:
a. Government conveys to an operator the right and
related obligation to provide services to the public
through the use and operation of a capital asset
(“facility”) in exchange for significant consideration
b. Operator collects and is compensated by fees from third
parties
9
Scope: What is an SCA?
ALL of the following criteria are met:
c. Government is entitled to significant residual interest in
the service utility of the facility at the end of the
arrangement
d. Government determines or has the ability to modify or
approve:
 What services the operator is required to provide
 To whom the services will be provided
 The prices or rates that will be charged
10
Examples of SCAs
 An operator will design and build a facility and obtain
the right to collect fees from third parties:
construction of a municipal complex for the right to
lease a portion of the facility to third parties.
 Operator will provide significant consideration in
exchange for the right to access an existing facility:
operating a parking garage and collecting fees from
third parties for its usage.
11
Examples of SCAs
 The operator will design and build a facility (new
tollway), finance the construction costs, provide the
associated services, collect the associated fees, and
convey the facility to the government at the end of
the arrangement.
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GASB Statement No. 60
Transferor Accounting:
 If existing facility, continue to report as capital asset
 If facility purchased or constructed, record:
Capital Asset
XX
PV of Contract Obligations
XX
Deferred Inflow of Resources
XX
 Capital asset is subject to existing requirements for
depreciation, impairment, and disclosures
 No depreciation if operator must return facility in its
original or enhanced condition
13
GASB Statement No. 60
Transferor Accounting: (Cont.)
 Should recognize a liability for certain obligations to
sacrifice financial resources if:
 Obligation relates directly to the facility, or
 Obligation relates to a commitment to maintain a
minimum or specified level of service in the facility
 Deferred inflow should be reduced and revenue
recognized in a systematic and rational manner over the
term of the SCA
14
GASB Statement No. 60
Governmental Operator Accounting:
 Should report an intangible asset for the right to access
the facility and collect third-party fees
 Costs of improvements to the facility by the operator
increase the intangible asset if they increase the capacity
or efficiency of the facility
 Intangible asset should be amortized and expense
recognized in a systematic and rational manner over the
term of the SCA
15
GASB Statement No. 60
Governmental Operator Accounting: (Cont.)
 If information is known that indicates the facility is not in
the specified condition, then a liability and, generally, an
expense to restore the facility should be reported
 Operators are not required to perform additional
procedures to identify potential condition deficiencies
beyond those performed as part of normal operations
16
GASB Statement No. 60
Accounting for Revenue Sharing Agreements:
 Applicable when transferor and operator share the facility’s
revenues
 Golf courses, tennis facilities, pools, recreation facilities
 Operator recognizes 100% of revenue earned and expenses
incurred
 Transferor recognizes only its share of the revenue
 If risk of operations is transferred
 If risk of operations is not transferred
 Transferor still reports entire operation
 If payments are periodic, recognize the present value
17
Note Disclosures
 Both transferors and governmental operators should
disclose the following:
a.
Description of the SCA in effect and management's
objectives; also, the status of the project during
construction
b.
Nature and amount of assets, liabilities, and deferred
inflows of resources in the F/S
c.
Nature and extent of rights retained by the transferor or
granted to the governmental operator under the SCA
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Note Disclosures
 If applicable, disclosures should be made about
guarantees and commitments, including identification,
duration, and significant contract terms of the
guarantees or commitments.
 Disclosures for multiple SCAs may be provided
individually or in the aggregate for those that involve
similar facilities and risk.
19
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GASB 61
GASB 61
The Financial Reporting Entity:
Omnibus - an amendment of
GASB Statements 14 and 34
22
INTRODUCTION
 Omnibus means to address multiple issues within one
document
 Objective: To improve financial reporting for
governmental entities and, specifically, to address
issues that have arisen since GASB 14 and 34
 Include the organizations that should be included
 Exclude the organizations that should not be included
 Consistency with current conceptual framework
23
SCOPE AND APPLICABILITY
 Applies to the assessment of potential component
units in determining what should be included in
the govern-mental financial reporting entity, as
well as the entity display and disclosures.
 It applies to financial reporting by primary governments and other stand-alone governments,
separately issued financial statements of governmental component units, and nongovernmental
component units when they are included in a
governmental financial reporting entity.
24
AMENDMENTS TO INCLUSION CRITERION
 GASB 61 still includes the “financial accountability” criteria of
GASB 14, which requires the following circumstances for a
primary government to have financial accountability:
Appoints a voting majority and it is able to impose its will on
the organization or there is a financial benefit/burden
relationship
b. Fiscal dependency on the primary government
a.
 Fiscal dependency refers to organizations that must obtain the
approval of another government for either:
Determining its budget
b. Establishing its rates, taxes, levies or changes, or
a.
c.
Issuing debt
25
AMENDMENTS TO INCLUSION CRITERION
 Now, in addition to fiscal dependency, a financial benefit or
burden relationship that is other than temporary must be
present. It is present if any one of these conditions exists:
Primary Government (PG) is legally entitled to, or can
otherwise access, the organization’s resources
b. PG is legally obligated, or has otherwise assumed the
obligation to finance the deficits of, or provide financial
support to, the organization
c. PG is obligated in some manner for the debt of the
organization
a.
26
AMENDMENTS TO THE “MISLEADING TO
EXCLUDE” CRITERION
 GASB 61 emphasizes the use of management’s professional
judgment when considering the inclusion of potential component
units.
 The relationship between a PG and closely related organization will
generally be financial in nature and often include financial benefit or
burden relationships.
 When an organization does not meet financial accountability criteria,
management may still determine that inclusion is necessary to
prevent the reporting entity’s financial statements from being
misleading.
 When evaluating a potential component unit, management should
be considering if the organization is closely related to or financially
integrated with the PG.
27
AMENDMENTS TO THE CRITERIA FOR BLENDING
COMPONENT UNITS
 Discrete presentation is the default method for inclusion of
component units. Blending should occur only in specific,
narrowly defined circumstances. Prior to GASB 61, this
criterion consisted of “substantively the same governing body”
and “services provided entirely/exclusively to the primary
government.”
 GASB 61 adds additional criteria for blending component
units.
28
AMENDMENTS TO THE CRITERIA FOR BLENDING
COMPONENT UNITS
 Using just the “substantively the same governing body” rule,
resulted in PG adding significant assets to their financial
statements that it could not access, or significant debt for
which it was not liable.
 The two provisions added to the blending criteria of
“substantively the same governing body” were as follows:
1) Either a financial benefit or burden requirement also
exists between the PG and component unit, or
2) Management of the PG also has operational responsibility for the component unit.
29
AMENDMENTS TO THE CRITERIA FOR
BLENDING COMPONENT UNITS
 GASB 61 also added a third criterion for blending, which
occurs when a component unit’s total debt outstanding,
including leases, is expected to be repaid entirely or almost
entirely with resources of the PG.
30
AMENDMENTS TO THE REQUIREMENTS FOR
REPORTING THE FUNDS OF A BLENDED
COMPONENT UNIT
 GASB 61 clarifies that funds of a blended component unit assume all
the characteristics of funds of the PG and are subject to the same
fund reporting requirements.
 The general fund of a blended component unit should continue to
be reported as a special revenue fund of the PG.
 For governments engaged only in business-type activities that use a
single-column presentation, a component unit may be blended by
consolidating its financial statement data within the single column
of the PG and presenting condensed combining information in the
notes to the financial statements.
31
AMENDMENTS TO THE REQUIREMENTS FOR
REPORTING THE FUNDS OF A BLENDED
COMPONENT UNIT
 Condensed combining information should include at
a minimum:
1) Condensed statement of net assets
2) Condensed statement of revenues, expenses, and
changes in net assets
3) Condensed statement of cash flows
32
AMENDMENTS TO THE MAJOR COMPONENT
UNIT REQUIREMENTS
 Prior to GASB 61, there was inconsistency between PG in how it
determined which component units are major.
 GASB 61 clarifies that major component units should be those which
are of greater interest to the financial statement user. Therefore,
determination should be based on the nature and significance of
relationship to the PG. This would include factors, such as:
1) Essential services provided to the citizenry
2) Significant transactions with the PG
3) Significant financial benefit or burden relationship with the PG
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AMENDMENTS TO THE MAJOR COMPONENT
UNIT REQUIREMENTS
 In addition, GASB 61 eliminates the requirement that the major
component unit determination include consideration of each
component unit’s significance relative to other component units.
 Major component units should be presented either:
1) In a separate column in the statement of net assets and activities
2) In combining statements of major component units in the basic
financial statement following the fund financial statements, or
3) In the notes to the financial statements in a condensed financial
statement format.
 Nonmajor component units should be aggregated in a single
column. A combining schedule is not required but is allowed as
supplementary information.
34
AMENDMENTS TO THE REQUIREMENTS FOR
REPORTING EQUITY INTERESTS OF COMPONENT
UNITS
 When a government owns a majority of the equity interest of
a legally separate organization and the intent is to directly
enhance the government’s ability to provide governmental
services, the organization should be reported as a component
unit.
 Prior to GASB 61, equity interests in discretely presented
component units were reported as expense or outflow of
resources for the acquisition, whereas equity interests in joint
ventures were reported as assets.
35
AMENDMENTS TO THE REQUIREMENTS FOR
REPORTING EQUITY INTERESTS OF COMPONENT
UNITS
 GASB 61 now requires that the equity interest in a
discretely presented component unit be reported as
an asset of the fund that has the equity interest
 If the component unit is blended, the equity interest is
eliminated in the blending process
36
NOTE DISCLOSURES
 GASB 61 clarifies how disclosure requirements for component
units should be applied.
 Note disclosures should include the following:
1) Brief description of the component units of the financial
reporting entity and their relationship to the PG.
2) Discussion of the rationale for including each component
unit in the financial reporting entity and whether it is
discretely presented, blended, or in fiduciary funds.
3) Information about how the separate financial statements
for the individual component units may be obtained.
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NOTE DISCLOSURES
 GASB 61 also clarifies that component units may be
disclosed together based on common characteristics, as long as each component unit is separately
identified. (Example: multiple CRA funds)
 Believe it or not, no new disclosures.
38
AMENDMENTS FOR COMPONENT UNITS AND
RELATED ORGANIZATIONS WITH JOINT VENTURE
CHARACTERISTICS
 GASB 61 provides reporting guidance for minority interests in
component units and related organizations with joint venture
characteristics.
 For component units reported in a majority participant’s
financial reporting entity, equity interests of the minority
participants should be reported as “restricted net assets,
nonexpendable.”
 “Minority interest in a component unit” was also added to
GASB 34’s paragraph describing expendable and nonexpendable restricted net assets.
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EFFECTIVE DATE AND TRANSITION
 Effective for financial statements for periods
beginning after June 15, 2012 (FL FY 6/30/13 or
9/30/13)
 Earlier application is encouraged
 The cumulative effect of applying this statement
should be reported as a restatement of beginning
equity for the current period with appropriate
disclosure
40
GASB 62
GASB Statement No. 62
Codification of Accounting and Financial Reporting
Guidance Contained in Pre-November 30, 1989 FASB
and AICPA Pronouncements
 Incorporates pronouncements issued before
November 30, 1989, by the following that do not
contradict GASB Pronouncements



FASB Statements and Interpretations (SFAS 106)
Accounting Principle Board Opinions (APB)
AICPA Accounting Research Bulletins
 Supersedes GASB 20
42
GASB Statement No. 62
 Capitalized interest
 Proprietary Funds
 Revenue recognition when right of return exists
 Proprietary Funds
 Defines classifications for a classified statement of position
(balance sheet)
 Over 500 paragraphs
 Due to issuance of FASB Codification
43
GASB Statement No. 62
IMPLEMENTATION EFFECT
 Eliminates the election for enterprise funds and business-
type activities to apply post-November 30, 1989 FASB
Statements and Interpretations that do not conflict with
or contradict GASB pronouncements
 Remember to remove the election note disclosure
44
Concepts Statement No. 4
Concept Statement No. 4 Background
to GASB 63 and 65
 Issued in June 2007
 Establishes definitions for 7 elements that make up
government financial statements:
1. Assets
2. Liabilities
3. Deferred outflow of resources
4. Deferred inflow of resources
5. Net position
6. Outflow of resources
7. Inflow of resources
46
GASB 63
For Proprietary Funds
 Net approach is encouraged
 Balance Sheet approach is allowed
For Governmental Funds
 Balance Sheet approach still appropriate
 Difference is still called Fund Balance
48
Definitions
 Deferred outflows of resources
 A consumption of net assets by the government that is
applicable to a future reporting period
 Has a positive effect on net position, similar to assets
 Deferred inflows of resources
 An acquisition of net assets by the government that is
applicable to a future reporting period
 Has a negative effect on net position, similar to
liabilities
 Net position
 The residual of all elements presented in a statement
of financial position
49
Statement of Net Position
Assets +
Deferred
Outflows =
Total Assets
and Deferred
Outflows
Liabilities +
Deferred
Inflows = Total
Liabilities and
Deferred
Inflows
Net
Position
50
Display Requirements
 Deferred outflows should be reported in a separate section
following assets
 Similarly, deferred inflows should be reported in a separate
section following liabilities
 Net position components resemble net assets components
under Statement 34, but include the effects of deferred
outflows and deferred inflows
 Net investment in capital assets
 Restricted
 Unrestricted
 Governmental funds continue to report fund balance
51
Disclosures
 Provide details of different types of deferred amounts
if components of the total deferred amounts are
obscured by aggregation on the face of the
statements
 If the amount reported for a component of net
position is significantly affected by the difference
between deferred inflows or outflows and their
related assets or liabilities, provide an explanation in
the notes
52
GASB 65
GASB Statement No. 65
Items Previously Classified as
Assets and Liabilities
Objective: Establishes accounting and financial
reporting standards so certain items previously
reported as assets and liabilities are now either:
a) Reclassified as deferred outflows of resources or
deferred inflows of resources
b) Recognized as outflows of resources (expenses/
expenditures) or inflows of resources (revenues)
54
Before Statement 65
 Recognition of deferred outflows of resources and
deferred inflows of resources should be limited to
those instances identified by GASB in authoritative
pronouncements
 Before GASB 65, there was only:
 Statement 53 - Accounting and Financial
Reporting for Derivative Instruments
 Statement 60 - Service Concession Arrangements
55
Scope and Applicability
 Amends or supersedes guidance for:
 Certain items previously required to be reported as
assets and liabilities
 Requirements for the determination of major funds
 Addresses other statement of net position and govern-
mental funds balance sheet presentation issues
 Applies to full accrual statements only, with the exception
of specific paragraphs that also apply to governmental
funds
56
Refundings of Debt
For current and advance refundings:
 The difference between the reacquisition price and the
net carrying amount of the old debt should be recognized
as a deferred outflow or deferred inflow of resources
 Previously reported as deferred amount on refunding and
reported as deduction or addition to new debt
 Recognized as a component of interest expense in a
systematic and rational manner over the remaining life of
the old debt or the life of the new debt, whichever is
shorter
57
Refundings of Debt
For lease provision changes resulting from a refunding by
the Lessor of tax-exempt debt where:
a) The perceived economic advantages of the refunding
are passed through to the Lessee and
b) The revised lease agreement is classified as a capital
lease by the Lessee
Then, the Lessee should adjust the lease obligation to the
PV of the future minimum lease payments using the
effective interest rate under the revised lease
The difference is reported as a deferred outflow or inflow of
resources.
58
Nonexchange Transactions
Imposed Nonexchange Revenue Transactions:
When resources or enforceable legal claim to resources are
received before:
a) The period for which property taxes are levied
b) The period when resources are required to be used or
use is first permitted by enabling legislation
Then, deferred inflow of resources should be
reported.
59
Nonexchange Transactions
Government-mandated Nonexchange Transactions and
Voluntary Nonexchange Transactions:
 Resources transmitted before eligibility criteria
are met (excluding time requirements) should be
reported as assets by the provider and as
liabilities by the recipient
 Resources received before time requirements are
met but after all other eligibility criteria have
been met, should be reported as deferred
outflows of resources by the provider and
deferred inflows of resources by the recipient
60
Sales of Future Revenues
 When a government receives proceeds in exchange
for the right to cash flows from specific future
revenue sources, the transferor government should
report the proceeds as deferred inflow of
resources and recognize as revenue over the
duration of the sales agreement
 Previously reported as deferred revenue
61
Intra-Entity Transfers of Future Revenues
When a sale/transfer of future revenues occurs within
the same financial reporting entity (ex: PG and
component unit):
 Transferee government should report the amount paid as a
deferred outflow of resources
 Transferor government should report the amount received as
a deferred inflow of resources
 Recognized over the duration of the sales agreement
 Previously reported as deferred charge and deferred revenue
62
Debt Issuance Costs



Old - GASB 62, para. 187, stated that “Issue costs
should be reported in the statement of net assets
as deferred charges.”
New - GASB 65, para. 15, states that “Debt issuance
costs, except any portion related to prepaid
insurance costs, should be recognized as an
expense in the period incurred.
Prepaid insurance costs should be reported as an
asset and recognized over the duration of the
related debt.
63
Initial Direct Costs of Operating Leases

Old - GASB 62, para. 227c., stated that “Initial direct
costs should be deferred and allocated over the
lease term…”

New - GASB 65, para. 17, states that “The Lessor
should recognize initial direct costs of an operating
lease as an expense/expenditure in the period
incurred.”
64
Sale-Leaseback Transactions
The gain or loss on the sale of property that is
accompanied by a leaseback of all or any part
of the property for all or part of its remaining
economic life should be recorded as a deferred
inflow of resources or deferred outflow of
resources.
65
Insurance and Lending Activities
Acquisition costs related to insurance
contracts – expense
 Loan origination fees – revenue
 Points received by lender – deferred inflow of
resources
 Commitment fees – liability until exercised
and then revenue

66
66
Lending Activities

Fees paid or received for purchase of loan or
group of loans – expense or revenue

Mortgage banking activities – fees paid and
received are recognized as expense or
revenue, except for loans held for investment

Loans held for sale – fees paid or received up
to point of sale are deferred outflows or
inflows
67
Regulated Operations
Rate actions of a regulator can result in a liability or a
deferred inflow of resources being imposed on a
regulated business-type activity

If the obligation is to the customers, then report as a
liability (ex: regulator requires refunds to customers)

If an acquisition of nets assets from customers that is
applicable to a future reporting period, then report as
deferred inflow of resources (ex: regulator established
current rates intended to recover costs that are expected to
be incurred in the future)

If gain or reduction of costs to be given to customers over
future periods, report as deferred inflow of resources
68
Revenue Recognition in Governmental
Funds
Governmental fund revenues are recognized
when they become both measurable and
available.
 When an asset is recorded in a governmental
fund but the revenue is not available, the
government should report a deferred inflow of
resources until the revenue becomes available.

69
Use of the Term “Deferred”

Use of the term “Deferred” should be limited to
items reported as deferred outflows of resources
or deferred inflows of resources
Major Fund Criteria

Assets should be combined with deferred
outflows of resources and liabilities should be
combined with deferred inflows of resources for
determining which elements meet criteria for
major fund determination
70
70
Effective Date and Transition

Effective for periods beginning after 12/15/2012 (FL
FYE 6/30/14 and 9/30/14); earlier application is
encouraged

Accounting changes adopted to conform to the
provisions of GASB 65 should be applied retroactively
by restating for all periods presented, if practical

If not practical, the cumulative effect, if any, should be
reported as a restatement of beginning net position or
fund balance for the earliest period restated

Disclose the nature of the restatement and its effect
71
Audit Standards Effective for FYE
2013 Engagements
Clarity Standards
 Replace all SAS’s from 1 – 116 except:
 SAS 65 - The Auditor’s Consideration of the Internal Audit
Function in Audit of F/S
 SAS 124 - Financial Statements Prepared in Accordance
with Financial Reporting Framework Generally Accepted in
Another Country
 SAS 125 – Alert That Restricts the use of the Auditor’s
Written Communication
 SAS 126 - The Auditor’s Consideration of an Entity’s Ability
to continue as Going Concern (no major changes)
73
Did You Notice?
 Terms of engagement (engagement letters)
 Initial audit engagements
 Performance materiality
 Considerations of laws and regulations
 Use of a service organization
 External confirmations
 Specific considerations for selected items
 Audits of Group Financial Statements
74
Did You Notice?
 Auditing estimates
 Communicating internal control matters
 Restriction on use of reports
 Use of specialists (including auditor’s specialists)
 Audit Reports
 Reports on summary financial statements
 Consistency of financial statements
75
AU-C Section 320 – Materiality in Planning
and Performing an Audit
 Introduces the term “Performance Materiality”
 Replaces previous use of tolerable misstatement
 Performance materiality is defined as:
 the amount(s) set by the auditor at less than materiality for
the financial statements as a whole to reduce to an
appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds
materiality for the financial statements as a whole
 also refers to the amount(s) set by the auditor at less than
the materiality level or levels for particular classes of
transactions, account balances, or disclosures
76
Performance Materiality
 Performance materiality is to be distinguished from
tolerable misstatement.
 Tolerable misstatement is defined as:
 the application of performance materiality to a
particular sampling procedure (Audit Sampling AU-C
530)
 a monetary amount set by the auditor to obtain an
appropriate level of assurance that the monetary
amount set by the auditor is not exceeded by the
actual misstatement in the population
 can be same as performance materiality or smaller
77
77
AU-C Section 250 – Consideration of Laws and
Regulations in Financial Statement Audits Example
Guidance Requirement
• The auditor should obtain
sufficient, appropriate audit
evidence regarding material
amounts and disclosures in the
financial statements that are
determined by the provisions
of those laws and regulations
generally recognized to have a
direct effect on their
determination
Examples
Pensions
OPEB
Investments
Fixed Assets
Debt
78
Were You Asked?
Additional Management Fraud Inquiry
 Has any correspondence from relevant licensing or regulatory
authorities been received? Are you aware of, or do you
suspect, any noncompliance of relevant laws and regulations?
Additional Inquiry of Others and if applicable Audit Committee
 Are you aware of, or do you suspect any noncompliance
related to relevant laws or regulations? Are you aware of any
related correspondence from relevant licensing or regulatory
authorities?
79
IDENTIFYING COMPONENTS AND GROUPS
Group
Financial
Reporting System
Operational
Functional
Process
Product/Services
Geographical
Location
Organizational
Structure
Parent
Head Office
Subsidiaries
Division
Joint Ventures
Branch
Equity Method
Investees
80
IDENTIFYING COMPONENTS AND GROUPS
• Can an audit be a group audit when
only one engagement team
performs the entire audit?
Yes
• Can a component be a separate legal
entity, a segment, or an equity
method investment?
Yes
• Can a component not be a separate
legal entity, such as a department,
campus, or product?
Yes
81
REVISED GROUP AUDIT
TERMINOLOGIES
Old Group Audit Terminologies
Revised Group Audit
Terminologies
Originating office
Group engagement team
Participating location
Component auditor
Other auditors
Component auditor
Entity level controls over group
financial reporting
Group-wide controls
Besides the group-wide controls, other entity level controls may exist at other
levels within the group structure
82
Questions?