State and Local Government
Financial Statement Audits:
An Audit Issues Rundown
GAQC Member Conference Call
November 17, 2009
Presented by
Donald L. Rahn, CPA, Partner
Baker Tilly, LLP
&
James C. Lanzarotta, CPA, Partner
Moss Adams, LLP
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Agenda
 Effect of the current economy on audit procedures and risk
assessments;
 Challenges relating to newer auditing standards;
 Client implementation of recently effective GASB standards and
related audit issues;
 GASB standards that will have to be implemented in future
years and potential related issues going forward; and
 Other developments
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Economic Crisis
 Current Economic Environment
• Credit crisis
• Mortgage crisis
• AICPA Economic Crisis and Recovery Center
http://economy.aicpa.org/
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Economic Crisis
 Local Government Bankruptcies
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Decreasing revenue
Increased demand for services
Chapter 9 bankruptcies
Going concern (GASB Statement No. 56)
Fraud
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Economic Crisis
 Municipal Securities
• Availability of credit
• Tax-exempt Debt
• GAQC Member Call on Tax-Exempt Bonds Accounting and Auditing Considerations in the
Current Environment (Can be found at
www.aicpa.org/GAQC under the Resources
tab)
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Audit Risk
 Other audit risks arising from current
economic climate
• Constraints on availability of capital and credit
• Unrealistic budget goals and objectives
• Special-purpose entities, joint ventures, or other complex
financing arrangements
• Volatile real estate and business markets
• Evaluating existence of assets
• Estimates
• IT internal control issues
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Estimates
 The credit crisis can cause significant measurement
uncertainty, including accounting estimates and fair
value estimates.
 Many estimates besides fair value to worry about
 Due to the current economic climate, auditors should
exercise additional professional skepticism over the
underlying assumptions
 In the current economy, new and different patterns
may be emerging
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IT Internal Control Issues
 Auditors may wish to assess resources that have
been allocated to IT issues in light of the current
economic climate
 More complex IT systems can affect all 5 elements
of COSO internal controls
 Auditors may need a specialist in IT to be a member
of the audit team
 Auditors may wish to pay particular attention to the
segregation of duties element of IT controls
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Other Auditor Considerations Due to the
Current Economic Climate
 Fraud
 Errors due to layoffs of accounting staff
 Internal controls related to the combination of duties
that should be segregated
 Going concern
 More in-depth understanding of the entity and the
environment
 Increased professional skepticism
 Importance of audit committees
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Other Auditor Considerations Due to the
Current Economic Climate
 Managing pricing pressures from clients
 Market competition with firms entering or reentering
the governmental audit sector
 Succession planning considerations – internal,
merge, sell
 Staff recruiting, development, and retention
 Developing niches within the firm
 Managing oversight from state and federal agencies
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Challenges with Newer Auditing
Standards
Communicating with those Charged
with Governance
SAS 115, including applicability in
Yellow Book and single audits
Compliance Auditing SAS (soon to be
released as SAS No.117)
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Accounting Developments and Related Audit
Issues
 GASB Statement No. 45 – OPEB
 Implementation FYE 12/31/08 – Phase II
governments
 Implementation FYE 12/31/09 – Phase III
governments
 Purpose
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Pension/OPEB – Use of Specialists
 Audit Issues and Tips
• Actuarial information now reported in the notes to the financial
statements rather than solely reported as RSI
• Auditor now has greater responsibility for that information
• Auditor should consider using the work of a specialist (AU 336)
• AU 336 gives examples of procedures for the auditor
• GAQC Member Call, OPEB Financial Reporting for Plans and
Employers and Related Audit Issues (Can be found at
www.aicpa.org/GAQC under the Resources tab)
• GAO rules 3.05 and QA #75 require additional steps…Auditor
must assure that the Specialist is independent.
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Accounting Developments and Related Audit
Issues
 GASB 48 – Sales and Pledges
 Implementation FYE 12/31/07
 Purpose
 Audit issues and tips
 Many reports are missing required disclosures for
revenue debt. See paragraph 21 of GASB 48.
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Accounting Developments and Related Audit
Issues
 GASB Statement No. 49 – Pollution
remediation liabilities
 Implementation FYE 12/31/08
 Purpose
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Pollution Remediation
 Audit Issues and Tips
• Obligation related financial accounting and
reporting
• Requires restatement of beginning liability
• Auditors should be concerned about
assertions of existence, completeness and
valuation
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Accounting Developments and Related Audit
Issues
 GASB 50 – Pension Disclosures—an
amendment of GASB Statements No. 25 and
No. 27
 Implementation FYE 6/30/08
 Purpose
 Audit issues and tips
 Are you auditing the expanded disclosures?
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Accounting Developments and Related Audit
Issues
 GASB Statement No. 51 – Intangibles
 Implementation FYE 6/30/10
 Purpose
 Audit Issues
 Has your client started yet?
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Accounting Developments and Related Audit
Issues
 GASB Statement No. 52 – Real Estate Held
by Endowments
 Implementation FYE 6/30/09
 Purpose
 Audit Issues
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Accounting Developments and Related Audit
Issues
 GASB Statement No. 53 – Derivatives
 Implementation FYE 6/30/10
 Purpose
 Audit Issues
 Coming soon to a government near you!
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Accounting Developments and Related Audit
Issues
 GASB Statement No. 54 – Fund Balance
 Implementation FYE 6/30/11
 Purpose
 Audit Issues
 What should you be doing right now?
 GAQC Member Call, New GASB Fund Balance
Standard: Now is the Time to Begin Talking to Your
Clients (Can be found at www.aicpa.org/GAQC under
the Resources tab)
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Accounting Developments and Related Audit
Issues
 GASB Statement No. 55 – GAAP Hierarchy
 Implementation – Effective upon issuance
 Purpose
 Audit Issues
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Accounting Developments and Related Audit
Issues
 GASB Statement No. 56 – Codification of
reporting standards previously in audit
standards
 Implementation – Effective upon issuance
 Purpose
 Related Parties
 Going Concern
 Subsequent Events
 Audit Issues
 Slight differences from previous auditing standards
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Accounting Developments – Looking
Forward
 Effect of FASB Codification project – GASB
ED expected in January 2010
• Background
• Issues
• Is GASB gearing up fast enough?
• Practice problems in the interim
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Auditing Changes under the American
Recovery and Reinvestment Act of 2009
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Federal IG response
Interim updates to Compliance Supplements
Prompt auditor referral requirement
Public institutions of higher education should
anticipate higher scrutiny of work-study, Pell grant
and similar programs under ARRA
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ARRA – Stay Current
 GAQC Recovery Act Resource Center
(http://gaqc.aicpa.org/Resources/Recove
ry+Act+Resource+Center/)
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Calls – 2 held to date
GAQC Alerts
GAQC Tools
Links to other important Web sites
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Questions ?????
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Contact information
Donald L. Rahn, CPA, Partner
Baker Tilly, LLP
608-240-2328
Donald.Rahn@bakertilly.com
-----------------------------------------------------------James C. Lanzarotta, CPA, Partner
Moss Adams, LLP
541-225-6070
James.Lanzarotta@mossadams.com
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