Accounting & Auditing

Current Topics
FARO-Fall Conference
November 14, 2006
Cline Comer, CPA
ccomer@larsonallen.com
Current Accounting & Auditing Topics
Objective Overview of recent Accounting and
Auditing Standards issued by GASB, AICPA,
etc.
Accounting Standards -GASB
GASB 45 OPEB Reporting for Employers
GASB 46 Net Assets Restricted by Enabling
Legislation
GASB 47 Accounting for Termination Benefits
GASB 48 Sales and Pledges of Receivables
and Future Revenues and Intra-Entity Transfers
of Assets and Future Revenues
Other FASB Projects
GASB 45 OPEB Reporting for Employers
Employers reporting
Plan reporting GASB 43
OPEB cost should be recognized in the same
period as the compensated service is being
provided
OPEB not offered through a pension plan
considered OPEB
Health care is always OPEB even if offered
through pension plan
GASB 45 -Exceptions
Employer contributing to a defined contribution
plan (cost simply equals required contribution)
Employer contributing to insured defined benefit
plans (same as above)
Employer contributing to cost-sharing plan
established as a trust (same as above)
GASB 45 -OPEB Contributions
Future cash flows must be projected
Projected cash flows discounted to present
value
Amounts allocated to specific years using an
acceptable actuarial cost allocation method
GASB 45 -Implicit Rate Subsidy
Example:
200 active employees/50 retirees
Monthly cost of actives = $20,000 or $100 per
employee
Monthly cost of retirees = $10,000 or $200 per retiree
Blended premium = $30,000 or $150 per employee
Implicit subsidy - $50 per month
GASB 45 -Implicit Rate Subsidy (continued)
GASB defines implicit rate subsidy as difference
between the active employees rate alone and
the blended rate
Recognizing the entire blended premium for
active employees similar to cash basis
GASB 45 requires any implicit rate subsidies be
part of projected cash flows
GASB 45 -Unfunded Actuarial Liability
Actuarial accrued liability is a measure of the
present value OPEB benefits promised
GASB 45 does NOT require immediate
recognition of unfunded actuarial liability
Existing unfunded actuarial liability will be
amortized but no more than 30 years
Closed amortization
Open amortization
GASB 45 -Annual Required Contribution
ARC includes:
Normal cost
Amortization of unfunded actuarial liability
If employer contributes ARC, then resources
accumulated should be sufficient to pay
promised benefits
GASB 45 Over or Underfunding
Overfunding
Contributing more than ARC
Net OPEB asset on any accrual-based statement
(primarily the government-wide statements)
Underfunding
Contributing less than ARC
Net OPEB liability
Fully fund No liability
GASB 45 -ARC Calculation
More than 200 plan members
Actuarial valuation every two years
Less than 200 plan members but more than 100
plan members
Actuarial valuation every three years
Less than 100 plan members
Nonactuarial approach every three years
GASB 45 -Reporting Requirements
Required Supplemental Information
Funding progress based on three most recent
actuarial valuations
Note disclosures
Plan description
Funding policy
GASB 45 -Disclosures
Plan description
Name of OPEB plan, administrator, and type of
plan (e.g., single-employer or agent multiple-
employer)
Types of benefits
Information on any separately issued report
Funding policy
GASB 45 -Effective Dates
Based on implementation phase of GASB 34
Phase I FYE 06/30/08
Phase II FYE 06/30/09
Phase III FYE 06/30/10
GASB 46 -Net Assets Restricted by Enabling
Legislation
Definition of legally enforceable
Based on professional judgment
If determined not to be enforceable for one may
affect judgment for others
Changes in enabling legislation
New resources restricted for new purpose
Existing resources professional judgment
If restrictions no longer enforceable
unrestricted
Governments should disclose the amount of net
assets restricted by enabling legislation
GASB 47 Termination Benefits:
Introduction/Background
Includes all termination benefits (voluntary &
involuntary)
Common benefits:
Enhancements to defined pension benefits
Cash payments at or following termination
Additional OPEB coverage
Life insurance coverage
Certain COBRA benefits
Career counseling
GASB 47 Exclusions/Exceptions
Unemployment compensation claims NCGA
Statement 4
Defined benefit pension benefits GASB
Statement 27 for measurement still follow
GASB 47 disclosure requirements
OPEB GASB Statement 45 for measurement
still follow GASB 47 disclosure requirements
Immaterial items
GASB 47 Termination Benefits vs. Post-
employment Benefits
May be difficult to distinguish between benefits
provided in exchange for early termination of
service and benefits in exchange for services
rendered
Professional judgment required
Employers intent
How employees view the benefits
Length of time for which benefits have been available
Benefit applies to termination before normal
retirement age
GASB 47 Measurement of Termination
Benefits
Includes the direct benefits themselves
Should include any fringe benefits related to the
termination benefits
Should include any changes in estimated costs
of other employee benefits (compensated
absences) if measurable
GASB 47 Recognition Requirements
Accrual Basis
Voluntary termination benefits (including COBRA
benefits when age-related & significant)
Expense & liability recognized when:
Employees accept offer
Amounts can be estimated
Liability measurement should be updated at end of
each subsequent reporting period
Incremental liability & expense should be measured
May be positive or negative
GASB 47 Recognition Requirements
Accrual Basis (continued)
Involuntary termination benefits
Expense & liability recognized when
Plan of termination approved by those with authority to
commit employer
Plan communicated to employees
Amounts can be estimated
Liability measurement should be updated at end of
each subsequent reporting period
Incremental liability & expense should be measured
May be positive or negative
Involuntary termination future service requirements
liability & expense recognized ratably over future
service period
GASB 47 Recognition Requirements
Modified Accrual
Liabilities and expenditures recognized to the
extent liabilities are normally expected to be
liquidated with expendable available resources
GASB Interpretation 6
Due and payable
GASB 47 Disclosure Requirements
In period when employer becomes obligated for
termination benefits or future periods in which
employees are required to render services to
receive involuntary termination benefits, then
disclose:
Description of termination benefit arrangements
Types of benefits provided
Number of employees affected
Period of time over which benefits are expected to be
provided
Cost of termination benefits (if not apparent from the
face of the statements)
For defined benefit pensions and OPEB benefits
change in the related actuarial accrued liability
GASB 47 Disclosure Requirements (continued)
In all periods when termination benefit liabilities
are reported:
Significant methods (e.g., discounted present value)
used to determine liabilities
Significant assumptions (e.g., discount rate, health
care cost trend rate, etc.) used to determine liabilities
GASB 47 Effective Date(s)
Termination benefits affecting an employers
obligations for defined benefit OPEB phased
implementation for employers based on GASB
34
Phase I FY beginning after 12/15/06
Phase 2 FY beginning after 12/15/07
Phase 3 FY beginning after 12/15/08
Early implementation of GASB 45 requires early
implementation of GASB 47
All other termination benefits, including those
affecting obligations for defined benefit pensions
FY beginning after 6/15/05
GASB 48 Sales and Pledges of Receivables
Addresses whether a transaction is a sale or a
collateralized borrowing resulting in a liability
Key issue is extent transferor retains or
relinquishes control over the receivables or
future revenues thru its continuing involvement
Report as collateralized borrowing unless criteria
indicate a sale has taken place
Also addresses sales of receivables or revenues
within the same financial reporting entity
GASB 48 Sales and Pledges of Receivables
Examples
Sale of delinquent property tax liens
Sale of future tobacco settlement revenue
Additional disclosures
Revenues pledged for debt service
Effective for fiscal years beginning after 12/15/06
Other GASB Projects
Pollution Remediation Obligations
Fund Balance
Separate from net assets project
Looking at categories other than reserves and
designation
Derivatives and hedging
Service Efforts & Accomplishments
Fiduciary Responsibilities
Preservation Method
Economic Condition Reporting
Auditing Standards
New Auditing Standards effective for years
ending after December 15, 2006
SAS 103: Audit Documentation
SAS 112: Communicating Internal Control Related
Matters Identified During an Audit
SAS 103: Learning Objectives
Understand the new documentation
requirements of SAS 103.
Plan the audit in order to date auditors report as
early as possible.
Evaluate the impact of subsequent events on the
financial statements and report date.
SAS 103 and SAS 96 Comparison
How does SAS 103 differ from SAS 96?
Documentation should be understandable by an
experienced auditor having no previous
connection to the audit.
Clarifies that auditors cannot use oral
explanations to support their work or
conclusions.
Requires auditors to document reasons for
departures from auditing standards.
Requires documentation to show who performed
and reviewed work and the date.
SAS 103 and SAS 96 Comparison (continued)
Added another category of significant findings:
Audit misstatements identified by the auditor,
whether or not corrected by management.
Requires documentation of how the auditor
addressed contradictory or inconsistent
information when forming a conclusion.
States the auditors report should be dated no
earlier than the date the auditor has obtained
sufficient audit evidence to support their opinion.
Prohibits deleting or discarding workpapers after
the documentation completion date.
AuditorsReport Date
Report date The date on which sufficient
evidence is obtained to support the opinion.
NOT the last day of fieldwork
Sufficient evidence includes
Evidence that the workpapers have
been reviewed.
Evidence that the financial statements, including
disclosures, have been prepared and management
has accepted responsibility for the financial
statements.
Management acceptance is generally demonstrated by signing
the management representation letter.
Reacting to the NewAuditorsReport Date
PLAN for and
SCHEDULE ALL audit
procedures
Send confirmations and
representation letters
early
(Update when needed)
Prepare financial
statements and related
disclosures ASAP
Address issues early (and
often)
Audit Procedures that Change the Date
Existence of F/S
Acceptance of F/S
(Who?)
Completeness of F/S
(Income Tax Footnote)
Significant Confirmations
Attorney Responses
Covenant Waivers
Engagement Principal
Review
Response to Comments
Requiring More Work
Subsequent Events
Two types of subsequent events require
consideration by management and evaluation by
the independent auditor:
Type I: Produce additional evidence with
respect to conditions that existed at the date of
the balance sheet.
adjust
Type II: Produce evidence with respect to
conditions that did not exist at the balance sheet
date but arose subsequent to that date.
disclose
Wrap Up SAS 103
When the engagement partner is ready to sign
the auditors report, then you know the report
date.
Fieldwork includes all necessary
audit procedures (the location of
the work does not matter).
Subsequent audit procedures must be
performed through the auditors report date.
SAS 103 Questions?
SAS 112: Learning Objectives
Understand the new definitions in SAS 112.
Utilize a reverse logic approach to evaluating
control deficiencies.
Develop an action plan for addressing client
control deficiencies early.
Communication of Internal Control Related
Matters
Communicate in writing
Significant deficiencies
Material weaknesses
Communicate to those
charged with governance
those with responsibility
for overseeing the
strategic direction of the
entity and the financial
reporting and disclosure
process
Best practice:
Communicate on the
report release date
Definitions Some Changed
Significant Deficiency
There is more than a
remote likelihood that a
more than inconsequential
misstatement of the entitys
financial statements will not
be prevented or detected.
Material Weakness
There is more than a
remote likelihood that a
material
misstatement of the entitys
financial statements will not
be prevented or detected.
Control Deficiency
More than a Remote Likelihood
More than Inconsequential Material
The Mathematics of the New Terms
Material Weakness >
Tolerable Misstatement
(TM)
Significant > 20% and <
100% of TM
Inconsequential > 5%
and < 20% of TM
Trivial (unlikely to be
material) < 5% of TM
Dont forget qualitative
factors that can move
deficiency up the scale
The Five Components of Internal Control
The Components:
The Control
Environment
Risk Assessment
Information and
Communication
Control Acti vi ties
Monitoring
Reminder: control
processes extend through
the preparation of
financial statements
Evaluating Control Deficiencies Identified
Evaluate individually and
in combination
Evaluate the potential for
misstatement, not
whether a misstatement
has occurred
Evaluate the likelihood of
misstatement
Evaluate the magnitude
of misstatement
Evaluate mitigating
effects of tested
compensating controls
Would a prudent official
agree with classification?
The Reverse LogicApproach
-a Mind Shift
Under prior standard, internal control related matters
were generally not communicated until auditor believed
they were of such a magnitude that they were
considered reportable conditions or material
weaknesses.
To effectively implement SAS 112, believe auditors need
to implement a mind shift and view internal control
related matters in reverse as material weaknesses,
until auditor can document reasoning in concluding that
an item is a significant deficiency or a control deficiency.
Action plan: Address client internal control related
matters during planning. Inform client of new reporting
requirements and whether you expect to report
significant deficiencies or material weaknesses.
Control Deficiencies that are at Least
Significant Deficiencies
The expertise and control over the selection and
application of appropriate accounting principles.
Antifraud programs and controls
Controls over nonroutine and nonsystematic
transactions.
Controls over the period-end financial reporting
process
procedures used to enter transaction totals into GL
initiate, authorize, record, and process journal entries
record recurring and nonrecurring FS adjustments
Control Deficiencies that are
Strong Indicators of Material Weakness
Ineffective oversight of
financial reporting and
internal control by those
charged with governance
Restatement of issued FS
Auditor identification of
material misstatement
An ineffective internal
audit function when
function is important
An ineffective regulatory
compliance function
Senior management
fraud, any magnitude
Failure to address
previously report
significant deficiency
An ineffective control
environment
Appendix A of SAS 112 provides examples of control
deficiencies, significant deficiencies, and material weaknesses.
Wrap Up SAS 112
SAS 112 requires that significant deficiencies or
material weaknesses be communicated in
writing to management and those charged with
governance as early as possible, but no later
than 60 days after the report release date.
In determining whether a potential misstatement
is more than inconsequential, the auditor should
consider qualitative and quantitative factors.
Evaluate client internal control related matters
during planning and discuss new reporting with
client during engagement planning.
AICPA Risk Assessment Auditing Standards
SAS 104-111
Effective for Audits of fiscal years beginning on
or after December 15, 2006
Background
ASB/IAASB Joint Project
Research into audit risk 3 countries
Initial ED in 2002; reexposed 2005
Risk Assessment Audit Standards Overview
Establish standards and provide guidance
Concerning the auditors assessment of the risks
of material misstatement (whether caused by
error or fraud) in an audit, and the design and
performance of audit procedures whose nature,
timing, and extent are responsive to the
assessed risks.
On planning and supervision (audit risk and
materiality), the nature of audit evidence, and
evaluating whether the audit evidence obtained
affords a reasonable basis for an opinion
regarding the financial statements under audit.
Risk Assessment Audit Standards Overview
(continued)
The primary objective of these Statements is to enhance
auditors application of the audit risk model in practice by
specifying, among other things:
More in-depth understanding of the entity and its
environment, including its internal control, to identify the
risks of material misstatement in the financial statements
and what the entity is doing to mitigate them.
More rigorous assessment of the risks of where and how
financial statements could be materially misstated based
on that understanding.
Improved linkage between the auditors assessed risks
and the nature, timing, and extent of audit procedures
performed in response to those risks.
Questions?
Do you have any
questions?