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8/12/2019 Accounting and Auditing Current Topics
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Accounting & Auditing
Current Topics
FARO-Fall Conference
November 14, 2006
Cline Comer, CPA
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Current Accounting & Auditing Topics Objective Overview of recent Accounting and
Auditing Standards issued by GASB, AICPA,
etc.
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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 Receivablesand Future Revenues and Intra-Entity Transfersof Assets and Future Revenues
Other FASB Projects
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GASB 45 OPEB Reporting for Employers Employers reporting
Plan reporting GASB 43
OPEB cost should be recognized in the sameperiod as the compensated service is beingprovided
OPEB not offered through a pension planconsidered OPEB
Health care is always OPEB even if offeredthrough pension plan
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GASB 45 - Exceptions Employer contributing to a defined contribution
plan (cost simply equals required contribution)
Employer contributing to insured defined benefitplans (same as above)
Employer contributing to cost-sharing plan
established as a trust (same as above)
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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
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GASB 45 - Implicit Rate Subsidy
Example:
200 active employees/50 retirees
Monthly cost of actives = $20,000 or $100 peremployee
Monthly cost of retirees = $10,000 or $200 per retiree
Blended premium = $30,000 or $150 per employee Implicit subsidy - $50 per month
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GASB 45 - Implicit Rate Subsidy (continued)
GASB defines implicit rate subsidy as differencebetween 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 bepart of projected cash flows
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GASB 45 - Unfunded Actuarial Liability
Actuarial accrued liability is a measure of thepresent value OPEB benefits promised
GASB 45 does NOT require immediaterecognition of unfunded actuarial liability
Existing unfunded actuarial liability will be
amortized but no more than 30 years Closed amortization
Open amortization
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GASB 45 - Annual Required Contribution
ARC includes:
Normal cost
Amortization of unfunded actuarial liability
If employer contributes ARC, then resourcesaccumulated should be sufficient to pay
promised benefits
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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
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GASB 45 - ARC Calculation
More than 200 plan members
Actuarial valuation every two years
Less than 200 plan members but more than 100plan members
Actuarial valuation every three years
Less than 100 plan members Nonactuarial approach every three years
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GASB 45 - Reporting Requirements
Required Supplemental Information
Funding progress based on three most recent
actuarial valuations Note disclosures
Plan description
Funding policy
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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
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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
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GASB 46 - Net Assets Restricted by Enabling
Legislation Definition of legally enforceable
Based on professional judgment
If determined not to be enforceable for one mayaffect 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
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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
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GASB 47 Exclusions/Exceptions
Unemployment compensation claims NCGAStatement 4
Defined benefit pension benefits GASBStatement 27 for measurement still followGASB 47 disclosure requirements
OPEB GASB Statement 45 for measurement still follow GASB 47 disclosure requirements
Immaterial items
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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 servicesrendered
Professional judgment required
Employers intent How employees view the benefits
Length of time for which benefits have been available
Benefit applies to termination before normalretirement age
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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
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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 ofeach subsequent reporting period
Incremental liability & expense should be measured
May be positive or negative
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GASB 47 Recognition Requirements
Accrual Basis(continued)
Involuntary termination benefits
Expense & liability recognized when
Plan of termination approved by those with authority tocommit employer
Plan communicated to employees
Amounts can be estimated
Liability measurement should be updated at end ofeach subsequent reporting period Incremental liability & expense should be measured
May be positive or negative
Involuntary termination future service requirements liability & expense recognized ratably over futureservice period
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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
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GASB 47 Disclosure Requirements
In period when employer becomes obligated fortermination benefits or future periods in whichemployees are required to render services toreceive involuntary termination benefits, thendisclose: Description of termination benefit arrangements
Types of benefits provided Number of employees affected
Period of time over which benefits are expected to beprovided
Cost of termination benefits (if not apparent from theface of the statements)
For defined benefit pensions and OPEB benefits change in the related actuarial accrued liability
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GASB 47 Disclosure Requirements (continued)
In all periods when termination benefit liabilitiesare reported:
Significant methods (e.g., discounted present value)used to determine liabilities
Significant assumptions (e.g., discount rate, healthcare cost trend rate, etc.) used to determine liabilities
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GASB 47 Effective Date(s)
Termination benefits affecting an employersobligations for defined benefit OPEB phasedimplementation for employers based on GASB34 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 thoseaffecting obligations for defined benefit pensionsFY beginning after 6/15/05
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GASB 48 Sales and Pledges of Receivables
Addresses whether a transaction is a sale or acollateralized borrowing resulting in a liability
Key issue is extent transferor retains orrelinquishes control over the receivables orfuture revenues thru its continuing involvement
Report as collateralized borrowing unless criteriaindicate a sale has taken place
Also addresses sales of receivables or revenues
within the same financial reporting entity
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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
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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
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Auditing Standards
New Auditing Standards effective for yearsending after December 15, 2006
SAS 103: Audit Documentation SAS 112: Communicating Internal Control Related
Matters Identified During an Audit
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SAS 103: Learning Objectives
Understand the new documentationrequirements of SAS 103.
Plan the audit in order to date auditors report asearly as possible.
Evaluate the impact of subsequent events on the
financial statements and report date.
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SAS 103 and SAS 96 Comparison
How does SAS 103 differ from SAS 96?
Documentation should be understandable by an
experienced auditor having no previousconnection to the audit.
Clarifies that auditors cannot use oral
explanations to support their work orconclusions.
Requires auditors to document reasons for
departures from auditing standards. Requires documentation to show who performed
and reviewed work and the date.
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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.
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Auditors Report Date
Report date The date on which sufficientevidence 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 managementhas accepted responsibility for the financialstatements.
Management acceptance is generally demonstrated by signingthe management representation letter.
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Reacting to the New Auditors Report Date
PLAN for andSCHEDULE ALL auditprocedures
Send confirmations andrepresentation lettersearly
(Update when needed) Prepare financial
statements and relateddisclosures ASAP
Address issues early (andoften)
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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
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Subsequent Events
Two types of subsequent events requireconsideration 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 sheetdate but arose subsequent to that date.
disclose
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Wrap Up SAS 103
When the engagement partner is ready to signthe auditors report, then you know the reportdate.
Fieldwork includes all necessaryaudit procedures (the location ofthe work does not matter).
Subsequent audit procedures must beperformed through the auditors report date.
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SAS 103 Questions?
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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.
C i ti f I t l C t l R l t d
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Communication of Internal Control Related
Matters Communicate in writing Significant deficiencies
Material weaknesses
Communicate to thosecharged with governance those with responsibility
for overseeing the
strategic direction of theentity and the financialreporting and disclosureprocess
Best practice:Communicate on thereport release date
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Definitions Some Changed
Significant Deficiency There is more than a
remote likelihood that amore than inconsequentialmisstatement of the entitys
financial statements will notbe prevented or detected.
Material Weakness There is more than a
remote likelihood that amaterialmisstatement of the entitys
financial statements will notbe prevented or detected.
Control Deficiency
More than a Remote Likelihood
More than Inconsequential Material
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The Mathematics of the New Terms
Material Weakness >Tolerable Misstatement(TM)
Significant > 20% and 5%
and < 20% of TM Trivial (unlikely to be
material) < 5% of TM
Dont forget qualitativefactors that can movedeficiency up the scale
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The Five Components of Internal Control
The Components:
The ControlEnvironment
Risk Assessment
Information andCommunication
Control Activities
Monitoring
Reminder: control
processes extend throughthe preparation offinancial statements
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Evaluating Control Deficiencies Identified
Evaluate individually andin combination
Evaluate the potential formisstatement, notwhether a misstatementhas occurred
Evaluate the likelihood ofmisstatement
Evaluate the magnitudeof misstatement
Evaluate mitigatingeffects of testedcompensating controls
Would a prudent officialagree with classification?
The Reverse Logic Approach
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The Reverse Logic Approach
- a Mind Shift Under prior standard, internal control related matterswere generally not communicated until auditor believedthey were of such a magnitude that they were
considered reportable conditions or materialweaknesses.
To effectively implement SAS 112, believe auditors needto implement a mind shift and view internal control
related matters in reverse as material weaknesses,until auditor can document reasoning in concluding thatan item is a significant deficiency or a control deficiency.
Action plan: Address client internal control related
matters during planning. Inform client of new reportingrequirements and whether you expect to reportsignificant deficiencies or material weaknesses.
Control Deficiencies that are at Least
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Control Deficiencies that are at Least
Significant Deficiencies The expertise and control over the selection andapplication of appropriate accounting principles.
Antifraud programs and controls Controls over nonroutine and nonsystematic
transactions.
Controls over the period-end financial reportingprocess
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
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Control Deficiencies that are
Strong Indicators of Material Weakness Ineffective oversight offinancial reporting andinternal control by those
charged with governance Restatement of issued FS
Auditor identification of
material misstatement An ineffective internal
audit function whenfunction is important
An ineffective regulatorycompliance function
Senior management
fraud, any magnitude
Failure to addresspreviously report
significant deficiency An ineffective control
environment
Appendix A of SAS 112 provides examples of controldeficiencies, significant deficiencies, and material weaknesses.
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Wrap Up SAS 112
SAS 112 requires that significant deficiencies ormaterial weaknesses be communicated in
writing to management and those charged withgovernance as early as possible, but no laterthan 60 days after the report release date.
In determining whether a potential misstatementis more than inconsequential, the auditor shouldconsider qualitative and quantitative factors.
Evaluate client internal control related mattersduring planning and discuss new reporting withclient during engagement planning.
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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
Ri k A t A dit St d d O i
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Risk Assessment Audit Standards Overview
Establish standards and provide guidance
Concerning the auditors assessment of the risksof material misstatement (whether caused byerror or fraud) in an audit, and the design andperformance 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 obtainedaffords a reasonable basis for an opinionregarding the financial statements under audit.
Risk Assessment Audit Standards Overview
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Risk Assessment Audit Standards Overview(continued)
The primary objective of these Statements is to enhanceauditors application of the audit risk model in practice byspecifying, among other things:
More in-depth understanding of the entity and itsenvironment, including its internal control, to identify therisks 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 howfinancial statements could be materially misstated basedon that understanding.
Improved linkage between the auditors assessed risksand the nature, timing, and extent of audit proceduresperformed in response to those risks.
Q ti ?
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Questions?
Do you have anyquestions?