governmental accounting & auditing supplement no. 3-2018 · of the governmental audit quality...

Governmental Accounting and Auditing Supplement No. 3-2018

GOVERNMENTAL ACCOUNTING AND

AUDITING SUPPLEMENT NO. 3-2018

© 2018 Association of International Certified Professional Accountants. All rights reserved. 1-1

Chapter 1

Governmental Accounting and Auditing Supplement No. 3-2018

Introduction

This update includes the more significant accounting and auditing developments affecting state and

local governments from July 1, 2018, through September 30, 2018. Included in this update are relevant

standard-setting and project activities of the Auditing Standards Board (ASB), Professional Ethics

Executive Committee (PEEC), GASB, the U.S. Government Accountability Office (GAO), and the Office of

Management and Budget (OMB).1

These developments, although believed to be complete at the date at which they were prepared for this

course material, may not cover all areas within accounting and auditing relevant to all users of this

material. Readers are encouraged to visit the AICPA’s Financial Reporting Center for additional resources,

including various “standards trackers,” for the most recent standard-setting activity in the areas of

accounting and financial reporting, audit and attest, and compilation, review, and preparation. Members

of the Governmental Audit Quality Center (GAQC) may also periodically check the GAQC website for

1 This does not include information that was covered in the Governmental Accounting and Auditing Supplement No.

2-2018 related to the Office of Management and Budget (OMB) 2018 Compliance Supplement, dated April 2018. For

assistance in using the 2018 Compliance Supplement see the GAQC resource at

https://www.aicpa.org/interestareas/governmentalauditquality/resources/singleaudit/2018-omb-compliance-

supplement.html. This resource is available to the public. The 2017 and 2018 supplements are available on the

OMB website at https://www.whitehouse.gov/omb/management/office-federal-financial-management.

https://www.aicpa.org/interestareas/governmentalauditquality/resources/singleaudit/2018-omb-compliance-supplement.html

https://www.aicpa.org/interestareas/governmentalauditquality/resources/singleaudit/2018-omb-compliance-supplement.html

https://www.whitehouse.gov/omb/management/office-federal-financial-management


developments in Government Auditing Standards, single audits, and audits of governmental financial

statements.

This update may refer you to other sources of information, in which case, you are strongly encouraged to

review that information if it is relevant to your needs.


Audit and accounting final and proposed standards

Final standards, interpretations, and regulations

Auditing Standards Board

The ASB did not issue any new or revised standards or interpretations affecting state or local

governments during this period.

Professional Ethics Executive Committee

Technical correction to “Agreed-Upon Procedure Engagements Performed in Accordance with SSAEs” interpretation

Issue date

July 2018

Background and main provisions

A technical correction was issued to correct the definition of a covered member in paragraph .12 of

“Definitions” (ET sec. 0.400)2 of the AICPA Code of Professional Conduct. Previously, a covered member

included a partner, partner equivalent, or manager who provides more than 10 hours of nonattest

services to the attest client within any fiscal year. This definition was updated to include a partner,

partner equivalent, or manager who provides 10 or more hours of nonattest services to the attest client

within any fiscal year.

Paragraph .05 of the “Agreed-Upon Procedure Engagements Performed in Accordance With SSAEs”

interpretation (ET sec. 1.297.020) of the “Independence Rule” was also updated as follows (correction in bold):

Furthermore, threats to compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level and could not be reduced to an acceptable level by the application of safeguards, and

independence would be impaired, if the firm had a material financial relationship with the responsible

party(ies) that was covered by any of the following interpretations of the “Independence Rule”:

a. Paragraphs 01. and .02 of “Overview of Financial Interests” [1.240.010] b. “Trustee or Executor” [1.245.010] c. “Joint Closely Held Investments” [1.265.020] d. “Loans” [1.260.010] [Prior reference: paragraph .13 of ET section 101]

2 All ET sections can be found in AICPA Professional Standards.


Effective date

The corrections are effective immediately.

“Hosting Services” interpretation

Effective date

The effective date of the “Hosting Services” interpretation (ET sec. 1.295.143) under the “Independence

Rule” has been changed from September 1, 2018, to July 1, 2019. The additional time is being provided to

allow AICPA members to work with their third-party vendors and clients to implement any necessary

changes resulting from the new interpretation.

GASB

Accounting standards updates

GASB Statement No. 90, Majority Equity Interests ─ an amendment of GASB Statements No. 14 and No. 61

Issue date

September 2018


GASB Statement No. 90 was issued to enhance the comparability of governments’ reporting of majority

equity interests in legally separate organizations and to improve the relevance of financial statement

information for certain component units.

GASB Statement No. 90 establishes criteria for reporting a government’s majority equity interest in a

legally separate organization. The statement defines an equity interest as a financial interest in a legally

separate organization evidenced by the ownership of shares of the organization’s stock or by otherwise

having an explicit, measurable right to the net resources of the organization that is usually based on an

investment of financial or capital resources by a government.

The statement requires that if a government’s holding of the majority equity interest in a legally separate organization meets the definition of an investment in paragraph 64 of GASB Statement No. 72, Fair Value Measurement and Application, the equity interest should be reported as an investment and measured using the equity method in accordance with paragraphs 205–209 of GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, as amended, with certain exceptions for special-purpose governments. If a special-purpose government engaged only in fiduciary activities, a fiduciary fund, or an endowment (including permanent and term endowments) or permanent funds holds a majority equity interest in a legally separate organization that meets the definition of an investment, the majority equity interest should be measured in accordance with the requirements in paragraph 64 of GASB Statement No. 72.


If the government’s holding of the majority equity interest does not meet the definition of an investment,

the government is required to report the organization as a component unit.

Effective date

The requirements of this statement are effective for reporting periods beginning after December 15,

2018.

GAO

Government Auditing Standards, 2018 Revision

Issue date

July 17, 2018


Changes from existing guidance found in the 2018 revision of Government Auditing Standards (the Yellow

Book) are as follows:

Requirements for a topic are separated from application guidance. – Requirements are presented in a box.

Chapters are restructured and rearranged. – Application guidance has been added to a number of topics.

The independence standard is expanded. – Increased emphasis is given to the consideration of nonaudit services.

The peer review standard is modified to differentiate requirements for those audit organizations affiliated with a recognized organization.

CPE requirements remain the same as in prior guidance. – Application guidance is added, including for years when there are revisions to the standards. – An exception to CPE requirements is added for nonsupervisory staff who charge less than 40

hours of their time annually to engagements performed under Government Auditing Standards. Requirements and application guidance related to the quality control standard are expanded. The standards add the concept of waste, which is applicable to financial audits, examination types of

attest engagements, and performance audits. Standards are added for reviews of financial statements performed under Government Auditing

Standards. Performance audit standards are updated with considerations for situations in which internal control

is significant to the audit objectives. Supplemental guidance from the appendixes found in the 2011 revision are either incorporated into

individual chapters or removed.

The revised standards are found on the GAO website at https://www.gao.gov/yellowbook/overview.

Look for the new course “The New Yellow Book: Government Auditing Standards, 2018 Revision,” available

in early 2019.

https://www.gao.gov/yellowbook/overview


Effective date

This revision is effective for financial audits, attestation engagements, and reviews of financial

statements for fiscal years ending on or after June 30, 2020. It is effective for performance audits

beginning on or after July 1, 2019.

Special note: An auditor must be independent from the audited entity for the entire period under audit.

Therefore, for a June 30, 2020, fiscal year-end, an auditor is required to comply with the 2018 Yellow

Book independence requirements beginning on July 1, 2019. Auditors will need to understand the

new requirements and make any adjustments needed to ensure independence by that date.

OMB

The OMB did not issue any standards, interpretations, or regulations during this period.

Proposed standards, interpretations, and regulations

AICPA

Auditing Standards Board

Proposed Statement on Standards for Attestation Engagements Revisions to Statement on Standards for Attestation Engagements No. 18, Attestation Standards: Clarification and Recodification

Issue date

July 11, 2018

Comment deadline and effective date

Comments on the exposure draft are due by October 11, 2018. If issued as final, the proposed revisions

would be effective for practitioners’ reports dated on or after May 1, 2020. Early implementation would

not be permitted.


To address concerns over the clarity, length, and complexity of its standards, the ASB established clarity

drafting conventions and undertook a project to redraft all the standards it issues in clarity format. The

ASB had previously revised and adopted clarified auditing standards, and upon completion of that

project, had begun to clarify the attestation standards. In April 2016, the ASB issued Statement on

Standards for Attestation Engagements (SSAE) No. 18, Attestation Standards: Clarification and

Recodification, which clarified the attestation standards.3

3 Statement on Standards for Attestation Engagements No. 18, Attestation Standards: Clarification and

Recodification, is codified in the AT-C sections in AICPA Professional Standards.


As its strategy, the ASB seeks to converge its standards with those of the International Auditing and

Assurance Standards Board (IAASB). For that reason, one of the objectives of this proposed SSAE is to

further converge the attestation standards with International Standard on Assurance Engagements

(ISAE) 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial

Information, which was issued in December 2013. ISAE 3000 (Revised) is an assurance standard that

addresses reasonable assurance engagements (examinations) and limited assurance engagements

(reviews). In completing the clarity attestation project, the ASB acknowledged that its standards were not

converged with the ISAEs, particularly because ISAE 3000 (Revised) does not require the practitioner to

request a written assertion from the responsible party. The clarified standards require the practitioner to

request such an assertion to perform an examination or review engagement. Accordingly, the ASB

determined that such matters should be the subject of a follow-on ASB project to further evaluate the

requirement for the practitioner to request an assertion.

The proposed revisions address seven main areas:

1. Proposed changes that affect all attestation engagements: a. No longer requires the practitioner to request a written assertion from the responsible party when

the practitioner is reporting directly on the subject matter. b. Adds a statement to the practitioner’s report regarding independence.

2. Proposed changes that affect examination and review engagements: a. Adds a requirement for the practitioner to request a written representation stating whether the

subject matter has been measured or evaluated against the criteria. b. Requires the practitioner to determine whether management has a reasonable basis for its

assertion when management provides an assertion. c. Acknowledges the practitioner’s ability to add information to the practitioner’s report that goes

beyond the minimum report elements required by AT-C section 205, Examination Engagements, and AT-C section 210, Review Engagements.

3. Proposed changes that affect only examination engagements: Eliminates the required report modification resulting from the practitioner’s inability to obtain one or more requested written representations.

4. Proposed changes that affect only review engagements: a. Changes the term review engagement to limited assurance engagement. b. Clarifies the types of procedures a practitioner may perform in a limited assurance engagement. c. Requires that the practitioner’s limited assurance report include a description of the work

performed as a basis for the practitioner’s conclusion. d. Allows the practitioner to express an adverse conclusion when the practitioner, having obtained

sufficient appropriate evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the subject matter.

5. Proposed changes that affect only agreed-upon procedures engagements: a. Responsibility for the procedures performed. Extant AT-C section 215, Agreed-Upon Procedures

Engagements, is premised on specified parties determining the procedures to be performed by the practitioner and assuming responsibility for the sufficiency of the procedures. The proposed SSAE allows the practitioner, the engaging party, or any other party to develop the procedures.

b. Revises guidance regarding when the use of a practitioner’s agreed-upon procedures report needs to be restricted.

6. Prohibition on the performance of a limited assurance engagement on certain subject matter. 7. Effective date: If issued as final, the proposed revised AT-C sections would be effective for

examinations, limited assurance, and agreed-upon procedures reports dated on or after May 1, 2020.


Early implementation would not be permitted. Early implementation of the proposed revised AT-C sections would not be permitted because of the significant revisions to the reporting requirements for examinations, limited assurance, and agreed-upon procedures reports. If early implementation was permitted, the resulting diversity in reporting would create confusion in the marketplace and, therefore, would not be in the public interest.

Readers are encouraged to review the full details of these proposed revisions at

https://www.aicpa.org/content/dam/aicpa/research/exposuredrafts/accountingandauditing/downloada

bledocuments/20180711a-ed-ssae-18-revisions.pdf.

Professional Ethics Executive Committee

The PEEC did not issue any proposed standards or interpretations affecting state or local governments

during this period.

GASB

Proposed Statement of the Governmental Accounting Standards Board Conduit Debt Obligations

Issue date

July 2018

Comment deadline and effective date

Comments on the proposed statement are due November 2, 2018. The requirements of the statement

will be effective for reporting periods beginning after December 15, 2020.


GASB issued the exposure draft to provide a single method for issuers to report conduit debt obligations

and provide some uniformity with the accounting and reporting of additional commitments extended by

issuers, arrangements associated with conduit obligations, and related note disclosures.

The proposed statement defines a conduit debt obligation as a debt instrument having all the following

characteristics:

a. There are at least three parties involved: i. An issuer ii. A third-party obligor iii. A debt holder or a debt trustee

b. The issuer and the third-party obligor are not within the same financial reporting entity. c. The debt obligation is not a parity bond of the issuer, nor is it cross-collateralized with other debt of

the issuer.


d. The third-party obligor or its agent, not the issuer, ultimately receives the proceeds from the debt issuance.

e. The third-party obligor, not the issuer, is primarily obligated for the payment of all amounts associated with the debt obligation (debt service payments).

f. The issuer’s commitment related to the debt service payments is limited.

The proposed statement does not require the issuer to record a debt liability, but a related liability and

expense or expenditure would be recognized if certain additional commitments are made and if it is more

likely than not that the issuer will support debt service payments for a conduit debt obligation. The issuer

would be required to evaluate at least annually whether such additional commitments exist and whether

it is more likely than not the issuer will support the debt.

The statement also clarifies that arrangements associated with conduit debt obligations, as described in

paragraph 13 of the statement, are not to be reported as leases. These arrangements are characterized

by capital assets that are constructed or acquired from the proceeds of a conduit debt obligation and

used by third-party obligors during their activities. Issuers retain the titles to the capital assets in these

arrangements, which may or may not pass to the obligors at the end of the arrangements.

The proposed statement also requires issuers to disclose certain information about their conduit debt

obligations in the notes to the financial statements, including a general description of the conduit debt

obligations, a general description of the issuer’s commitments, the aggregate amount of outstanding

principal, and a description of each type of commitment.

GAO

The GAO did not issue any proposed standards, interpretations, or regulations during this period.

OMB

The OMB did not issue any proposed standards, interpretations, or regulations during this period.

AICPAStore.com | CIMAglobal.com

https://www.aicpastore.com/templates/index.jsp

https://www.cimaglobal.com/

governmental accounting & auditing supplement no. 3-2018 · of the governmental audit quality...

Documents