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Update on Recent GASB/SAS Pronouncements

Presented byCorey Arvizu, CPA

Heinfeld, Meech & Co.

GFOAz TrainingGovernmental Accounting 101January 11, 2008

Communication of Audit Matters

New audit standard - Communicating Internal Control Related Matters Identified in an Audit – SAS No. 112

New terminology for audit findings “Harmonization” of international, public

company, and government audit standards Threshold for reporting items has been lowered Must be issued within 60 days of report release

date Effective for December 31, 2006 and later

audits

Communication of Audit Matters

Old Definitions – SAS N0. 60

New Definitions – SAS No. 112

Other matters related to internal control

Management letter comment

Significant deficiency

Reportable conditions

Material weakness

Material weakness

Communication of Audit Matters – Examples of Potential Deficiencies

Lack of segregation of duties The identification by the auditor of a

material adjustment•In general ledger or supporting schedules

Lack of controls when the auditor drafts the financial statements

Fraud involving cash Numerous exceptions noted during

controls test work

Communication of Audit Matters – Auditor Drafting Financial Statements

Internal control must extend beyond the general ledger

Auditor cannot be part of a client’s internal control

Client’s designation of individual to oversee service is not a control

Auditor’s drafting of statements does not cause a control deficiency

Contracting of accounting services and statement preparation to a third-party does not relieve management of its responsibilities

Communication of Audit Matters – Demonstrating and Documenting Controls when the Auditor Drafts the Financial Statements

Agree financial statements to your general ledger and schedules

Use a financial statement checklist Create a written procedure as to your

review of the draft Ask questions Remember - client is not expected to

be able to replicate auditor’s work

Communication of Audit Matters – Discussions with the Governing Body and Other

Understand the language in the auditors reports

Material weakness doesn’t result in a qualified opinion?

Cost considerations for any internal control must be considered

Have auditors attend a Board meeting Develop an audit committee

SAS 112 CASE STUDIES

GASB – Net Assets Restricted by Enabling Legislation

Intended to prevent blanket determinations

External party can compel the government to abide by the restriction

Matter of professional judgment Net assets restricted by enabling

legislation should be disclosed in the notes

GASB – Other Postemployment Benefits

Implementation follows GASB No. 34 format – phase one in fiscal year 2008

Perform an actuarial study of OPEB prior to required implementation•Study may be performed up to two years prior to the beginning

of the implementation year

Don’t forget about implicit rate subsidy element of the pronouncement

Plan and budget for costs of actuarial study Ensure governing body and other parties are

aware of the financial impact of benefits plans

GASB – Other Postemployment Benefits

Employment Period

Benefits Period$15,000 of future benefits

Allocate future benefits to service period

Retirement

GASB – Sales and Pledges of Receivables

Assumes all “sales” transactions are borrowings, or pledges, unless certain criteria are satisfied

Control based checklist determines sale of receivable and revenues

Revenue from sale should typically be recognized over duration of agreement

Note disclosure required for pledged revenues

Effective for fiscal year 2008

GASB – Sales and Pledges of Receivables

Example disclosure for pledged revenues:

Note 10: Utility Revenues PledgedThe City has pledged future water customer revenues, net of specified operating expenses, to repay $5.7 million in water system revenue bonds issued in December 2003. Proceeds from the bonds provided financing for the construction of the 17th Street filtration plant. The bonds are payable solely from water customer net revenues and are payable through 2028. Annual principal and interest payments on the bonds are expected to require less than 22 percent of net revenues. The total principal and interest remaining to be paid on the bonds is $8,849,250. The total principal and interest paid for the current year and total customer net revenues were $470,250 and $2,612,500.

GASB – Intangible Assets

Issues addressed in draft - •Characteristics

•Classified as capital assets

•When to capitalize

•Internally generated software

•Possible indefinite useful lives for certain assets

•Retroactive implementation New attention and focus on water

rights and reporting as assets Effective for fiscal year 2010

GASB – Fund Balance Reporting

GASB position and arguments - •Most utilized element of governmental

financial information

•Users want to clearly identify discretionary resources

•Governments report reserved fund balance that should be unreserved

•Provide method to categorize components of fund balance

Fiscal year 2010 effective period?

GASB – Fund Balance Reporting

General FundCapital

Projects Fund

Transportation Capital

Projects FundResources legally restricted:

Capital projects Reserved Unreserved UnreservedTransportation projects Reserved Reserved UnreservedPalm Lane bridge project Reserved Reserved Reserved

Resources intended use:Capital projects Designated Undesignated UndesignatedTransportation projects Designated Designated UndesignatedToltec bridge project Designated Designated Designated

GASB – Fund Balance Reporting, Definitions

Expect narrow definition of special revenue funds

Enhances definitions of debt service and capital projects funds

Encumbrances must be appropriated to be reported as reserved

Term “legally limited” will likely appear as additional guidance

Expenditure Limitation Reports

Exclusions exceed expenditures at the fund level

Not all expenditures/expenses included, in particular other financing uses

Interest revenues claimed as both exclusion and a carryforward

Special district do not qualify as “political subdivisions”

Budget for internal service expenses and inter-departmental charges if looking to go “home rule”

Audit Committees

Growing and increasing emphasis on the importance of audit committees for governments

Sarbanes-Oxley “creep” to governments Accounting profession encouraging more

responsibility by auditees Practical means for the governing board to

provide oversight of internal controls and the financial reporting process

Our firm has begun including the evaluation of audit committees in management letters

Resources for Audit Committees

AICPA - Audit Committee Toolkit for Government Organizations: www.aicpa.org/AudCommCtr/

GFOA - Recommended Practice – Audit Committees: www.gfoa.org/services/rp/caafr.shtml

The Institute of Internal Auditors – model audit committee charter

Maricopa County Community College District – Audit and Finance Committee Resource Guide

Other Topics

HURF reporting and related requirements of allowable expenditures

Street and highways certification Electronic submission of CAFR to GFOA IRS fringe benefits audits Audit committees for governmental Federal study of Single Audit quality New risk assessment standards for

auditors

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Thank You!

Corey Arvizu (520) 742-2611 ext. 101carvizu@heinfeldmeech.com