Accounting and Auditing Current Topics

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

[email protected]


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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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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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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?

Accounting and Auditing Current Topics

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