Presented by:

Susan Johnson, PrincipalJudith Ventura Enright, Senior Manager

Inside The AuditMarch 9, 2012

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•Deliverables

• Audit Phases and Timeline

• Readiness Recommendations

•Government-wide Conversion

Agenda

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• Audit report, including report on supplementary information

• Report of deficiencies noted in internal control

• Business advice

• Single Audit reports

• Agreed Upon Procedures report for UCOA

• If engaged, draft financial statements, including notes and supplemental schedules. Supplemental safeguards required.

Deliverables

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• Planning and Interim

• Fieldwork

• Completion and Presentation to Governing Bodies

Audit Phases

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• Planning and Interim - May

• Client Preparation – June to September

• Fieldwork – Mid-September

• Completion and Presentation to Governing Bodies –November/December

Current timeline often lacks flexibility for governing body meetings and results in last minute submittal to State

Timeline

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• Communicate planning process to governing bodies

• Obtain/update understanding of client and industry

• Preliminary analytical procedures

• Risk assessments

• Create/modify audit program

• Agree upon scheduling of fieldwork

Planning and Interim

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Activities performed:• Meet with members of governing body

• Read minutes – Town Council, Audit Committee, School Committee, and others as necessary

• Read major agreements and contractsBonds issued, significant grants, significant

additions/disposals of property, etc.

• Analytical procedures on interim account balances

• Single audit considerations - interim Schedule of Expenditures of Federal Awards

Planning and Interim

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Activities performed: • Inquiries of personnel performing significant processes (i.e. payroll) and walkthrough of internal controls

• Inquiries of members of management and governing body

• Identification of confirmations deemed necessary (i.e. cash, investments, debt) and related follow-up

• Review schedules and analysis required and agree upon timeline for completion.

Planning and Interim

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• Test significant account balances, classes of transactions, and disclosures

• Obtain source documents

• Obtain explanations from client, corroborate where necessary

• Coordinate testing with Single Audit

Fieldwork

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Significant Areas Tested:• Cash and investments

• Taxes and other significant accounts receivable and related revenue

• Capital assets

• Financing

• Accounts payable, accrued expenses and other liabilities (i.e. claims), including compensated absences

Fieldwork

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Significant Areas Tested: • Interfund balances

• Fund balances/net assets

• General procedures, revenue and expense analytical procedures and testing of significant journal entries

• Procedures specific to Trust Funds (i.e. Private Pensions, OPEB)

• Disclosures in the financial statements

Fieldwork

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Activities Performed:• Test accuracy of templates prepared by client that include ending balances and footnote presentation

• Test client’s cash reconciliations

• Agree investment balances and details to confirmations or original statements

• Test insured/collateralized status

• If significant, test interest income

Cash And Investments

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Activities Performed:• Test accuracy of tax roll-forward schedule to source documents (financial statement format)

• Verify current tax levy through minutes and certified “Assessor’s Statement of Assessed Values & Tax Levy”

• Test 60-day revenue

• Test significant abatements to authorizations

• Evaluate reasonableness of allowance for taxes receivable

Taxes & Other SignificantReceivables and Revenues

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Activities Performed: • Evaluate existence and collectability of significant receivables (subsequent cash receipts)

• Test recording of other significant receivables based on measurement basis (i.e.– collected within reasonable period of time after year end (60 days) (deferred revenue)

• Apply analytical procedures to identify activity outside historical/normal trends

• Substantive testing of cash collections and application to taxpayers’ accounts, if necessary

Taxes & Other Significant Receivables and Revenues

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Activities Performed:• Test accuracy of roll-forward schedule (financial statement format)

• Vouch significant additions and disposals

• Evaluate depreciation methods and lives in accordance with GAAP

• Obtain/test accuracy of information needed for government-wide conversionDepreciation by functionCapital asset additions by function

Capital Assets

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Activities Performed:• Test accuracy of roll-forward schedule (financial statement format)

• Test new additions to source documents, including bond premiums/discountsIncludes capital leases

• Agree ending balances and details to confirmations

• Test interest expense and accrued interest

Financing

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Activities Performed:• Search for unrecorded liabilities – subsequent disbursements journal

• Test accrued payroll

• Test accrued compensated absences

• Analytical procedures applied to identify activity outside historical/normal trends

• Inquiry of legal counsel

Accounts Payable, Accrued Expenses and Other

Liabilities

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Activities Performed:• Agree all balances to respective trial balances and ensure balances net to zero between funds

• Includes Due to/from accounts and transfers

Interfund Balances

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Activities Performed:• Test roll-forward of balances from prior year’s financial statements

• Test classification of balances among categories (GASB 54) for fund balances (Fund financial statements) and net assets (government-wide financial statements)

• Test disclosure of deficit fund balances

Fund Balances/Net Assets

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Activities Performed:• Reconcile wages paid per payroll records to wages recorded in trial balances, if deemed necessary

• Test significant journal entries

• Apply analytical procedures (on amounts not tested elsewhere):Actual expenditures to budgeted expendituresActual expenditures to prior year expenditures

General Procedures

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Activities Performed:• Review reconciliation of contributions to trust reports and the fund making the contributions

General Fund or School Unrestricted Fund

• Review reconciliation of distributions to trust reports

• Test eligibility, participant contributions and distributions

• Read actuarial valuations and compare to disclosure in footnotes

Trust Funds

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Activities Performed:• Workpapers structured to support balances and disclosures

• Need latest State pension report

• Test completeness of commitment and contingency disclosures

Disclosures

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Activities Performed:

• Final analytical procedures

• Discuss with management adjustments and waived adjustments (throughout engagement)

• Agree amounts and disclosures in draft financial statements to audited trial balances and workpapersManagement responsible for preparation of draft financial statements,

but may engage accountants, if safeguards are implemented

• Presentation of financial statements and control deficiencies identified to governing bodies Important to discuss who has authority to accept the draft financial

statements (i.e. Town Administrator, Audit Committee, Town Council)

• Issuance of the financial statements and other deliverables

Completion & Presentation

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• Establish policies & procedures for reconciling significant account balances and classes of transactions on a monthly basisReconciliation of taxes receivable and revenue - include

tax collection system, assessment system, and general ledger

Reconciliation of interfund balances (Due to/From) Reconciled on periodic basis (at least quarterly) For accounts with a high volume of transactions, reconcile monthly

(i.e. Town General Fund and School Unrestricted Fund) Create checklist for normal/recurring interfund transactions and use to

ensure entries are current (i.e. allocation of payroll, insurance) Year-end reconciliation should occur as soon as June is closed so

variances can be researched and corrected (impacts ability to provide final trial balances to auditors)

Readiness Recommendations

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• Schedule of Expenditures of Federal AwardsUpdate details as awards are receivedEnter amounts after year-end close

• Update capital asset system as expenditures are made

• Set up an “Audit” folder on your internal networkSave audit relevant information as soon as it is received

(significant grant agreements, bond documents, purchase and sales agreements)

Readiness Recommendations

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• Prioritize work based on when it can be done, following can be done in July:Cash and investmentsFinancing flow-throughAccrued Compensated absencesTax roll-forward and reconciliation – can be principally done

in July and then adjusted for 60-day rule, if applicableCapital asset flow-throughRecording of pay-as-you-go payments to OPEBReconciling contributions received by Private Trusts to

expenditures in the Fund that makes themCompare trial balances for current year to final audited

prior year trial balance to help identify items that may require follow-up – as soon as June is closed

Readiness Recommendations\

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• Maintain funds on the accounting basis applicable to them throughout the year, i.e. Enterprise and Trust Funds on the accrual basis of accounting

• Roll and revisit the MD & A during the year so that narrative information presented is fresh, relevant, and focused on the significant activities during the year

• Provide original and amended budgets, exported to Excel, to auditors on first day of fieldwork. Final amendments can be provided later, if necessary.

Readiness Recommendations

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Government-wide Conversion

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• Government-wide, Proprietary Funds, and Fiduciary Funds:

economic resources/full accrual

• Governmental Funds:financial resources/modified accrual

• Budgetary Statement:budgetary basis with modified accrual

Measurement Focus and Basis of Accounting

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• Economic resources/full accrual:Focus on total economic resources and recognition of

increases and decreases in economic resources as soon as the underlying event or transaction occurs

• Financial resources/modified accrual:Focus on resources available for spending and recognition

of increases and decreases in financial resources only to the extent they reflect near-term inflows or outflows of cash

Measurement Focus and Basis of Accounting

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Statement Of Net AssetsTotal Governmental Funds- Per Balance

Sheet Governmental Funds Debt

CapitalAssets

Deferred Revenue

Governmental Activities Per

Statement of Net Assets

Assets

Cash and cash equivalents $ 17,340,000 $ 17,340,000

Investments 4,382,000 4,382,000

Property taxes receivable 1,468,000 1,468,000

Other receivables 2,310,000 2,310,000

Due from other funds 1,946,000 1,946,000

Capital assets net of depreciation $ 29,825,000 29,825,000

Total Assets 27,446,000 - 29,825,000 - 57,271,000

Liabilities and Fund Balances

Liabilities:

Accounts payable and accrued expenses 983,000 983,000

Due to other funds 2,546,000 2,546,000

Deferred revenue 1,390,000 $ (1,290,000) 100,000

Long term obligations $ 17,000,000 17,000,000

Total liabilities 4,919,000 17,000,000 - (1,290,000) 20,629,000

Total fund balances/net assets 22,527,000 (17,000,000) 29,825,000 1,290,000 36,642,000

Total liabilities and fund balances/net assets $ 27,446,000 - $ 29,825,000 - $ 57,271,000

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Statement Of ActivitiesTotal Governmental

Funds- Per Statement of revenues, expenditures,

and changes in fund balances Debt

Capital Assets

Deferred Revenue

Governmental Activities Per Statement of

ActivitiesRevenuesProperty Taxes $ 28,500,000 $ 225,000 $ 28,725,000 Grants 1,200,000 25,000 1,225,000Licenses, permits, and fees 975,000 975,000 Other 225,000 225,000 Total Revenues 30,900,000 - - 250,000 31,150,000

Expenditures:

Expenditures (general, public safety, education, etc) 27,200,000 $ 1,000,000 28,200,000 Debt Service 1,950,000 $ (1,200,000) 750,000 Capital Outlay 1,650,000 (1,650,000) - Total Expenditures 30,800,000 (1,200,000) (650,000) 28,950,000

Excess of revenues over expenditures 100,000 1,200,000 650,000 250,000 2,200,000

Other financing sources (uses):Bond Proceeds 1,000,000 (1,000,000) Total other financing sources (uses) 1,000,000 (1,000,000) - - -

Excess of revenues and other financing sources over expenditures and other financing uses 1,100,000 200,000 650,000 250,000 2,200,000

Fund balances, beginning of the year 21,427,000 (17,200,000) 29,175,000 1,040,000 34,442,000

Fund balances, end of year $ 22,527,000 $ (17,000,000) $ 29,825,000 $ 1,290,000 $ 36,642,000

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• General information Prior year outstanding balance $17,200,000 Current year new bond issuances $1,000,000 Current year principal payments $1,200,000 Current year outstanding balance $17,000,000

• Accounting in fund financial statements Outstanding balance is not recorded Principal payments are recorded as expenditures New issuances are recorded as other financing sources

Debt Conversion

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• Accounting in government-wide financial statements Outstanding balance is recorded as liabilities Principal payments are recorded as a reduction of

liabilities New issuances are recorded as an addition to the

liabilities

• Conversion Add outstanding balance to statement of net assets Remove principal payments from expenditures Remove new issuances from other financing sources

Debt Conversion

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DebtLong term obligations per the fund financial statements -

Add prior year balance $ 17,200,000

Add current year debt issuances 1,000,000

Less current year principal payments (1,200,000)

Long term obligations per the government-wide financial statements $ 17,000,000

Debt service expenditures per fund financial statements $ 1,950,000

Less current year principal payments (1,200,000)

Debt service expense per government wide-financial statements * $ 750,000

* Remaining debt service on the government -wide financial statements should be interest expense

Other financing sources per fund financial statements $ 1,000,000

Less current year debt issuances (1,000,000)

Other financing sources per government wide-financial statements -

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• General information Prior year capital assets, net of depreciation $29,175,000 Current year additions of $1,650,000 Current year depreciation expense of $1,000,000 Current year capital assets, net of depreciation

$29,825,000

• Accounting in fund financial statements Current year additions are expenditures Depreciation is not recorded

Capital Assets Conversion

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• Accounting in government-wide financial statements Current year additions are recorded as assets Depreciation is recorded

• Conversion Current year additions removed from expenditures and added to assets Depreciation recorded

Capital Assets Conversion

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Capital AssetsCapital assets, net of depreciation per fund financial statements -

Add prior year capital assets, net of depreciation $ 29,175,000

Add current year additions 1,650,000

Less current year depreciation (1,000,000)

Capital assets, net of depreciation per government-wide financial statements $ 29,825,000

Capital outlay per fund financial statements $ 1,650,000

Less current year capital assets (1,650,000)

Capital outlay per government-wide financial statements -

Expenditures per fund financial statements (general, public safety, education, etc.) $ 27,200,000

Add current year depreciation 1,000,000

Expenses per government-wide financial statements (general, public safety, education, etc.) $ 28,200,000

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• General information Prior year grant receivable not received within 60 days $40,000 Current year grant receivable not received within 60 days $65,000 Prior year taxes receivable not received within in 60 days $1,000,000 Current year taxes receivable not received within 60 days $1,225,000 Current year grant revenue received but for which all

grant requirements have not yet been met $100,000

Deferred Revenue Conversion

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• Accounting in fund financial statementsProperty tax revenue - recognized when susceptible to

accrual. Susceptibility occurs when revenues are both measurable and available for liquidating liabilities of the current period. “Measurable” means the amount of the transaction can be determined,

and “Available” means collectible within the current period or soon enough

thereafter to be used to pay liabilities of the current period (i.e. 60 days).

Deferred Revenue Conversion

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• Accounting in fund financial statements Grants

Where expenditure is the prime factor in determining eligibility, grant revenue is recognized as allowable expenditures are made, provided the grants are collected during the year or within 60 days subsequent to year-end.

Prior to allowable expenditure, proceeds are recorded as deferred revenues.

Deferred Revenue Conversion

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• Accounting in government-wide financial statementsProperty taxes are recognized as revenue in the year for

which they are levied. Grants and similar items are recognized as revenue as

soon as all eligibility requirements imposed by the grantor have been met.

• ConversionRemove amounts deferred in the prior year due to the

period availabilityAdd amounts deferred in the current year due to the

period of availability

Deferred Revenue Conversion

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Deferred Revenue

Deferred revenue per fund financial statements $ 1,390,000

Less taxes receivable not received within 60 days of year end $ (1,225,000)

Less grant revenue not received within 60 days of year end (65,000) (1,290,000)

Deferred revenue per government-wide financial statements * $ 100,000

* Remaining amount represents grant money received in advance of meeting grant requirements (i.e. unearned revenue)

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Deferred Revenue

Tax revenue per fund financial statements $ 28,500,000

Less prior year deferred revenue received in current year $ (1,000,000)

Add current year taxes receivable not received within 60 days of year end 1,225,000 225,000

Tax revenue per government-wide financial statements * $ 28,725,000

* Tax revenue on government-wide should equal current year assessment, less abatements, plus interest on past due amounts

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Deferred Revenue

Grant revenue per fund financial statement statements

$1,200,000

Less prior year deferred revenue received in the current year $ (40,000)

Add current year grant receivable not received within 60 days of year-end 65,000 25,000Grant revenue per government-wide financial statements * $ 1,225,000

* Grant revenue on government-wide financial statements should be equal to the total amount of revenue for which all grant requirements have been met; regardless of when the cash is received.

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Questions?

LGC+D LLPCPAs/Business Advisors

10 Weybosset Street ∙ Suite 700 ∙ Providence ∙ RI ∙ 02903P [401] 421-4800 ∙ F [401] 421-0643

www.lgcd.com

Susan Johnson: sjohnson@lgcd.comJudith Ventura Enright: jenright@lgcd.com