Understanding Financial Statements, Single Audit Report, and Impact on Re-Designation

1. Understanding Financial Statements, Single Audit Report, and Impact on Re-Designation Walter K. Frye, MBA, CPA • Mississippi Head Start Association • April 3, 2012

2. Understanding Financial Statements, Single Audit Report, and Impact on Re-Designation Presented by: Walter K. Frye, MBA, CPA Revelation Management Systems, LLC 320 Main Street West Orange, NJ 07052 973-902-1040 walterfrye@aol.com

3. The Auditor’s Responsibility • Auditor’s Consideration of an Agency’s ability to Continue as a Going Concern • The Auditor’s Responsibility • Audit Procedures • Consideration of Conditions and Events • Consideration of Management’s Plans • Consideration of Financial Statement Effects • Consideration of the Effects on the Auditor’s Report • Documentation

4. The Auditor’s Responsibility • Evaluate whether there is substantial doubt about the agency’s ability to continue as a going concern for a reasonable period of time, not to exceed one year, beyond the date of the financial statements being audited. • Based upon knowledge of relevant conditions and events that exist at or have occurred prior to the date of the Auditor’s Report.

5. The Auditor’s Responsibility • The auditor’ evaluates as follows: • Considers whether the results of procedures performed in planning, examining evidential matter for various audit objectives, identify conditions and events, when considered in aggregate, indicate there could be substantial doubt. • If the auditor believes there is substantial doubt, the auditor will: • Gather information about management’s plans that are intended to mitigate the effect of such conditions or events and, • Assess the likelyhood that such plans can be effectively implemented.

6. The Auditor’s Responsibility • After evaluation of Management’s plans, the auditor concludes whether there is substantial doubt. If the auditor concludes there is substantial doubt, • Consider the adequacy of disclosure • Include an explanatory paragraph (following the opinion paragraph) to reflect his/her conclusion. • If the auditor concludes that substantial doubt does not exist, he/she should consider the need for disclosure. • The auditor is not responsible for predicting future conditions or events.

7. Audit Procedures • Analytic procedures • Review of subsequent events • Review of compliance with debt and loan agreements • Reading minutes of Board Meetings • Inquiry of Agency’s attorney about litigation, claims, and assessments • Confirmation with related and third parties of the details of arrangements to provide or maintain financial support

8. Consideration of Conditions and Events • Negative Trends – recurring operating losses, working capital deficiencies, negative cash flows from operating activities, adverse key financial ratios • Other indications of possible financial difficulties: • Default on loan or similar agreements • Denial of usual credit from suppliers • Restructuring of debt • Internal Matters • Work stoppages or labor difficulties • Uneconomic long term commitments • External Matters that have occurred: • Legal proceedings • Legislative matters that might jeopardize the ability to operate • Loss of license or major funding grant • Uninsured or underinsured catastrophe (earthquake or flood)

9. Consideration of Management’s Plans • The auditor’s considerations may include: • Plans to dispose assets • Plans to borrow money or restructure debt • Plans to reduce or delay expenditures **When evaluating management’s plans, the auditor will identify those elements that are significant to overcoming the adverse effects of the conditions and events and will obtain evidential matter and the adequacy of support for the plans.

10. Consideration of Financial Statement Effects • If the auditor concludes there is substantial doubt, the auditor will consider the possible effects on the financial statements and adequacy of disclosure. • Pertinent conditions and events giving rise to the assessment of substantial doubt. • Possible effects of such conditions and events • Management’s evaluation of the significance of those conditions and events and mitigating factors • Possible discontinuance of operations • Management’s plans (including relevant prospective financial information) • Information about the recoverability or classification of recorded assets amounts or the amounts or classification of liabilities

11. Consideration of the Effects on the Auditor’s Report • If the auditor concludes substantial doubt remains, the audit report will include an explanatory paragraph (following the opinion) to reflect that conclusion: “The accompanying financial statements have been prepared assuming that the “Agency” will continue as a going concern. As discussed in “Note X’ to the financial statements, the Agency has suffered recurring losses from operations and has a net asset deficiency that raises substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters are also described in “Note X”. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.”

12. Consideration of the Effects on the Auditor’s Report • If the auditor concludes that the Agency’s disclosures with respect to the Agency’s ability to continue as a going concern are inadequate, a departure from GAAP exists. This may result in either a qualified (except for) or an adverse opinion.

13. Documentation • The auditor must document all of the following: • Conditions or events that led to the belief that there is substantial doubt • Elements of management’s plans that the auditor considered to be significant to overcoming the adverse effects of the conditions • Audit procedures performed and evidence gathered to evaluate the significant elements of management’s plans • The auditor’s conclusion as to whether substantial doubt is alleviated • The auditor’s conclusion as to whether to include an explanatory paragraph in the audit report.

14. Policies and Procedures for Designation Renewal of Head Start and Early Head Start Grantees – 45 CFR 1307 1307.3 - Basis for determining whether Head Start will be subject to open competition 1307.4 -Grantee Reporting Requirements concerning certain conditions

15. 1307.4 - Grantee Reporting Requirements Concerning Certain Conditions (within 10 working days of occurrence) • Revocation of license to operate a center by state or local agency • Filing of bankruptcy or agree to re-organization as part of bankruptcy settlement • Debarred from receiving Federal or state funds from any federal or state department or disqualified from (CCFP) Program • Audit, audit review, investigation, or inspection report from IPA, state agency, or cognizant Federal Agency containing determination that the Agency is at risk for ceasing to be a going concern

16. 1307.3 – Basis for Determining Whether an Agency will be Subject to Open Competition Whenever responsible HHS Official determines that one or more of 7 conditions existed during the relevant time period covered by the responsible official’s review: FISCAL • One or more deficiency on a single review under Section 641 • Determined to have been within 12 months preceding the officials review to be at risk of failing to continue functioning “as going concern”

17. Understanding Financial Statements, Single Audit Report, and Impact on Re-Designation • Questions?????? • Review sample single audit report

18. Understanding Financial Statements, Single Audit Report, and Impact on Re-Designation Contact Information: Walter K. Frye, MBA, CPA 973-902-1040 walterfrye@aol.com