Department for the Aging Financial Management Training Workshops

1. Department for the AgingFinancial Management Training Workshops Accounting and Auditing Update Presented by: Rich Pontynen, CPA Goodman & Company Richmond June 22, 2004 Roanoke June 24, 2004

2. FASB Financial Accounting Standards Board Statements • SAS Statements on Auditing Standards • GAO General Accounting Office (Issuer of Government Auditing Standards) • OMB Office of Management & Budget (Established OMB Circular A-133

3. Financial Accounting Standards Board Statements There have been 150 statements issued since FASB-1 was released in 1973. The most significant relating to not-for-profits have been: • FASB-116 – Accounting for Contributions Received and Contributions Made • FASB-117 – Financial Statements of Not-for-Profit Organizations • FASB-124 – Accounting for Certain Investments Held by Not-for-Profit Organizations • FASB-136 – Transfer of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others

4. Financial Accounting Standards Board Statements Statements with effective dates/provisions that might be initially applied in financial statements issued on or after June 1, 2003: • FASB-132 Employer’s Disclosures About Pensions and Other Postretirement Benefits (revised) • Reduces the amount of disclosure previously required regarding pension plans and other postretirement benefits for non-public employers

5. Financial Accounting Standards Board Statements • FASB-142 Goodwill and Other Intangible Assets Intangible assets are in two categories • Those with finite lives (whose cost should be amortized over the useful life) and, • Intangible assets with indefinite lives (whose value is not amortized, but must be tested for impairment annually)

6. Financial Accounting Standards Board Statements • FASB-143 Accounting for Asset Retirement Obligations • Requires a liability to be recognized for disposition costs in the period in which the liability is incurred if a reasonable estimate can be made • The liability is initially regarded as a cost of the asset (i.e. capitalized) at its fair (present) value

7. Financial Accounting Standards Board Statements • FASB-146 Accounting for Costs Associated with Exit or Disposal Activities • Defines when an organization can recognize the costs related to exit or disposal activities • Recognition occurs only when a present obligation to others is incurred, which leaves the entity little or no discretion to avoid future transfer or use of assets to settle the liability (i.e. costs to terminate a contract that is not a capital lease)

8. Financial Accounting Standards Board Statements • FASB-149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities • Updates statement 133 for technical considerations and provides implementation guidance

9. Financial Accounting Standards Board Statements • FASB-150 Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity • Clarifies that certain financial instruments are to be recorded as liabilities instead of equity

11. Statements on Auditing Standards Statements on Auditing Standards that will impact your audits • SAS-99 Consideration of Fraud in a Financial Statement Audit • This statement broadens the work that auditors must perform when considering fraud during a financial statement audit. In addition to expanded planning done by the audit staff, the SAS requires auditors to make inquiries of management and others within the organization to obtain their views about the risk of fraud and how fraud risks are assessed.

12. Statements on Auditing Standards • “And others” will normally include: • Employees with varying levels of authority within the organization • Operational personnel not directly involved in the financial reporting process • Employees involved in initiating, recording, or processing complex or unusual transactions

13. Statements on Auditing Standards • SAS-100 Interim Financial Statements • Establishes standards and provides guidance on the nature, timing and extent of procedures to be formed when conducting a review of interim financial statements

14. Statements on Auditing Standards • SAS-101 Auditing Fair Value Measurements and Disclosures • Provides that the auditor obtain an understanding of the internal controls related to the determination of an organization’s fair value measurement and disclosures in order to plan the appropriate audit procedures • Application - investment portfolios: active market values, and non-traded debt and equity securities

15. Government Accounting Office (GAO) Government Auditing Standards – “Yellow Book” • 2003 Yellow Book revisions – effective for financial audits and attestation engagement for periods ending on or after January 1, 2004 • Major Considerations for not-for-profit organizations: • Auditors performance of non-audit services for clients (independence issue)

16. Government Accounting Office (GAO) QUESTIONS & ANSWERS!

17. Government Accounting Office (GAO) Can an audit organization be involved in preparing a trial balance and draft financial statements and notes without impairing its independence to audit the financial statements? Can audit engagement team members perform these activities?

18. Government Accounting Office (GAO) Can an audit organization assist an audited entity’s management in preparing depreciation schedules without impairing its independence to perform the financial statement audit?

19. Government Accounting Office (GAO) If the audit organization posts transactions coded by the audited entity’s management, would the audit organization’s independence be impaired to perform the financial statement audit?

20. Government Accounting Office (GAO) An audited entity provides its cash receipts and disbursements journals to the audit organization, which, as part of its financial statement audit, proposes adjusting entries to convert from a cash basis to an accrual basis of accounting. The audited entity’s management, which has requested the conversion, reviews, approves, and posts the entries and has sufficient knowledge and ability to take responsibility for them. Would the audit organization’s independence be considered impaired for the financial statement audit?

21. Government Accounting Office (GAO) A small audited entity’s sole accountant suddenly leaves due to an emergency situation, and it asks an audit organization to provide a temporary staff person until a new accountant is hired. If the staff person that the audit organization assigns to provide this assistance is not part of the audit engagement team and the audit organization complies with all of the required safeguards, would its independence be considered impaired on a financial statement audit?

22. Government Accounting Office (GAO) If an audit organization arrives at an audited entity to perform a financial statement audit and finds that bank account reconciliations were not performed during the year, can the audit organization perform this service without impairing independence?

23. Government Accounting Office (GAO) Is an audit organization’s independence to perform a financial statement audit impaired if it assists a client in converting its financial statements to address new accounting principles?

24. Government Accounting Office (GAO) An audited entity purchases a commercial accounting package and asks an audit organization to provide advice on setting up the chart of accounts and the financial statement format. Would the audit organization’s independence be considered impaired?

25. Government Accounting Office (GAO) Can an audit organization assist its clients in preparing Internal Revenue Service (IRS) form 990, “Return of Organization Exempt From Income Tax,” without impairing its independence to audit the entities? Can audit engagement team members perform this activity?

26. Office of Management and Budget (OMB) OMB Circular A-133 “Audits of States, Local Governments and Non-Profit Organizations” Revised June 27, 2003 - Effective for years ending after December 31, 2003

27. Office of Management and Budget (OMB) Major Changes: • Federal agencies with oversight for an auditee can reassign oversight to another federal agency under special circumstances • Raises to $500,000 the amount expended in a year that would require a single audit • This does not raise the dollar limitation for a program to be a major program

28. Office of Management and Budget (OMB) OMB Circular A-122 “Cost Principles for Non-Profit Organizations” Revised May 10, 2004 – Effective June 9, 2004 • Along with A-21 (educational institutions) and A-87 (state, local government and Indian tribes)

29. Office of Management and Budget (OMB) Changes: • Intended to improve consistency and clarify language • Added to all three circulars cost items, when appropriate, where they might have been in only one or two before • Other amendments or revisions: • Interest, which now includes applicable dates • Travel costs, which are now consistent in all three circulars • Specialized service facilities, which has been clarified to specify that periodic rate adjustment reviews be done every two years Major impact of changes – None

31. THE END! QUESTIONS?