State and Local Government Financial Statement Audits:

An Audit Issues Rundown

GAQC Member Conference CallNovember 17, 2009

Presented by Donald L. Rahn, CPA, Partner

Baker Tilly, LLP&

James C. Lanzarotta, CPA, Partner

Moss Adams, LLP

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Agenda

Effect of the current economy on audit procedures and risk assessments;

Challenges relating to newer auditing standards; Client implementation of recently effective GASB standards

and related audit issues; GASB standards that will have to be implemented in future

years and potential related issues going forward; and Other developments

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Economic CrisisCurrent Economic Environment

• Credit crisis

• Mortgage crisis

• AICPA Economic Crisis and Recovery Centerhttp://economy.aicpa.org/

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Economic CrisisLocal Government Bankruptcies

• Decreasing revenue

• Increased demand for services

• Chapter 9 bankruptcies

• Going concern (GASB Statement No. 56)

• Fraud

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Economic CrisisMunicipal Securities

• Availability of credit

• Tax-exempt Debt

• GAQC Member Call on Tax-Exempt Bonds - Accounting and Auditing Considerations in the Current Environment (Can be found at www.aicpa.org/GAQC under the Resources tab)

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Audit RiskOther audit risks arising from current

economic climate• Constraints on availability of capital and credit• Unrealistic budget goals and objectives• Special-purpose entities, joint ventures, or other complex

financing arrangements• Volatile real estate and business markets• Evaluating existence of assets• Estimates• IT internal control issues

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EstimatesThe credit crisis can cause significant measurement

uncertainty, including accounting estimates and fair value estimates.

Many estimates besides fair value to worry aboutDue to the current economic climate, auditors should

exercise additional professional skepticism over the underlying assumptions

In the current economy, new and different patterns may be emerging

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IT Internal Control Issues

Auditors may wish to assess resources that have been allocated to IT issues in light of the current economic climate

More complex IT systems can affect all 5 elements of COSO internal controls

Auditors may need a specialist in IT to be a member of the audit team

Auditors may wish to pay particular attention to the segregation of duties element of IT controls

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Other Auditor Considerations Due to the Current Economic ClimateFraudErrors due to layoffs of accounting staff Internal controls related to the combination of duties

that should be segregatedGoing concernMore in-depth understanding of the entity and the

environment Increased professional skepticism Importance of audit committees

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Other Auditor Considerations Due to the Current Economic ClimateManaging pricing pressures from clientsMarket competition with firms entering or reentering

the governmental audit sectorSuccession planning considerations – internal,

merge, sellStaff recruiting, development, and retentionDeveloping niches within the firmManaging oversight from state and federal agencies

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Challenges with Newer Auditing StandardsCommunicating with those Charged

with GovernanceSAS 115, including applicability in

Yellow Book and single auditsCompliance Auditing SAS (soon to be

released as SAS No.117)

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Accounting Developments and Related Audit Issues

GASB Statement No. 45 – OPEB Implementation FYE 12/31/08 – Phase II

governments Implementation FYE 12/31/09 – Phase III

governmentsPurpose

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Pension/OPEB – Use of SpecialistsAudit Issues and Tips• Actuarial information now reported in the notes to the financial

statements rather than solely reported as RSI• Auditor now has greater responsibility for that information• Auditor should consider using the work of a specialist (AU 336)• AU 336 gives examples of procedures for the auditor• GAQC Member Call, OPEB Financial Reporting for Plans and

Employers and Related Audit Issues (Can be found at www.aicpa.org/GAQC under the Resources tab)

• GAO rules 3.05 and QA #75 require additional steps…Auditor must assure that the Specialist is independent.

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Accounting Developments and Related Audit Issues

GASB 48 – Sales and Pledges Implementation FYE 12/31/07 Purpose Audit issues and tips

Many reports are missing required disclosures for revenue debt. See paragraph 21 of GASB 48.

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Accounting Developments and Related Audit Issues

GASB Statement No. 49 – Pollution remediation liabilities Implementation FYE 12/31/08 Purpose

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Pollution Remediation

Audit Issues and Tips• Obligation related financial accounting and

reporting• Requires restatement of beginning liability• Auditors should be concerned about

assertions of existence, completeness and valuation

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Accounting Developments and Related Audit Issues

GASB 50 – Pension Disclosures—an amendment of GASB Statements No. 25 and No. 27 Implementation FYE 6/30/08 Purpose Audit issues and tips

Are you auditing the expanded disclosures?

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Accounting Developments and Related Audit Issues

GASB Statement No. 51 – Intangibles Implementation FYE 6/30/10 Purpose Audit Issues

Has your client started yet?

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Accounting Developments and Related Audit Issues

GASB Statement No. 52 – Real Estate Held by Endowments Implementation FYE 6/30/09 Purpose Audit Issues

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Accounting Developments and Related Audit Issues

GASB Statement No. 53 – Derivatives Implementation FYE 6/30/10 Purpose Audit Issues

Coming soon to a government near you!

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Accounting Developments and Related Audit IssuesGASB Statement No. 54 – Fund Balance

Implementation FYE 6/30/11PurposeAudit Issues

What should you be doing right now?GAQC Member Call, New GASB Fund Balance

Standard: Now is the Time to Begin Talking to Your Clients (Can be found at www.aicpa.org/GAQC under the Resources tab)

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Accounting Developments and Related Audit Issues

GASB Statement No. 55 – GAAP Hierarchy Implementation – Effective upon issuance PurposeAudit Issues

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Accounting Developments and Related Audit IssuesGASB Statement No. 56 – Codification of

reporting standards previously in audit standards Implementation – Effective upon issuance Purpose

Related Parties Going Concern Subsequent Events

Audit Issues Slight differences from previous auditing standards

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Accounting Developments – Looking Forward

Effect of FASB Codification project – GASB ED expected in January 2010• Background• Issues

• Is GASB gearing up fast enough?• Practice problems in the interim

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Auditing Changes under the American Recovery and Reinvestment Act of 2009

Federal IG response Interim updates to Compliance SupplementsPrompt auditor referral requirementPublic institutions of higher education should

anticipate higher scrutiny of work-study, Pell grant and similar programs under ARRA

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ARRA – Stay Current

GAQC Recovery Act Resource Center (http://gaqc.aicpa.org/Resources/Recovery+Act+Resource+Center/) • Calls – 2 held to date

• GAQC Alerts

• GAQC Tools

• Links to other important Web sites

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Questions ?????

Contact information

Donald L. Rahn, CPA, Partner

Baker Tilly, LLP

608-240-2328

Donald.Rahn@bakertilly.com

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James C. Lanzarotta, CPA, Partner

Moss Adams, LLP

541-225-6070

James.Lanzarotta@mossadams.com

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