Accounting and Audit Update
December 3, 2013
Keith A. Solomon
Partner
ksolomon@odpkf.com

Alexander K. Buchholz
Audit Mana...
Agenda
• Accounting Update
– Lease accounting (exposure draft)
– Going concern (exposure draft)
• Auditing Update
– Clarit...
Lease Accounting (exposure draft)
General concepts
• Both operating and capital leases will be recorded on the
balance she...
Lease Accounting (exposure draft)
• The proposed guidance would bring all leases on the balance
sheet
• The leases would b...
Going Concern and Liquidation
Basis of Accounting (exposure draft)
• Going concern and liquidation basis of accounting—
pr...
Going Concern and Liquidation
Basis of Accounting (continued)
• Current state
– Auditors are responsible for assessing unc...
Going Concern and Liquidation
Basis of Accounting (continued)
• Proposed model
– Does not consider the mitigating impact o...
Audit Update

Accounting and Audit Update
December 3, 2013

8
Clarity Standards
The Clarified Standards - effective for the December 31, 2012
audits and forward
Some reminders of chang...
Fraud Guidance
Who is responsible for the prevention and detection of
Fraud?
• Management and those charged with governanc...
Fraud Guidance (continued)
Where is the auditor’s guidance on Fraud?
• The guidance is included under AU-C section
240, Co...
Fraud Guidance (continued)
Some Examples of Circumstances That Indicate the Possibility
of Fraud:
• Unavailability of othe...
Management Letter
What is the guidance for the management letter?
• The guidance is included under AU-C section
265, Consi...
Management Letter (continued)
What is the management letter guidance?
• Types of observations
– Deficiency
– Significant D...
Management Letter (continued)
• Significant deficiencies or material weaknesses are required be
communicated in writing to...
A-133 Audit Fundamentals
A-133 Overview
• Entities subject to A-133 will either have a single audit or a program specific ...
A-133 Audit Fundamentals
• The audit reporting submission due date is the earlier of 30
days after the receipt of the audi...
A-133 Audit Fundamentals
Management’s Responsibilities:
• Management is responsible for:
– Identifying Federal Awards
– Cl...
14 Compliance Requirements
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Activities allowed and unallowed
Allowable costs and cost principl...
Common Findings
• Common audit findings noted during A-133 Audits:
– SEFA does not reconcile to the general ledger
– SEFA ...
Yellow Book 2011
• The main change in the 2011 Yellow Book
relates to independence, especially when
performing nonaudit se...
Future Developments
•

Audit resolution and oversight resources would be concentrated on higher
dollar, higher risk awards...
The Current Economy
• Auditors need to understand the economic conditions facing the industry
in which an entity operates,...
Common Peer Review Findings
•

In general, in order to be admitted to or retain their membership in the AICPA, members who...
Auditing and Attestation Updates (Issuers)
Auditor’s Reporting Model
•

In August 2013, the PCAOB proposed a new auditing ...
Questions

Accounting and Audit Update
December 3, 2013

26
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Accounting & Audit Update

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Get the latest information on accounting and audit updates including the details of changes to lease accounting, Going Concerns, Fraud Guidance, Management letters and a number of other issues for year end 2013 -O'Connor Davies - NY CPA Firm.

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Accounting & Audit Update

  1. 1. Accounting and Audit Update December 3, 2013 Keith A. Solomon Partner ksolomon@odpkf.com Alexander K. Buchholz Audit Manager abuchholz@odpkf.com
  2. 2. Agenda • Accounting Update – Lease accounting (exposure draft) – Going concern (exposure draft) • Auditing Update – Clarity standards update – Fraud guidance – Management letter – OMB Circular A-133 updates – Other items Accounting and Audit Update December 3, 2013 2
  3. 3. Lease Accounting (exposure draft) General concepts • Both operating and capital leases will be recorded on the balance sheet • Presently, operating leases are recorded on the income statement only and disclosed in the notes • The change in accounting is based on a convergence project between the FASB and the International Accounting Standards Board Accounting and Audit Update December 3, 2013 3
  4. 4. Lease Accounting (exposure draft) • The proposed guidance would bring all leases on the balance sheet • The leases would be segregated into Type A (similar to capital leases) and Type B leases (similar to real estate leases) • The lease definition would be based on the “right of use of an asset” • There is an exception for leases that are less than one year • The FASB received 630 comment letters from preparers of financial statements • No definite date has been set, but deliberations will likely continue well into 2014 Accounting and Audit Update December 3, 2013 4
  5. 5. Going Concern and Liquidation Basis of Accounting (exposure draft) • Going concern and liquidation basis of accounting— previous FASB project on risks and uncertainties – Split into two projects • Liquidation basis of Accounting ASU 2013-07 issued in April 2013 – Apply liquidation basis accounting when plan approved and likelihood that the plan will be blocked is remote • Going concern proposed ASU issued in July 2013 – Covers how to assess going concern and when to make related disclosures Accounting and Audit Update December 3, 2013 5
  6. 6. Going Concern and Liquidation Basis of Accounting (continued) • Current state – Auditors are responsible for assessing uncertainties surrounding GC presumption – No guidance exists in ASC • Proposed model – Each reporting period, management would assess ability to meet obligations as they become due – Disclosures made when it is more-likely-than-not the entity will not meet its obligations in 12 months, or known/probable that it will not meet obligations in 24 months Accounting and Audit Update December 3, 2013 6
  7. 7. Going Concern and Liquidation Basis of Accounting (continued) • Proposed model – Does not consider the mitigating impact of plans that management would take that are outside the normal course of business in assessing if disclosure is required (a lot of judgment involved) – For SEC filers, if the likelihood reaches probable, declare that substantial doubt regarding going concern exists – Two of Seven Board members voted against the proposed ASU Accounting and Audit Update December 3, 2013 7
  8. 8. Audit Update Accounting and Audit Update December 3, 2013 8
  9. 9. Clarity Standards The Clarified Standards - effective for the December 31, 2012 audits and forward Some reminders of changes from the previous audit guidance: • • • • • AU-C-210—Terms of Engagement—must agree on terms of audit with management and TCWG, determine that FRF is appropriate. Cannot accept engagement when know a disclaimer will be issued. Exception, is Limited Scope EB plan audit AU-C 250 – Consideration of laws and regulations – the auditor should perform procedures to identify instances of non compliance with laws and regulations in response to assessed risk of material misstatement AU-C 265 – Communicating internal control matters – include in management letters the potential effects of significant deficiencies and material weaknesses AUC-510—Required to obtain evidence about whether opening balances are misstated, including the appropriateness and consistency of accounting policies AU-C 600 – Group Audits – Expands the scope and includes specific procedures for group engagements (previously, guidance was in AU 543 “Part of Audit Performed by Other Independent Auditors” Accounting and Audit Update December 3, 2013 9
  10. 10. Fraud Guidance Who is responsible for the prevention and detection of Fraud? • Management and those charged with governance Responsibilities of Management: • Place a strong emphasis on fraud prevention • Make a commitment to create a culture of honesty and ethical behavior Responsibilities of those charged with governance: • Reinforce management by active oversight by those charged with governance Accounting and Audit Update December 3, 2013 10
  11. 11. Fraud Guidance (continued) Where is the auditor’s guidance on Fraud? • The guidance is included under AU-C section 240, Consideration of Fraud in a Financial Statement Audit • Topics covered include: – Insights into the environment that can lead to fraud – Evidence to look for in a GAAS audit that may indicate fraud – Types of additional procedures that can be used to determine if fraud exists Accounting and Audit Update December 3, 2013 11
  12. 12. Fraud Guidance (continued) Some Examples of Circumstances That Indicate the Possibility of Fraud: • Unavailability of other than photocopied or electronically transmitted documents when documents in original form are expected to exist • Significant unexplained items on reconciliations • Inconsistent, vague, or implausible responses from management or employees arising from inquiries or analytical procedures • Unusual discrepancies between the entity's records and confirmation replies • Large numbers of credit entries and other adjustments made to accounts receivable records Accounting and Audit Update December 3, 2013 12
  13. 13. Management Letter What is the guidance for the management letter? • The guidance is included under AU-C section 265, Consideration of Fraud in a Financial Statement Audit • Establishes standards and provides guidance on communicating matters related to an entity's internal control over financial reporting identified in an audit of financial statements • Control deficiency – Design deficiency – Operation deficiency Accounting and Audit Update December 3, 2013 13
  14. 14. Management Letter (continued) What is the management letter guidance? • Types of observations – Deficiency – Significant Deficiency – Material weakness • Indicators that a deficiency is a material weakness include the following: – Identification of fraud – Restatement of previously issued financial statements – Identification of a material misstatement by the auditor where indications are that the misstatement would not have been detected by the entity’s controls – Ineffective oversight of the entity’s financial reporting and internal control by those charged with governance Accounting and Audit Update December 3, 2013 14
  15. 15. Management Letter (continued) • Significant deficiencies or material weaknesses are required be communicated in writing to management and those charged with governance. • The communication must also include previously reported significant deficiencies and material weaknesses that have not yet been resolved. • The written communication should be made by the report release date, which is the date the auditor grants the entity permission to use the auditor's report in connection with the financial statements. • Otherwise the communication should be made no later than 60 days following the report release date. Accounting and Audit Update December 3, 2013 15
  16. 16. A-133 Audit Fundamentals A-133 Overview • Entities subject to A-133 will either have a single audit or a program specific audit: – A single audit is performed by an independent auditor in accordance with Government Auditing Standards and includes an audit of the entity’s financial statements as well as federal programs. – A program specific audit is an audit of an entity’s compliance with direct and material compliance requirements as they relate to an individual federal program. • The provisions of Circular A-133 apply to not-for-profit institutions that are recipients or subrecipients of Federal Financial Assistance and expend $500,000 or more in federal awards in a fiscal year. • An institution can receive federal awards either directly from a federal agency or indirectly, through a state/local government or another not-for-profit, in which case they would be called a subrecipient. Accounting and Audit Update December 3, 2013 16
  17. 17. A-133 Audit Fundamentals • The audit reporting submission due date is the earlier of 30 days after the receipt of the auditor's reports or nine months after year end (section 320). • A data collection form (SF-SAC) must be submitted electronically by the auditee, with sign-off by auditor, to the Federal Audit Clearinghouse (FAC) (section 320(b)). Accounting and Audit Update December 3, 2013 17
  18. 18. A-133 Audit Fundamentals Management’s Responsibilities: • Management is responsible for: – Identifying Federal Awards – Classifying them by Federal Program and by CFDA number – Listing all Federal Programs and amounts expended on the Schedule of Expenditures of Federal Awards – Understanding and complying with all federal laws and regulations • Note: If management cannot identify Federal Awards or prepare the SEFA, consider this as a possible significant deficiency or material weakness Accounting and Audit Update December 3, 2013 18
  19. 19. 14 Compliance Requirements • • • • • • • • • • • • • • Activities allowed and unallowed Allowable costs and cost principles Cash management Davis Bacon Act Eligibility Equipment and Real Property Management Matching, Level of Effort and Earmarking Period of Availability of Funds Procurement, Suspension and Debarment Program Income Real Property Acquisition and Relocation Assistance Reporting Subrecipient Monitoring Special Tests and Provisions (unique to program) Accounting and Audit Update December 3, 2013 19
  20. 20. Common Findings • Common audit findings noted during A-133 Audits: – SEFA does not reconcile to the general ledger – SEFA has incorrect CFDA Numbers – SEFA incorrectly identifies State funding as Federal – Federal dollars are not spent in accordance with grant contracts or the compliance supplement – Controls are not adequate for Subrecipient Monitoring – Missing supporting documentation for Eligibility – Suspension/debarment – Entity uses debarred/suspended vendors (System for Award Management website: http://www.SAM.gov) Accounting and Audit Update December 3, 2013 20
  21. 21. Yellow Book 2011 • The main change in the 2011 Yellow Book relates to independence, especially when performing nonaudit services • The Yellow Book requires auditors to evaluate and document the skill, knowledge and experience of member(s) of management who will accept responsibility to oversee any non-audit services performed by auditors. Accounting and Audit Update December 3, 2013 21
  22. 22. Future Developments • Audit resolution and oversight resources would be concentrated on higher dollar, higher risk awards. – Entities that expend less than $750,000 in federal awards would not undergo a Single Audit (increased from $500,000) – Changes to the Major Program Determination Process - Type A/B Threshold – Among other changes, the Proposed Guidance raises the minimum threshold for Type A/B program determination from $300,000 to $500,000. – More detail will be required to be reported in auditor findings. The questioned cost threshold for reporting will be increased from $10,000 to $25,000. – Percentage of Coverage Changes – The percentage of coverage required in a single audit would be reduced from the current 50% (normal) and 25% (low-risk) to 40% (normal) and 20% (low-risk) – Other changes such as: 1. 2. 3. Reduction in compliance requirements from 14 to 6 The criteria for Type A programs to qualify as high-risk are being revised. The number of high-risk Type B programs that must be tested as major programs would be reduced from at least one-half to at least one-fourth of the number of low-risk Type A programs. Additionally, small Type B programs would be considered those that are a flat 25% of the Type A/B program threshold. Accounting and Audit Update December 3, 2013 22
  23. 23. The Current Economy • Auditors need to understand the economic conditions facing the industry in which an entity operates, as well as the effects of these conditions on the entity itself. • External factors, such as interest rates, availability of credit, consumer confidence, overall economic expansion or contraction, inflation, and labor market conditions, are likely to have an effect on an entity’s business. • Auditors should evaluate whether changes have occurred since the previous audit that may affect their reliance on any information obtained from their previous experience with the entity. • These changes may affect the risks and risk assessment procedures applicable to the current year’s audit. Accounting and Audit Update December 3, 2013 23
  24. 24. Common Peer Review Findings • In general, in order to be admitted to or retain their membership in the AICPA, members who are engaged in the practice of public accounting in the United States are required to be practicing as partners or employees of firms enrolled in an approved practice-monitoring program. • Why does one undergo a peer review? – Public interest in the quality of services provided by public accounting firms (accounting, auditing, and attestation services). – Firms indicate that peer review contributes to the quality and effectiveness of their practices (stewardship theory). – Most state boards of accountancy require their licensees to undergo peer review. – Other regulators require peer review in order to perform engagements and issue reports under their standards. • The most common findings in recent peer reviews are as follows: – Lack of disclosure of the date through which subsequent events have been evaluated – Lack of disclosure of open tax years – Lack of documentation of expectations for analytical procedures – Lack of documentation around risk assessment procedures – Engagement letters not updated for current engagement Accounting and Audit Update December 3, 2013 24
  25. 25. Auditing and Attestation Updates (Issuers) Auditor’s Reporting Model • In August 2013, the PCAOB proposed a new auditing standard to enhance the auditor’s reporting model. – Would retain the pass/fail model and the basic elements of the current auditor's report. – Would require the auditor to communicate a wider range of information specific to the particular audit: • Communication of critical audit matters as determined by the auditor; • Enhancements to existing language in the auditor's report related to responsibilities for fraud and notes to the financial statements; • Addition of new elements to the auditor's report related to: – auditor independence; – auditor tenure; – the auditor's responsibilities for, and the results of, the auditor's evaluation of other information outside the financial statements. Accounting and Audit Update December 3, 2013 25
  26. 26. Questions Accounting and Audit Update December 3, 2013 26

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