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.

1. Accounting and Audit Update
December 3, 2013
Keith A. Solomon
Partner
ksolomon@odpkf.com
Alexander K. Buchholz
Audit Manager
abuchholz@odpkf.com

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
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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
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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
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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
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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
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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
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8. Audit Update
Accounting and Audit Update
December 3, 2013
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9. Clarity Standards
The Clarified Standards - effective for the December 31, 2012
audits and forward
Some reminders of changes from the previous audit guidance:
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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19. 14 Compliance Requirements
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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
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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
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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
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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)
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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
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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
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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
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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
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26. Questions
Accounting and Audit Update
December 3, 2013
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