Understanding Your Audit Report Presented to Government Finance Officers Association 2018 Annual Fall Conference Golden Nugget, September 26, 2018 Valerie Dolan, CPA, RMA, PSA, CFMO Man Lee, CPA, RMA, PSA, CFMO

Understanding Your Audit Report What is an Audit? Types of Audit Opinions Notes to the Financial Statements Notes to the SEFA Common Findings Trust Reserves

What Is An Audit? The type of audit performed for municipalities is a financial statement audit, NOT a forensic audit. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.

What Is An Audit? How do auditors accomplish these goals? We review and assess the municipality’s internal controls. We test the internal controls (a common misconception is that every transaction is looked at during the audit). We perform substantive procedures to test balances, etc. We perform compliance procedures to test compliance with laws, etc. We do not perform an operating efficiency audit.

Types of Audit Opinions Independent Auditor’s Report – issue an opinion on whether the financial statements are: Prepared in accordance with accounting standards. U.S. Generally Accepted Accounting Principles Adverse Regulatory Basis of Accounting Unmodified Modified (Qualified for Fixed Assets) Reasonably free from material misstatements.

Types of Audit Opinions Unmodified Financial statements are presented fairly, in all material respects. Modified Qualified: Misstatements, individually or in the aggregate, are material but not pervasive to the financial statements or Unable to obtain sufficient appropriate audit evidence but possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

Types of Audit Opinions Modified Adverse – after obtaining audit evident, the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements. Disclaimer – the auditor is unable to obtain sufficient appropriate audit evidence and concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

Notes to the Financial Statements Summary of Significant Accounting Policies Description of the entity Description of major funds Basis of accounting (when revenue and expenses are recognized) Revenue is recognized when received in cash Grant revenue is realized: In the operating funds when budgeted. In the capital funds when improvements are authorized. Expenditures are charged to operations based on budgeted amounts.

Notes to the Financial Statements Long Term Debt Summary of debt issued and authorized. Calculation of the net debt (percentage of average equalized valuation basis) Calculation of the statutory borrowing power. For utilities with debt, will also include calculation for self-liquidation. Schedule of debt maturity. Description of various bonds, loan or other debt issued and outstanding. Net Pension Liability (GASB 68 and GASB 75)

Notes to the Financial Statements Pension Plans PERS, PFRS and DCRP Details of each plan, including plan description, benefits provided, required contributions, pension liabilities and expense. In addition, also include other information provided by the State. Pension liability is disclosed only in the footnotes and not recorded in the financial statements (regulatory basis of accounting).

Notes to the Financial Statements Selected Tax Information Comparative schedule of: Tax rates and assessed valuations Tax levies, collection and percentage of collection.

Notes to the Financial Statements Cash and Cash Equivalents and Investments Description of the cash management plan Description of deposits and investments rules Summary balances of cash and cash equivalents at year end. Summary of investments (if applicable).

Notes to the Financial Statements Risk Management Description of various insurance coverages, including health benefits. If a member of a joint insurance fund, a detail of coverages provided, requirements of the plan and year end financial information of the fund. Unemployment Compensation Insurance(UCI): Method followed by the entity (reimbursement or contributory). Comparative schedule of activities in the UCI Trust.

Notes to the Financial Statements Contingent Liabilities Legal request letters Disclose any potential significant claims (e.g. tax appeals) Post Retirement Benefits (GASB 75) Will change significantly for the 2018 audit (i.e. more pages of disclosures based on information provided by the State).

Notes to the Financial Statements Fixed Assets Summary of activities Should be recorded at historical or estimated historical value (not assessed value). Has become a focus of DLGS desk reviews requiring municipalities to resolve this deficiency.

Notes to the Financial Statements Tax Abatements (GASB No. 77, effective 12/31/16) Requires disclosure of tax abatement information about (1) a reporting government's own tax abatement agreements and (2) those that are entered into by other governments and that reduce the reporting government's tax revenues. Requires state and local governments to disclose key information about their tax abatement agreements that has not been consistently or comprehensively available before.

Notes to the Financial Statements Tax Abatements (GASB No. 77, effective 12/31/16) Under a tax abatement agreement, a government reduces or abates the taxes a company or person otherwise would owe. The company or person, in turn, takes a specific action that contributes to economic development or otherwise benefits the government or its citizens. It is important to provide your auditor with all tax abatement agreements (e.g. PILOT).

Notes to the SEFA Notes to the Schedule of Expenditures of Federal and State Awards Basis of Presentation – in accordance with the Uniform Guidance. Summary of Significant Account Policies – cash or modified accrual. Loan details (if applicable) such as NJEIT loans.

Common Findings Comments and recommendations – not an item that will materially misstate the financial statements, whereas a significant deficiency might. Deficiency in internal controls – when the design or operation of a control does not allow entity to prevent, or detect and correct, misstatements on a timely basis. Examples include: Segregation of Duties Noncompliance with Technical Directives Disclose on the Schedule of Findings and Questioned Costs

Trust Reserves Trust Reserves – review for sufficient balance Compensated Absences Storm Recovery Self Insurance Deductible All expenses made from any trust reserves require a dedication-by-rider.

Questions? Valerie Dolan, Partner Man Lee, Principal Nisivoccia LLP Nisivoccia LLP 200 Valley Road, Suite 300 200 Valley Road, Suite 300 Mt Arlington, NJ 07856 Mt Arlington, NJ 07856 (973) 328-1825 (973) 328-1825 vdolan@nisivoccia.com mlee@nisivoccia.com

Thank You