State and Local Government Financial Statement Audits: An Audit Issues Rundown GAQC Member Conference Call November 17, 2009 Presented by Donald L. Rahn, CPA, Partner Baker Tilly, LLP & James C. Lanzarotta, CPA, Partner Moss Adams, LLP 1

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 2

Economic Crisis Current Economic Environment Credit crisis Mortgage crisis AICPA Economic Crisis and Recovery Center 3

Economic Crisis Local Government Bankruptcies Decreasing revenue Increased demand for services Chapter 9 bankruptcies Going concern (GASB Statement No. 56) Fraud 4

Economic Crisis Municipal 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 under the Resources tab) 5

Audit Risk Other 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 6

Estimates The credit crisis can cause significant measurement uncertainty, including accounting estimates and fair value estimates. Many estimates besides fair value to worry about Due 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 7

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 8

Other Auditor Considerations Due to the Current Economic Climate Fraud Errors due to layoffs of accounting staff Internal controls related to the combination of duties that should be segregated Going concern More in-depth understanding of the entity and the environment Increased professional skepticism Importance of audit committees 9

Other Auditor Considerations Due to the Current Economic Climate Managing pricing pressures from clients Market competition with firms entering or reentering the governmental audit sector Succession planning considerations – internal, merge, sell Staff recruiting, development, and retention Developing niches within the firm Managing oversight from state and federal agencies 10

Challenges with Newer Auditing Standards Communicating with those Charged with Governance SAS 115, including applicability in Yellow Book and single audits Compliance Auditing SAS (soon to be released as SAS No.117) 11

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 governments  Purpose 12

Pension/OPEB – Use of Specialists Audit 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 under the Resources tab) GAO rules 3.05 and QA #75 require additional steps…Auditor must assure that the Specialist is independent. 13

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

Accounting Developments and Related Audit Issues GASB Statement No. 49 – Pollution remediation liabilities  Implementation FYE 12/31/08  Purpose 15

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 16

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? 17

Accounting Developments and Related Audit Issues GASB Statement No. 51 – Intangibles  Implementation FYE 6/30/10  Purpose  Audit Issues  Has your client started yet? 18

Accounting Developments and Related Audit Issues GASB Statement No. 52 – Real Estate Held by Endowments  Implementation FYE 6/30/09  Purpose  Audit Issues 19

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! 20

Accounting Developments and Related Audit Issues GASB Statement No. 54 – Fund Balance  Implementation FYE 6/30/11  Purpose  Audit 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 under the Resources tab) 21

Accounting Developments and Related Audit Issues GASB Statement No. 55 – GAAP Hierarchy  Implementation – Effective upon issuance  Purpose  Audit Issues 22

Accounting Developments and Related Audit Issues GASB 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 23

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 24

Auditing Changes under the American Recovery and Reinvestment Act of 2009 Federal IG response Interim updates to Compliance Supplements Prompt auditor referral requirement Public institutions of higher education should anticipate higher scrutiny of work-study, Pell grant and similar programs under ARRA 25

ARRA – Stay Current GAQC Recovery Act Resource Center ( ry+Act+Resource+Center/) ry+Act+Resource+Center/ Calls – 2 held to date GAQC Alerts GAQC Tools Links to other important Web sites 26

27 Questions ?????

Contact information Donald L. Rahn, CPA, Partner Baker Tilly, LLP James C. Lanzarotta, CPA, Partner Moss Adams, LLP