Yellow Book CPE
Jul 06

2018 Yellow Book CPE Requirements – A Summary

By Charles Hall | Auditing , Local Governments

What are the 2018 Yellow Book CPE requirements?

You’ve heard about the new Yellow Book (effective for audits of years ending June 30, 2020, and after). So, now you’re wondering if there are any changes in CPE requirements. This article explains the Yellow Book continuing education requirements. 

Below we will address (1) who is subject to the Yellow Book CPE requirements and (2) what CPE classes satisfy those requirements.

Yellow Book CPE

Overview

Paragraph 4.16 of the Yellow Book states “Auditors who plan, direct, perform engagement procedures for, or report on an engagement conducted in accordance with GAGAS should develop and maintain their professional competence by completing at least 80 hours of CPE in every 2-year period.”

Nevertheless, Paragraph 4.26 states “nonsupervisory auditors who charge less than 40 hours of their time annually to engagements conducted in accordance with GAGAS may be exempted by the organization from all CPE requirements in paragraph 4.16.” Additionally, paragraph 4.27 allows an audit organization to exempt “college and university students employed on a temporary basis.”

Auditors not exempted by the provisions in paragraphs 4.26 or 4.27 must take at least 20 hours of CPE in each year of the two years. 

So, there is an 80 requirement. Additionally, there are two more requirements:

  1. 56-hour (every two years)
  2. 24-hour (every two years)

Below we’ll see:

  1. Who is subject to each requirement?
  2. What classes qualify for each requirement?

Before we get into the details, you may be wondering, “How do I know if I am subject to the Yellow Book CPE requirements?” To answer that question, consider whether a Yellow Book report is to be issued (or whether one was issued in a prior engagement). If yes, then consider the requirements below. In most audit reports, you’ll see the Yellow Book report just after the notes to the financial statements. And when must an entity comply with the Yellow Book requirements? Usually when a law or a grant requires it. 

Now, let’s start our review of Yellow Book CPE requirements.

The 24-Hour Requirement – Who is Subject?

Who is subject to the 24-hour requirement? If you work on a Yellow Book engagement as an auditor, you are subject to the 24-hour requirement. Even so, if you are a nonsupervisory auditor that works less than forty hours annually on Yellow Book engagements, your audit organization can exempt you from Yellow Book requirements. (See paragraph 4.26 of the Yellow Book.) Additionally, audit organizations can exempt college students hired temporarily. (See paragraph 4.27 of the Yellow Book.)

Next, let’s see who is subject to the 56-hour requirement?

The 56-Hour Requirement – Who is Subject?

Who is subject to the 56-hour requirement? Auditors who are involved in:

1. Planning,
2. Directing, or
3. Reporting 

These are usually partners, managers, and in-charges. 

Additionally, the 56-hour requirement applies to auditors who are not involved in planning, directing, or reporting but charge 20 percent or more of their annual time to GAGAS engagements. This category usually includes professional staff personnel. 

So, consider this example. You have a staff member that has:

  • 2,000 hours of total time each year
  • 140 hours in two GAGAS (Yellow Book) engagements for the year
  • He is not involved in planning, directing, or reporting

He is not subject to the 56-hour requirement (his GAGAS time is less than 20% of the total hours), though he is subject to the 24-hour requirement.

But suppose he is promoted during the year and becomes a manager on the second Yellow Book engagement. Even though his time is less than 20% of his annual time, he is now subject to the 56-hour requirement. Why? He is directing the engagement. 

Now, let’s see what classes qualify for Yellow Book CPE. 

What Classes Qualify for Yellow Book CPE?

Paragraph 4.21 of the Yellow Book states, “Determining what subjects are appropriate for individual auditors to satisfy the CPE requirements is a matter of professional judgment to be exercised by auditors in consultation with appropriate officials in their audit organization.” Moreover, there are differences in the 56-hour requirement and the 24-hour requirement. Otherwise, only one category would exist. The 56-hour requirement is broader and the 24-hour requirement is more specific. 

Yellow Book CPE

Okay, let’s define the differences in the 56-hour and 24-hour requirements. 

The 56-Hour Rule – Classes that Qualify

The 56-hour rule is broad, encompassing any CPE that enhances the auditor’s professional expertise to conduct engagements.  So, CPE classes about better writing, for example, would qualify. 

Paragraph 4.24 of the Yellow Book provides the following as examples of acceptable topics:

  • Subject matter categories for the 24-hour requirement listed in paragraph 4.23 (the 24-hour requirement–see below)
  • General ethics and independence
  • Communicating clearly in writing or verbally
  • Managing time
  • Leadership
  • Political science

Now, let’s compare the general 56-hour requirements with the more specific 24-hour requirements. 

The 24-Hour Rule – Classes that Qualify

Each auditor performing work under GAGAS should complete, every two years, at least twenty-four hours of CPE that directly relates to government auditing, the government environment, or the specific or unique environment in which the audited entity operates.

Paragraph 4.23 of the Yellow Book provides the following as examples of acceptable topics:

  • GAO generally accepted government auditing standards (GAGAS)
  • AICPA Statements of Auditing Standards (SASs)
  • AICPA Statements on Standards for Attestation Services (SSAEs)
  • AICPA Statements on Accounting and Review Services (SSARS)
  • Standards issued by the Institute of Internal Auditors
  • Standards issued by the Public Company Accounting and Oversight Board
  • U.S. Generally Accepted Accounting Principles (FASB and GASB)
  • Standards for Internal Control in the Federal Government
  • COSO Internal Controls–Integrated Framework
  • Relevant audit guides (including information technology auditing and forensic auditing)
  • Fraud and abuse in a governmental environment
  • Compliance with laws and regulations
  • Topics related to the governmental environment such as financing, economics, appropriations, program performance
  • Governmental ethics and independence

Notice these topics are more directly related to auditees than those in the 56-hour requirement. But again, use judgment to determine whether a CPE class is in the 24-hour or the 56-hour bucket. 

Since the GAO, a governmental agency, issues the Yellow Book, we tend to associate Yellow Book engagements with audits of governments. But the Yellow Book can be in play for entities such as banks or electric membership corporations. 

Specific or Unique Environment in Which the Audited Entity Operates

Suppose you audit electric membership corporations (EMCs) subject to the Yellow Book. A CPE class about electric supply grids qualifies for the 24-hour requirement. Or if you audit banks subject to Yellow Book requirements (e.g., FHA loans), then a CPE class dealing with lending qualifies. These classes address issues unique to the environment in which the entity operates.

So, are there CPE classes that don’t qualify as GAGAS hours?

CPE that Does Not Qualify as Yellow Book Hours

Some CPE classes will not qualify as GAGAS hours. Paragraph 4.36 of the Yellow Book provides the following examples:

  • On-the-job training
  • Resume writing
  • Improving parent-child relations
  • Personal investments
  • Money management
  • Retirement planning

Additionally, paragraph 4.35 states that some taxation classes may not qualify such as estate planning. It is possible that a tax class would qualify if “topics relate to an objective of the subject matter of an engagement.”

Your head might be spinning from all of the above rules. So, you might be wondering, can my audit organization use a standard two-year cycle for all employees? You’d like to keep this as simple as possible. 

Two-Year Cycle

An audit organization can adopt a standard two-year period for all of its auditors to simplify the administration of CPE requirements.

But can you carry over excess CPE credit earned in the two-year period?

Carryover Credit

Auditors are not allowed to carry over hours in excess of the 24-hour or 56-hour rule to the next reporting period.

And what are the Yellow Book CPE requirements for a new employee?

Proration of Hours for New-Hires (or Those Newly Assigned to a Yellow Book Audit)

You will prorate the hourly requirements based on the remaining full 6-month intervals in your two-year reporting period. For example, you hire Joan on May 1, 2021, and the firm’s two-year cycle ends on December 31, 2021. There is one remaining full 6-month period. So, if Joan is subject to the 24-hour rule, she will multiply 25% (one six-month period divided by the four six-month periods in the two-year cycle) times 24 to compute the required hours: 6 hours.

And when is the 2018 Yellow Book effective?

Effective Date of Yellow Book Guidance

The 2018 Yellow Book is effective for audits of financial statements for periods ending on or after June 30, 2020. Early implementation is not permitted.

But, didn’t the GAO provide COVID-19 relief? Yes. 

COVID-19 GAO Guidance

The above information is provided without consideration of the COVID-19 guidance issued on February 29, 2020. See the GAO COVID-19 guidance here

PPP and EDIL Accounting Solutions
Jul 03

PPP and EIDL Accounting Solutions

By Charles Hall | Accounting

Are you wondering about PPP and EIDL accounting? Well, you've come to the right place. Below I provide you with accounting alternatives for these COVID-19 related funds. 

PPP and EDIL Accounting Solutions

PPP and EDIL Accounting Confusion

At the stroke of midnight December 31, 2019, I toasted the new year and dreamed of better days. Little did I know that COVID-19 would rattle us all. Yes, I was aware of its existence. But I thought it’s was just another scare. Like SARS and Ebola. Nothing to concern me. I see differently now.

Congress, to its credit, provided lifelines to businesses and nonprofits around the country. Some breathing room, if you will. Money to tide them over. But with the money came surprising challenges, even for accountants.

As the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) were made, few were thinking about accounting. They just wanted the money. But once the funds arrived, accountants began to scratch their heads. What is this? A loan, a grant, or something else? So they checked the FASB Codification. But there was no direct guidance for some situations such as federal loans to private businesses that would later be forgiven. And so, the accounting became challenging.

If there is no direct FASB guidance, what is to be done? ASC 105-10-05-2 says “first consider accounting principles for similar transactions or events within a source of authoritative GAAP for that entity and then consider nonauthoritative guidance from other sources.” So, we look for similar accounting guidance. That might be in the FASB Codification or in the international standards. 

Below you’ll see three PPP loan scenarios and three different accounting alternatives. Then you'll see a summary of the EIDL programs and related accounting guidance. Once done, you'll have a much greater understanding of PPP and EIDL accounting.

PPP Loan Accounting

First, I’ll start with the most common loan scenario: PPP loans are received and are expected to be forgiven.  

1. PPP Loans Expected to be Forgiven

When loans are expected to be forgiven, consider three different possible accounting approaches. (I am providing the options I like best.)

The first accounting alternative we’ll consider is ASC 958-605. 

ASC 958-605, Revenue Recognition

A small business or nonprofit receives the PPP loan. Those funds are placed in the entity’s checking account, increasing cash. And the entity records a liability, a refundable advance. As the entity substantially meets the conditions of the agreement, contribution revenue is recognized. The revenue is usually shown separately and can be titled “Forgiveness of PPP Loan” or “PPP Grant.” The contribution revenue is recorded as the entity incurs qualifying expenses. At the same time, the refundable advance (liability) decreases by a like amount. 

So what guidance supports this approach? ASC 958-605, Revenue Recognition. (See my article ASU 2018-08: Nonprofit Revenue Recognition.) While 958-605 is a not-for-profit section, FASB says businesses can “analogize.” And using this approach, the entity treats the loan as a conditional contribution to the business or nonprofit.

The revenue recognition section applies to “cancellations of liabilities,” according to ASC 958-605-15-5. And some grants are recognized “to the extent that the expenses are incurred,” per ASC 958-605-55-21. So, the entity will consider the SBA PPP loan program conditions and determine if they are “substantially met.” If they are, then contribution revenue is recognized. And, again, this can be done as the expenses are incurred.

Now, let’s look at a second accounting alternative, ASC 470, Debt

ASC 470, Debt

A business or a nonprofit can record the PPP funds as a loan using ASC 470. The entity would not impute interest at market rate. (ASC See 835-30-15-3e.) And the loan remains as a liability until it is paid or until the entity is “legally released” from the obligation. (See ASC 405-20-40-1b.) Forgiven amounts are recorded as a gain on extinguishment. 

Next, we’ll examine a third accounting alternative, IAS 20.

IAS 20, Accounting for Government Grants and Disclosure of Government Assistance

A business could use of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. This method calls for recording the PPP loan as deferred income (a liability). Then grant revenue is recognized when there is “reasonable assurance” (similar to “probable” in U.S. GAAP) that conditions will be met and the assistance will be received. The revenue is recorded “on a systematic basis over the periods in which the entity recognizes as expenses the related costs.” One significant difference in this approach is the earnings can be shown as a reduction of the related expenses or as other income. 

Now let’s move to the second scenario: PPP loans are expected to be partially forgiven. 

2. PPP Loans Expected to Be Partially Forgiven

Larger PPP loans will be subject to greater scrutiny. Treasury Secretary Mnuchin stated that all PPP loans greater than $2 million will be audited by the SBA prior to forgiveness. If forgiveness is questionable, ASC 470 may be preferable. Why? It’s a more conservative posture. This model is dependent upon the business or nonprofit being “legally released” by the SBA. If the entity is legally released from the loan, then a gain on extinguishment is recognized and the loan balance is reduced. Amounts not forgiven remain on the books until paid.

Still, ASC 958-605 and IAS 20 are available for businesses. And ASC 958-605 is available for nonprofits. But ASC 470 may be the better model when partial forgiveness is expected. Again, the uncertainty about the forgiveness amount may merit the more conservative approach in ASC 470.

And now the last scenario: PPP loans are not expected to be forgiven. 

3. PPP Loans are not Expected to Be Forgiven

When a business or nonprofit expects to repay the PPP loan or expects that the loan will not be forgiven, record the funds as a loan in accordance with ASC 470. Reduce the loan as it is paid. Finally, include the normal financial statement debt disclosures.

Which Policy is Best?

As you can tell from the above information, the accounting choice depends on the entity’s preferences and on some factors beyond the entity’s control. Regardless of the approach, the entity should clearly disclose the accounting policy. Clarity is key, especially given the lack of direct FASB guidance in some situations. 

Now, let's consider the effects of PPP funds on Single Audits, if any.

PPP Loans and Single Audit

Are PPP funds subject to the Uniform Guidance single audit requirements? The answer is no. The Small Business Administration (SBA) has informed the AICPA that PPP loans made to nonprofits are not subject to single audit requirements.

Next, let’s shift gears and discuss Economic Injury Disaster Loans (EIDL). 

EIDL Accounting

EIDL Accounting

Economic Injury Disaster Loan Accounting

Some small businesses have received funds under the Economic Injury Disaster Loan Emergency Advance program. The SBA website states that small business owners can apply for an EIDL advance of up to $10,000. The site states “This loan advance will not have to be repaid.” Therefore, these funds can be recorded as grant revenue or other income. 

Additionally, some small businesses and nonprofits have received loan funds under the COVID-19 Economic Injury Disaster Loans program. Such funds are working capital loans and should be recorded accordingly (as debt). The term of the loan can be up to thirty years. And loan amounts can be up to $2 million.  

Economic Injury Disaster Loans and Single Audit

The Economic Injury Disaster Loan Emergency Advance program is not subject to single audit requirements. The CFDA number for this program is 59.072 according to the Governmental Audit Quality Center of the AICPA

The COVID-19 Economic Injury Disaster Loans program, however, is considered a direct loan (that is, payments are made by a federal agency). They are, therefore, subject to single audit requirements. (The SBA, a federal agency, disburses EIDL funds directly to recipients. Banks disburse PPP loans.) The CFDA number for this program is 59.008 according to the Governmental Audit Quality Center of the AICPA

2020 New Year's Eve

Well, I’m hoping that the coming New Year’s Eve will usher in a better year. There is, however, one silver lining in the current one: COVID-19 has given CPAs a great opportunity to aid their clients in a time of need. I hope this information about PPP and EIDL accounting is useful to you as you continue to assist them. 

$16 million stolen from bakery
Jul 01

How $16 Million was Stolen from a Bakery

By Charles Hall | Asset Misappropriation

$16 million was stolen from a bakery. You read that right.

Today I show you how large sums of money can be taken from a small business with one simple fraud scheme.

The Theft

Sandy Jenkins, the controller of Collin Street Bakery in Corsicana, Texas, made off with more than just fruitcakes. He took over $16 million, so says the FBI. And what did Mr. Jenkins do with the money?

He used the funds in the following ways:

  • $11 million on a Black American Express card
  • $1.2 million at Neiman Marcus in Dallas
  • 532 luxury items, including 41 bracelets, 15 pairs of cufflinks, 21 pairs of earrings, 16 furs, 61 handbags, 45 necklaces, 9 sets of pearls, 55 rings, and 98 watches (having an approximate value of $3.5 million)
  • Wine collection (having an approximate value of $50,000)
  • Steinway electronic piano (having a value of $58,500)
  • 223 trips on private jets (primarily Santa Fe, New Mexico; Aspen, Colorado; and Napa, California, among other places), with a total cost that exceeded $3.3 million
  • 38 vehicles, including many Lexus automobiles, a Mercedes Benz, a Bentley, and a Porsche
  • And more…

How the money was stolen

You might think that stealing $16 million would require an elaborate scheme. But did it? 

Here’s an example of his method: Jenkins would print a check to his personal credit card company, but he would void the check in the accounting system. (He still had the printed check.) Then, he would generate a second check for the same amount to a legitimate vendor, but the second check was never mailed. Next, Jenkins would send the first check to his credit card company.

The result: Jenkins’ credit card was paid, but the general ledger reflected a payment to an appropriate vendor.

$16 million was stolen from bakery

The Weakness that Led to the Theft

No one was comparing the cleared check payees to the general ledger. 

The Fix that Will Detect the Theft

Someone other than those who create checks should reconcile the bank statements to the general ledger. As they do, they should compare the cleared check payees to the vendor name in the accounting system. Some businesses have hundreds (or even thousands of checks) clearing monthly. Therefore, they may not desire to examine every cleared check. 

Alternatively, the business could periodically sample the cleared checks, comparing the cleared checks to the vendor payments in the general ledger. The persons creating checks should know that this test work will be performed. Doing so creates the camera effect. When people know their actions (in this case, the creation of checks) will be examined, they act differently–they are much less likely to steal.

If you desire a preventive control, require a second-person review of canceled checks.

Additionally, someone should be reviewing the profit margins of the company, comparing the ratios with prior periods.

Lastly, when segregation of duties is not possible, have the bank statements mailed to someone outside the accounting department such as an owner. That person should review the cleared checks before providing them to the accounting department. Alternatively, provide online access to the reviewing person. The reviewer should examine the cleared checks and provide documentation of his or her examination to the accounting department.

What Happened to Sandy Jenkins?

Sandy Jenkins was sentenced by U.S. District Judge Ed Kinkeade to serve a total of 120 months in federal prison. His wife, Kay Jenkins also pleaded guilty to one count of conspiracy to commit money laundering. Ms. Jenkins was sentenced to five years of probation.

In March 2019, Sandy Jenkins passed away in a federal prison.

Forthcoming Movie

You may be familiar with the movie Catch Me If You Can which chronicled the exploits of Frank Abagnale, one of the most brilliant cons of all time. Now, it appears there will be a new movie about another: Sandy Jenkins. 

Auditing Equity
Jun 15

Auditing Equity: The Why and How Guide

By Charles Hall | Auditing

Auditing equity is easy, until it’s not. 

Auditing equity is usually one of the easiest parts of an audit. For some equity accounts, you agree the year-end balances to the prior year ending balance, and you’re done. For instance paid-in-capital seldom changes. Often, the only changes in equity are from current year profits and owner distributions. And testing those equity additions and reductions in equity takes only minutes.

Nevertheless, auditing equity can be challenging, especially for businesses that desire to attract investors. Such companies offer complicated equity instruments. Why? The desire to attract cash without giving away (too much) power. And this balancing act can lead to complex equity instruments.  

Regardless of whether a company’s equity is easy to audit or not, below I show you how to focus on important equity issues.

Auditing Equity

Auditing Equity — An Overview

In this post, we will cover the following:

  • Primary equity assertions
  • Equity walkthroughs
  • Equity-related fraud and errors
  • Directional risk for equity
  • Primary risks for equity
  • Common equity control deficiencies
  • Risk of material misstatement for equity
  • Substantive procedures for equity
  • Common equity work papers
Continue reading
CPA's Office Setup
Jun 14

CPA’s Office Setup: A Behind-the-Scenes Spotlight

By Charles Hall | Technology

Is a CPA’s office setup important? You bet.

Like you, I am continually looking for ways to be more productive. I buy books, watch videos, and take note of how others work.

I like to see the offices of other CPAs. Here’s mine.

Multiple Monitors

Docking Station – I use a docking station that allows me to push one button to disconnect and place my laptop into a bag for travel. The docking station provides connectivity inputs behind my computer. Rather than disconnecting several wires to “set my computer free,” I push one button.

Multiple Monitors – I use multiple monitors. See how to review financial statements on computer screens.

50″ Monitor (on a swivel hinge) – This monitor is about two feet behind my desk. I use this screen as a fourth working monitor. For example, when I am reviewing financial statements, I sometimes place the balance sheet on the 50″ screen and a second copy of the financial statements on my lower center monitor. Then as I review the remainder of the statements (e.g., notes), I can glance at the balance sheet.

The 50″ monitor hangs from a swivel hinge. The swivel hinge allows me to tilt the screen in other directions when I am sharing information from my laptop with others in my office. We also use the monitor to watch webcasts. 

Todoist Checklist – I place all my outstanding to-do items in Todoist. Since Todoist integrates with Outlook, I usually have Outlook docked on the 50″ monitor. With just a glance, I can quickly see what I need to complete. With one click, I can add a new to-do item. And the to-do items I add on my laptop show up on my iPad and iPhone Todoist apps (and vice versa)–this integration is why I started using Todoist.

Logitech Camera – I often have online meetings and share information on my computer screen with those I am speaking with (I use Zoom). This Logitech camera (C930e) creates an excellent picture and sound so those I’m sharing with can see and hear me

iPhone on a Stand – Do you ever lay your phone down and later you can’t find it? (We used just to lose our keys, now it’s the phone and the keys.) This stand provides me with a consistent place for my phone. elago M2 Stand for all iPhones, Galaxy, and Smartphones (Angled Support for FaceTime), Black

printer shot

Fujitsu ScanSnap S1500 Scanner – When I receive physical paper documents, my usual first step is to scan the paper and place it (the paper) in my shred box. I use this scanner several times a day. Fujitsu ScanSnap iX1500 Color Duplex Document Scanner with Touch Screen for Mac and PC

Deluxe Shred Box – My deluxe shred box is a box top. I know, sophisticated, huh?

Landline Phone – I keep my phone over on my side table to keep it off my main desktop.

HP Printer – Many CPAs use a central printer for several people but think about the cumulative time you waste walking to the printer. HP Laserjet P2035 Printer

CPA's Office Setup

iPad – This is my favorite device. I use it mainly outside the office, but I place it on the corner of my desk, so I can quickly pick it up as I go out.

The Physical Library – I order most publications electronically, but for my physical books, I keep them handy here.

Adjustable Standup Desk – In my attempt to be a (little) more healthy, I bought this standup desk about three years ago. About once a day, I will print and stand while I review a set of financial statements–mainly to get my rear out of the chair. There has been a great deal of press lately about professionals (slowly) killing themselves by sitting too much. This desk does adjust down to the level of my main desktop, and it is mobile, so I use it–when I’m tired of standing–as an extension of my main desktop. I recently purchased a Varidesk for my home (not pictured). It raises up and down electronically. Somewhat expensive but the quality is outstanding.

Paper-in Tray – I use a three-level tray for my incoming paper. The top shelf is for newly arrived paper information.

conference space

Corner Meeting Spot –  I use this corner area as a place to meet with partners and staff, especially if they bring paper copies in to discuss.

Coffee Maker – This is probably the most important appliance in my office. No coffee, no Charles.

whiteboard

Whiteboard – If someone needs to draw an idea out, here’s the place. I sometimes take iPhone pictures of the information drawn on the board and then store it in Evernote.

Watercooler – Drinking plenty of water each day will enhance your stamina. You want to create energy that sustains you.

Your Ideas

How would you change my office? What additional ideas would you add to these?

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