All Posts by Charles Hall

Group Audit Standards Applicability: One Firm

By Charles Hall | Auditing

Do the group audit standards apply when one firm audits all of the entities comprising a consolidated whole?

Yes.

You say, “confusing.” I say, “I agree.”

The confusion–at least for me–lies in the pre-clarity auditing standard, AU 543, Part of Audit Performed by Other Independent Auditors, which focused on who was performing the audit. The clarity standard, AU-C 600 Special Considerations — Audits of Group Financial Statements, focuses on what is being audited. The word group (as applied to the group audit standards) does not mean more than one auditor.

Regarding applicability (of the group audit standards), we look at the entities and business activities being audited rather than how many audit firms are involved. We used to focus on the interaction with other auditors; now we focus on the risks associated with the group financial statements.

Group Audit Standards When There is Only One Audit Firm

The AICPA’s Technical Questions and Answers (8800.24) says the following about the applicability of AU-C Section 600 (Audits of Group Financial Statements) when only one engagement team is involved:

Inquiry—Company X consolidates the operations of Entity A. The same group engagement team that audits Company X also audits Entity A. Because only one engagement team is involved, does AU-C section 600 apply? If so, what does AU-C Section 600 require that is not already covered by other auditing standards?

Reply—AU-C section 600 applies to all audits of group financial statements, which are financial statements that contain more than one component. In the circumstances when the same engagement team audits all components of the group, the considerations addressed in AU-C Section 600 that relate to component auditors are not relevant. However, considerations addressed in AU-C section 600, such as understanding the components; identifying components that are significant due to individual financial significance and the significant risk of material misstatement; determining component materiality; understanding the consolidation process; and addressing the risks, including aggregation risk, of material misstatement in the group financial statements; are relevant in all group audits.

What does this mean?

If your firm audits consolidated financial statements, then the group audit standards apply, and you do need to comply with certain provisions (even though your firm audits all entities included in the consolidation). Consequently, you have some additional documentation requirements. Your audit file should contain the following documentation:

• Your understanding of the components
• Your identification of significant components (due to financial significance or risk)
• Component materiality
• Your understanding of the consolidation process
• How you plan to address the identified risk of material misstatement (including aggregation risk)

Group Financial Statements

What are group financial statements? They are statements that include the financial information of more than one component.

Here are examples of components:

• Subsidiaries
• Geographical locations
• Divisions
• Investments (equity method)
• Products or services
• Component units of a state or local government

You can see from these examples of components, the concept of group financial statements is broader than that of consolidated or combined financial statements.

The idea behind the group audit standards is to highlight the risk of material misstatement whether at the group level or a lower level. If for example, a component is not financially significant but it has particularly risky assets (e.g., derivatives), then the group audit standards direct our attention here.

Examples of When Group Audit Standards are Applicable

Here are examples of when the group audit standards are in play:

• Consolidated subsidiary
• Combined financial statements due to common control
• Investment accounted for using the equity method
• Consolidated affiliate (due to variable-interest considerations)

Notice we made no mention of other auditors in these examples. It is possible that another firm may audit a subsidiary (for example), but this factor is not the determinant of when the group audit standards apply.

Single Audits under the Uniform Guidance

By Charles Hall | Accounting and Auditing , Local Governments

Recently I listened to the AICPA Governmental Audit Quality Center (GAQC) webcast titled: Uniform Guidance for Federal Awards: Auditor Planning Considerations for the New Single Audit Rules.

The presenters, Diane Edelstein, Mandy Nelson, and Mary Foelster, did a great job in providing helpful information. I made a few summary notes that are presented below; the notes are not intended to be comprehensive. The GAQC archived the presentation on their website.

Applicability of Uniform Guidance

Here’s a summary of when the new guidance is applicable.

Type of Entity	Effective Date
Federal Agencies	Must implement policies and procedures by issuing regulations to be effective December 26, 2014 (accomplished with the issuance of the Joint Interim Final Rule)
Non-federal Entities	Implement the new administrative requirements and cost principles for all new Federal awards made after December 26, 2014, and to additional funding related to existing awards ("increments") made after that date
Auditors	Audit requirements are effective for fiscal years beginning on or after December 26, 2014 (early implementation not permitted)

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GASB 63 and 65: Deferred Outflows, Inflows

By Charles Hall | Accounting , Local Governments

GASB 63 and 65 provide guidance regarding deferred outflows and inflows in governments. This article provides an overview of those standards.

• Statement No. 63 – Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position
• Statement No. 65 – Items Previously Reported as Assets and Liabilities

 

What are the effective dates for Statements 63 and 65?

• GASBS 63 is effective for periods beginning after December 15, 2011; earlier application encouraged
• GASBS 65 is effective for periods beginning after December 15, 2012; earlier application encouraged

It is best to implement GASBS 63 and 65 at the same time.

What is the purpose of these changes?

To put it succinctly, GASB is using one of its conceptual statements (specifically Concepts Statement 4) to make revisions to reporting requirements (to include deferred outflows and deferred inflows).

Prior to GASBS 63 and 65, debit balances were reported on the statement of net position (balance sheet) as assets; similarly, all non-equity credits were reported as liabilities. The new standards add deferred outflows and deferred inflows to the mix.

All debit balances in the statement of net position will be reported as:

• Assets
• Deferred Outflows

Assets represent present service capacity to the government; deferred outflows (e.g., prepaid bond insurance) represent the consumption of net position applicable to future reporting periods.

Liabilities represent amounts to be paid; however, some amounts previously reported as liabilities (e.g., deferred property taxes) involve no future payment. Consequently, with the implementation of GASB 63, all non-equity credits in the statement of net position will be reported as:

• Liabilities
• Deferred Inflows

The difference in liabilities and deferred inflows is primarily resources that are going out and resources that are coming in. Liabilities normally represent a future surrender of resources; deferred inflows do not.

What are the main points of GASB 63?

This statement distinguishes assets from deferred outflows of resources and liabilities from deferred inflows of resources.

Additionally, many of your financial statement titles (e.g., Statement of Net Position), categories (e.g., Assets and Deferred Outflows of Resources), and notes will change. Net Assets will now be labeled Net Position.

The five elements of the statement of net position are:

1. Assets
2. Deferred Outflows of Resources
3. Liabilities
4. Deferred Inflows of Resources
5. Net Position

The three categories of net position are:

1. Net Investment in Capital Assets
2. Restricted
3. Unrestricted

Note – The requirement to change to a statement of net position (rather than a statement of net assets) – a GASBS 63 change – occurs one year earlier than the requirements of GASBS 65; you are required to change the term net assets to net position even though you may not have any deferred outflows or inflows until GASBS 65 is implemented – possibly a year later. Again it is easier to simply implement both GASBS 63 and 65 at the same time (both can be early adopted).

What are the main points of GASB 65?

• It identifies the specific items to be categorized as deferred inflows and deferred outflows.
• It clarifies the effect of deferred inflows and deferred outflows on the major fund determination.
• It limits the use of the term deferred in financial statements.

What are some examples of specific items to be categorized as deferred inflows and deferred outflows?

• The gain or loss from current or advance refundings of debt (the gain or loss will no longer be netted with the related debt but will be shown separately as a deferred outflow or a deferred inflow)
• Prepaid insurance related to the issuance of debt
• Property taxes received or accrued prior to the period in which they will be used

How should debt issuance costs be treated?

Debt issuance costs should be expensed when incurred. GASB concluded that debt issuance costs do not relate to future periods, and, therefore, should be expensed.

If your government has debt issuance costs (recorded as assets), you will need to remove them as you implement these standards (using a prior period adjustment).

How should cash advances related to expenditure-driven grants be recorded?

Cash advances from expenditure-driven grants should be recorded as unearned revenue (a liability). The key eligibility requirement for an expenditure-driven grant is the use of funds (which does not occur until funds are spent). Any grant funds received prior to meeting eligibility requirements will be shown as a liability. It is improper to use the word deferred for this line item; for example, deferred revenue is not appropriate. The more appropriate title is unearned revenue.

How do these standards affect the determination of major funds?

Assets should be combined with deferred outflows of resources and liabilities should be combined with deferred inflows of resources for purposes of determining which elements meet the criteria for major fund determination.