See How Opinion Units Affect Governmental Audit Planning and Opinions

Most governments have multiple opinion units requiring unique audit plans. Below, I explain how governments use two different measurements focuses and how they often have multiple opinion units. Auditors will fail to plan and conduct their governmental audits appropriately if these are not understood.
First letโs look at the two measurement focuses.
Measurement Focus
Governments use two different measurement focuses:
- Economic resources
- Current financial resources
Governments use full accrual accounting for government-wide financial statements and fund-level proprietary funds, those using the economic resources measurement focus.
Governments use modified accrual accounting for governmental funds, those using the current financial resources measurement focus. (To simplify this discussion, I am not addressing fiduciary funds.)
The current financial resources measurement focus is on financial resources available in the near term; those using the economic resources measurement focus encompass all assets and liabilities, including long-term such as capital assets and bonds payable.
Governmental financial statements often contain government-wide and fund-level financial statements. (Business-type entities can present one level of reporting.)
Government-Wide Financial Statements
The government-wide financial statements include governmental activities and business-type activities. The government provides a separate column for each, using full accrual accounting. Think of government-wide financial statements as the big picture for a government. The government combines governmental funds to create the governmental activities column and enterprise funds to create the business-type column. In developing the governmental activities column, the government converts governmental funds’ modified accrual accounting (explained below) to full accrual accounting. Reconciling information is provided in the government fund statements.
Governments use fund-level financial statements to account for particular activities, such as a specific grant or the provision of water and sewer services. The Governmental Accounting Standards Board divides these fund-level statements into governmental and proprietary.
Governmental funds use modified accrual accounting, and proprietary funds use full accrual accounting. When governmental or proprietary funds do not pay cash for services or goods received, they accrue liabilities, resulting in expense recognition; this is true for funds using modified accrual or full accrual accounting.
However, revenues are recognized differently in governmental and proprietary funds. Proprietary funds accrue revenues as earned, but governmental funds recognize revenues only if they are measurable and available. Governments often define “available” as within sixty days of the period’s end. So, if property taxes, for example, are due on September 30 but are not received within sixty days thereafter, the revenue recognition is deferred (revenues are not recognized).
Governmental financial statements include fund-level financial statements, including governmental and proprietary.
Governmental Funds
Governmental funds include:
- General fund
- Special revenue funds
- Capital project funds
- Debt service funds
- Permanent funds
Governmental funds include nonexchange activity. For example, property taxes appear in a general fund. The government provides no direct service to the taxpayer for property taxes; governments use such funds to pay for general operations such as paving streets and providing police safety.
Another example of a governmental fund is the government’s use of a special revenue fund to account for a federal grant to build housing for those economically deprived.
When a government receives special purpose sales taxes to build a courthouse, it might use a capital project fund to account for this activity.
In these examples, governments receive property taxes, grants, and special-purpose sales taxes. The parties paying the money to the governments receive no direct benefit. Governments account for such activities in separate funds to provide accountability to citizens and other governments. When grants are received, the funding parties, such as federal and state governments, can mandate how the recipient government accounts for the use of such monies, and they often require separate governmental funds.
Sometimes, laws, regulations, or grant agreements require particular governmental funds. For example, state laws might require a separate capital projects fund for special purposes sales taxes.
Next, letโs consider proprietary funds.
Proprietary Funds
Proprietary funds include enterprise funds and internal service funds. Examples of enterprise funds include:
- Water and sewer fund
- Electrical fund
- Transit fund
Enterprise fund activity involves charging for services (e.g., water bills), and governments usually desire that such activity result in a profit. Thus, enterprise funds use full accrual accounting. The government wants to know if it made a profit and, if it did, how much. Doing so allows the government to set rates (e.g., water) fairly for those using its services. Excessive profits, if present, are obvious in an enterprise fund.
Governments might account for services provided to several funds in an internal service fund. For example, a government might provide vehicle or information technology services to a water fund and general fund departments (e.g., police and streets). Internal service funds allocate the costs incurred to service the other funds or departments.
Governmental entities raise a unique audit issue, the need for multiple audit opinions in one audit report. Why? Because most governments have multiple opinion units.
Opinion Units
Auditing governments differs from auditing commercial entities. How? Most governments have multiple opinions (in one audit report), while a commercial entity has only one opinion.
When there are multiple opinion units, the auditor computes materiality for each and plans the audit at the opinion unit level. Here’s an example summary of a county government’s list of opinion units:
- Governmental Activities
- Business-Type Activities
- General Fund
- Special Purpose Sales Tax Fund (major fund)
- Federal Grant Fund (major fund)
- Courthouse Construction Fund (major fund)
- Water and Sewer Fund (major fund)
- Remaining funds (includes all nonmajor funds)
- Development Authority (discretely presented component unit)
The auditor computes a separate materiality for each of the above and plans the audit for each opinion unit. When the audit is complete, the auditor renders an opinion on each of these.
Planning for Your Opinion Units
Keep the above in mind as you plan your governmental audits. You’ll have cash, for example, in each of the above, and your audit approach will be similar in most cases. The same applies to other audit areas, such as receivables/revenues, expenditures/payables, and capital assets (plant, property, and equipment in commercial accounting). You can audit areas across funds. So, audit cash for all opinion units simultaneously and put those work papers in one location in the audit file. You will gain efficiencies by auditing areas such as cash and receivables or payables across funds.