Donna Collins

1. Getting Prepared to Prepare Your Own Financial Statements Presented by Donna Collins Milestone Professional Services

Internal Control

Independence

Statement on Auditing Standard (SAS) No. 112 (Communication of Internal Control Related Matters Identified in an Audit)

Ethics Interpretation 101-3 (Performance of Nonattest Services)

Defines significant deficiencies and material weaknesses

Provides guidance on evaluating control deficiencies

Requires written communication to management

Effective for periods ending on or after 12/15/06

control deficiency

adversely affects ability to initiate, authorize, record, process or report financial data reliably in accordance with GAAP

more than remote likelihood that misstatement of financial statements that is more than inconsequential

will not be prevented or detected

a significant deficiency or combination of significant deficiencies

results in more than remote likelihood that material misstatement of financials will not be prevented or detected

Many governmentsmayhave a material weakness in internal control due to lack of internal controls over the preparation of their financial statements.

Auditors must be independent to issue an opinion on financial statements

Material weakness in internal control over financial reporting creates independence issues under Ethics Interpretation 101-3

Auditors may not be able to opine on governments financials

Have auditors prepare financials

Hire an outside firm to prepare financials

Prepare financial statements ourselves

Hybrid of the above

The auditors can prepare financials if they meet certain guidelines governing their independence.

There are issues I may want to consider even if my auditors can meet the over arching principles.

Public perception

Analytical advantage of preparing your own financial statements

Cost factors

My choices include: another audit firm, a consulting firm, or an individual that works for the government on a contractual basis

Cost is still a factor

Availability to meet our entitys deadlines should be a consideration

Consider the time involved

Evaluate whether our entity has the technical expertise required

What is the availability of my auditors to comply with my timetable

Prepare my own financial statements with as needed assistance

Prepare my own financial statements but hire a firm to perform a technical review (for adequacy of disclosure and correctness of implementation of new standards)

Things to Remember

Things to Plan for

Things to Gather

Things to Coordinate

They are your financial statements

Dont be afraid to ask for help (but do it early)

Leave an audit trail (know what documentation the auditor will require)

Financial Statement Format

Annual Financial Statements versus CAFR

Participation in the Certificate of Achievement for Excellence in Financial Reporting program

Political Environment

Others that should be included in the process

Major fund determination issues

Clean starting point

Distinct cut-off for accounts payables

Inclusion of all journal entries necessary for closing the year

Posting of all accruals and estimates

Recording of any audit entries

Realistic timetable for financial statement preparation

Include specific tasks

Clearly identify individuals responsible for each task

Identify an expected completion date

Incorporate deadlines for Auditor General, grantor agencies, etc.

Remember that many things can be done before year-end

List of tasks that can be accomplished prior to year-end

Develop a template for your financial statements

Draft footnote wording for new pronouncements

Draft descriptions for new funds

Design cover and dividers and go ahead and order them

Begin gathering statistical information

Open communication throughout entity and with third parties regarding:

Budget schedules

Grant information (if single audit is applicable)

Component Unit information

Communication issues (continued)

Constitutional Officer Statements roll in and information needed for footnotes (counties)

Long-term debt (compensated absences and capital leases)

Capital Assets

Retirement Contributions

Information for Statistical Section (CAFRs)

Technical Resources

Blue Book (GAAFR 2004 or later)

Codification of GASB pronouncements

New GASBs not yet in codification

Implementation Guides

AICPA Accounting and Reporting Guides

Copy of prior year financials (and those of other governments for reference)

Disclosure Checklist

GFOA checklists if applying for the Certificate program

Others such as PPC (ask auditors)

Original and Final Amended Budget

Prior year GFOA comments and auditor comments (if applicable)

Actuarial reports (pensions, post-employment benefits, etc.)

Arbitrage rebate calculations (if applicable)

Landfill estimates from engineers (if applicable)

Timetable with auditors

For audit wrap-up (no more adjustments)

Financial statement review (auditor comments)

Developing your template

Dont forget to add any new funds and delete funds that have been closed

Determine your major funds

Use prior year as starting point (remember to check at completion)

Total assets, liabilities, revenues, or expenditures/expenses must equal 10% of corresponding total for funds of that category (governmental or enterprise) AND

Total assets, liabilities, revenues, or expenditures/expenses must be at least 5% of total for all governmental and enterprise funds combined.

Determine your major funds (continued)

Calculation reminders

Do not include other financing sources and uses

Use governmental and enterprise funds only in total no internal service or fiduciary funds

You can remove interfund and advances

Guidance is found at paragraph 75 and 76 of GASB 34, 2005 GAAFR page 177, etc.

Templates available

Determine your major funds (continued)

General fund always a major fund

Internal Service funds are never major

Consider other factors

Political constraints

Funds that require opinion specifically

Funds important due to public interest or consistency of presentation

Format issues should be decided early

Page layouts including indentions and capitalization

Underlines, dollar signs and continued

Proper titles for statements and schedules

Consistency of phrasing (ie. Interest income versus investment income)

Classification of line items (classified or liquidity order)

Linking documents is efficient

Consider the impact of multiple users

Most common documents to link include

Combining statements to budget schedules

Combining statement totals to fund level statements in the basic financial statements

MD&A, notes and statistical sections to basic financial statements (excel spreadsheets to word documents)

Net Assets

Changes in Net Assets

Expenses and Program Revenues

Revenues by Source

Capital Assets

Bonds and Notes

Link all tables that have information that comes from the Basic Financial Statements

Net Assets by Component

Changes in Net Assets

Fund Balances of Governmental Funds

Changes in Fund Balance of Governmental Funds

Make sure beginning net asset and fund balance numbers agree to the prior year issued financial statements

DONT USE PENNIES!

Consider rounding to thousands for larger entities but be consistent throughout the document

Consider starting with the combining statements in the back and moving forward

Budget to actual schedules can be linked to the combining schedules already input

Use total columns to verify that established links are bringing correct information forward

Begin with trial balance for each fund that is grouped in accordance with the State Chart of Accounts

Consider your source documents because the auditors will have to verify your groupings

Remember that major funds will have to be pulled out of any grouped reports for inclusion in the basic financial statements

Some items should not be grouped via the State Chart of Accounts

Examples:

Interfund transfer activity in internal service funds becomes recharacterized as revenue/expense

Unamortized bond costs are assets but should be netted with the corresponding liability

Negative cash balances should be classified as a liability

Remember to add any blended component units (often reflected as special revenue funds)

For counties, constitutional officers need to be incorporated into combining statements

Special revenue funds

Agency funds

General fund usually rolls into general fund for the Board

When are budget schedule versus budget statements appropriate?

What makes a budget presentation a schedule?

When do I include both original and final budget numbers?

Do I include budget information for all funds?

Budget Statements

Included in Basic Financial Statements

Auditors opinion includes these statements

Presented for general fund and major special revenue funds only

Includes original and final budget

Other non-major funds have budget presentation in Other Supplemental Information section with final budget only

Budget Schedules

Presented outside the Basic Financial Statements

Auditors opinion is in relation to

Presentation most often used

General fund and all major special revenue funds included in RSI with both original and final budget

Budget Schedules (continued)

Other major governmental funds (debt service and capital projects funds) and non major governmental funds included in Other Supplemental Information with final budget only

Presentation is only included if legally binding budget is adopted

Helpful Hints

Link where appropriate to combining or fund level statements

Coordinate with budget department

Proprietary funds do not report budgetary comparisons

Helpful Hints (continued)

Presentation should be at the legal level of control

Variance column should have neutral terminology (over/under not favorable/unfavorable)

If included in RSI, add footnote to indicate if prepared on GAAP basis

Basic Financial Statements include:

Government-wide financial statements

Fund Level statements

Footnotes

Governmental

All major funds shown in individual columns

Non major funds grouped into one aggregate column that should agree to combining statement

Total column for governmental funds included

Fund balance must agree between Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balance

Proprietary

All major funds shown in individual column

Non major funds grouped into one aggregate column that should agree to combining statement

Total column for proprietary funds included

Proprietary (continued)

Net assets must agree between Statement of Net Assets and Statement of Revenues, Expenses and Changes in Net Assets

Statement of Activities is divided into operating (charges for services and direct expenses) and non-operating revenues/expenses (grants, interest income and expense, gain/loss on capital assets)

Statement of Cash Flows is required

Statement of Cash Flow issues

Separated into four distinct sections

Common mistakes

Failure to back out fixed asset transactions from account payable change in balance

Misclassification of grants operating versus capital

Reporting transaction as net rather than gross

Non-cash transaction

Contributed capital

Change in fair value of investment

Other reminders

Fiduciary funds will have Statement of Net Assets and Statement of Changes in Net Assets (except for Agency funds)

Component units may also have Statement of Net Assets and Statement of Activities in Fund Level presentation

Insurance recoveries are shown as Other Financing Sources

Negative net investment activity is shown as a negative revenue

Fund Balance Reservations and Net Asset Restrictions

Fund Balance reservations

Prepaid balances

Inventory balances

Debt Services

Building department resources unexpended

Encumbrances

Fund Balance Reservations and Net Asset Restrictions (continued)

Net Asset Restrictions follow GASB 46

Must be legally enforceable due to statue or ordinance

Examples:

Some grant funds

Federal and State Police Forfeiture Fund

Set up a conversion spreadsheet that begins with the governmental fund financial statements and reflects all adjustments necessary to arrive at the Statement of Net Assets and Statement of Activities

Can be separate spreadsheet linked to source and destination documents

Can be notations on the side of the governmental fund statements

Note that many reconciling items between the fund level and government-wide statements affect both the Statement of Net Assets and the Statement of Activities

Most common examples are

capital assets and long-term liabilities

Interfund activity is eliminated so that only internal balances remain

Interfund activity can result in out of balance position at fund level statements that is resolved only at the government-wide level

Transfer of capital assets from enterprise fund to governmental fund

Remember that interfund activity between agency funds and governmental and business-type funds must be reclassified

Indirect costs are removed from functional expense in the government-wide statements

Except for general government activities

Indirect cost allocations are reversed for government-wide reporting

Internal service funds can be combined with governmental activities or business-type activities

It is generally safe to assume consolidation with government activities

If service is provided solely to enterprise funds, then group with business-type activities

If service is provided to both government and business-type activities, consolidate with predominant customer of services ( cannot split between activities)

Conversion spreadsheet example separate spreadsheet

Begins with governmental balances

Reflects column for each type of adjustment showing both impact on Statement of Net Assets and Statement of Activities

Final column can be linked directly into the Government-wide statements

Conversion spreadsheet example directly on governmental statements

All significant adjustments from governmental fund statements to arrive at government-wide statements are included in properly labeled calculations outside the print area

Disadvantage is that it is more difficult to see impact on both top level statements of each type of reconciling item

Statement of Net Assets

Includes column for governmental activities, business-type activities, a total column and then an aggregated column for all component units no matter what type of fund

Conversion from fund level statements generally involves:capital assets, long-term liabilities, internal service fund net assets and the impact of deferred revenue transactions

Statement of Activities

Separately reflects activities of the primary government (including governmental activities and business-type activities) from those of component units

Expenses by function or activity are shown first

Program revenues are reflected next to arrive at a net revenue (expense) from each function or activity

Statement of Activities (continued)

General revenues are shown separate from program expenses and revenues

Transfers are then added to general revenues to arrive at subtotal

After adding beginning net assets, the end result should be net assets per the Statement of Net Assets

Conversion from fund level statements generally involves: capital purchases, long-term liability activity, internal service fund change in net assets, and the impact of grant revenues or other deferred revenue items.

General revenues versus program revenues?

Operating special assessments are charges for services while capital special assessments are capital contributions

All taxes are general revenues

Charges for services reported as program revenue of function which generated the revenue rather than where it will be spent

General revenues versus program revenues?

Grant contributions that can be used for both capital or operating purposes should be classified as operating grants and contributions

Pass through grants used to finance capital acquisitions should be treated as operating grants and contributions by the primary recipient

Much of the information needed is already in audit schedules that have been prepared.

Use the prior year as a starting point but consider:

Changes in major funds

Changes in governmental policies

New pronouncements

Subsequent events such as debt issuance, capital leases or legal settlements

Most common challenges

Amounts that dont agree to the face of the financial statements

Exclusion of constitutional officer information (counties)

Missing or insufficient note disclosures especially in the area of pensions

Inclusion of negative disclosure

Distinction of major versus non-major not present

Required supplementary information

Managements Discussion and Analysis (MD&A) comes before the basic financial statements

Must be consistent with information in financial statements, notes and statistical section

Include only allowable information

Many tables can be linked to financial statements

Must provide comparative data

Budget comparisons (if not already in the Basic Financial Statements)

Trend data on funding of pension and Other post employment benefits in certain circumstances

Trend data on infrastructure condition if using the modified approach

GASB 44 is the source of technical guidance

Templates are available from those who have implemented

A narrative explaining the schedules in this section is required

Dont forget to indicate the source of the information

Most of these items can be prepared early

Required items are:

Cover page

List of officials*

Table of contents

Transmittal letter*

Organizational chart*

Certificate of Achievement for Excellence in Financial Reporting* from prior year

* Required for CAFRs only

Basics of financial statement review

Consistency throughout document

Financial amounts

Descriptions

Format presentations

Information flows and is logical in format

Presentation is easy to read and understand

Document is technically complete with all required sections and disclosures

Relationships within the document make sense

Consistency throughout document

Individual schedules to combining

Combining to combined

Combined to basic financial statements

Footnotes to basic financial statements

MD&A to basic financial statements

Statistical section to statements, notes and MD&A

Information flows and is logical in format

Note one incorporates the governments significant accounting principles

Certain items are required use disclosure checklist to make sure required elements are present

Order generally follows account presentation in statements

Information generally follows the order in the statements

After note one, cash and deposits are generally next followed by investments..

Presentation is easy to read and understand

Add totals that tie to the face of the financial statements (where appropriate)

Check for correct grammar and punctuation

Consider the readers of your financial statements

Standard is a person with knowledge

Document is technically complete with all required sections and disclosures

Utilize the information gathered during the planning stage

Ensure new standards are addressed

Complete a disclosure checklist

Relationships within the document make sense

Perform top level analytic to see if the change from the prior year reflects what really happened

Do the capital asset numbers on the reconciliations for the government-wide statements supported by additions per the capital asset footnote

For proprietary fund level statements, are there restricted assets identified that are at least equal to liabilities payable from restricted assets

Problem areas

Dollar differences (DONT INPUT PENNIES)

GFOA prior year comments not addressed

Different terminology for same item (funds, line items, etc.)

New requirements not met

Tools available

Disclosure checklists (GFOA, PPC, etc.)

Other financials from similar entities

Auditors

GAAFR examples

Send your financial statements to:

Auditor General within 12 months of year end

Copy is filed with Annual Financial Report to the Department of Financial Services

Grantor agencies may required copy and the Federal Clearing House if single audit is applicable

Lendors

Others involved in interlocal agreements with our government

Clean up documentation immediately!

Documents

Donna Collins