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2020 State and Local Government Audit Planning Considerations
A Governmental Audit Quality Center Web Event
May 28, 2020
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2
Questions? Problems? Contact: 888.777.7077 or [email protected]
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3
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Presenters
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Michelle Watterworth, CPAPlante Moran
Chris Pembrook, CPACrawford & Associates
Flo Ostrum, CPAGrant Thornton
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Program Objectives
• Overview of current environment• Impact of COVID-19 pandemic on SLG
financial statement audits• Discuss current auditing and accounting
developments affecting state and local government financial statement audits
• Increase awareness on GAQC and AICPA resources available to help you maintain or improve your audit quality
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Terminology & Abbreviations
6
Abbreviation AbbreviationASB AICPA Auditing Standards Board IG GASB Implementation GuideAPA Availability Payment Arrangements MD&A Management's discussion and analysisCOVID-19 Novel Coronavirus MSRB Municipal Securities Rule BoardCU Component Unit MTMI More than minimal influenceDC Defined contribution plans OPEB Other post-employment benefitsDB Defined benefit plans PEEC Professional Ethics Executive CommitteeEAQ AICPA Enhancing Audit Quality Initiative PPP Public-Private or Public-Public
PartnershipEMMA Electronic Municipal Market Access RMM Risk of material misstatementET AICPA Code of Professional Conduct section SAS ASB Statement on Auditing StandardF/S Financial statements SCA Service Concession ArrangementsFSAC Financial Statement Attest Client SEC U.S. Securities & Exchange CommissionGAO U.S. Government Accountability Office SLG State and local governmentsGASB Governmental Accounting Standards Board SOC System and organization controlsGFOA Government Finance Officers Association TQA AICPA Technical Questions and Answers
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Current Environment
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Economy Pre-COVID-19
8
GROWING TAX REVENUES
Q3 & Q4 2019
SALES TAX SPIKES Q3 2019
US SURPASSED LONGEST ECONOMIC RECOVERY
ON RECORD
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Economy Post-COVID-19
9
Shutdown of the economy
Unprecedented unemployment
Drastically reduced sales and income taxes expected
Escalating costs to manage public health crisis
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Legislative & Regulatory Developments—SEC & MSRB
SEC Statement on COVID-19 Disclosures– The Importance of Disclosure for our Municipal Markets
MSRB Resources– Weekly COVID-19-Related Disclosure Summary
– Daily Municipal Market Trading Report
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Legislative & Regulatory Developments—Single Audit
COVID-19 implications• Significant influx of
federal funds • Lack of clarity around
whether subject to single audit
• Challenges with new or revised compliance requirements
• Potential for significant changes in processes and controls during the year
• Audit extensions
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2020 Compliance Supplement without COVID-19 updates expected late June
2020
Possible follow-up addendum
addressing COVID-19 matters in Fall
2020
GAQC June 30th event providing the latest on single audits GAQC member registration and non-member registration.
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Federal government response
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Coronavirus Preparedness and
Response Supplemental
Appropriations Act (March 6, 2020)
Families First Coronavirus Response
Act (March 18,
2020)
CARES Act and
subsequent COVID-19
Relief Package
(March 27 and April 24,
2020)
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Single Audit - Challenges due to COVID-19
Timing of the pandemic will introduce many challenges for 2020 single auditsGAQC issued a comprehensive letter to OMBsummarizing the key questions and issues that need to be resolvedAmong those questions are the following:• Which new programs will be subject to the Uniform
Guidance? • What catalog of federal domestic assistance numbers
are associated with new programs?• How will the Compliance Supplement recognize
agency changes to compliance requirements? 13
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Panel discussion – What concerns are your clients voicing surrounding the impact of the COVID-19 pandemic?
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COVID-19 Implications for 2020 SLG F/S Audits
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Timing
GAQC Website:
Summary of COVID-19 Related Deadline
Extensions of Audited F/S and Other Reports
Deadlines/Extensions
State or federal-
mandated
EMMA continuing disclosures
GFOA & Other
Certificate Programs
Automatic or Request
Extensions?
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Engagement Letters/Audit Contracts
Due dates
Scope of services
Fees
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Risk Assessment
New RMMMagnitude
and likelihood of
misstatement
Increased risk
of errors
New or changed
fraud risks
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Internal Control
Pre-pandemic Remote Post-
pandemic
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Analytics & Estimates
• Historical trends and assumptions may not be relevant in the current environment
• Certain estimates may be significant given current uncertainties
• Additional considerations and testing may be necessary
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Specialists/3rd party reporting
Potential for new limitations/ language
Possible impact on reports• SOC 1 control issues
• Valuation issues
Timing
Upfront considerations
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Revenue
Declines
Impact of delayed due dates
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Management’s Discussion & Analysis – COVID-19 Considerations
23
FYE 2/29/20 and earlier
Currently known facts
section
FYE after 2/29/20
Throughout the MD&A
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Subsequent Events – COVID-19 Considerations• For periods ending prior to February 29, 2020,
COVID-19 related events would likely require disclosure.
• Auditors would need to consider the effect on their report for any subsequent events not appropriately recognized in the financial statements.
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Going Concern and COVID-19
Going Concern Considerations
Type of entity
Taxingpower
Financial condition
pre-COVIDRecurring
losses
Borrowing capabilities
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Accounting Considerations Surrounding COVID-19
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Operating vs. Nonoperating
Special & Extraordinary Items
Expenditures (modified accrual)
Grant accounting
Changing employee programs (furloughs, etc.)
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Increased Emphasis on Noncompliance with Laws and Regulations
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Reporting requirements
Debt covenants
Minimum fund balance regulations
Pension & OPEB funding
requirements
Budgetary policies and regulations
Compliance with grant programs
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Panel discussion –What additional risks do your firms foresee in the coming year? How are you responding?
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Audit Developments & Practice Issues
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Risk Assessmentand
Internal Control
AICPA EAQ initiative - 2020 areas of focus
Auditing Revenue Recognition
SOC Engagements
Engagement Acceptance
COVID-19 Response
30
The 2020 primary area of focus will be COVID-19
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AICPA Deferral of Effective Dates
SAS 141, Amendment to the Effective Date of SAS Nos. 134 Through 140 (Issued May 2020)
One year delay issued to provide relief to auditors amid the challenges created by the COVID-19 pandemic
The standards will now be effective for audits of F/S for periods ending on or after December 15, 2021
One change is that early implementation of the standards will now be permitted
The ASB recommends that all these SASs be implemented concurrently
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Remote Auditing Considerations
• Potential quality issues• Ensure accuracy, completeness, relevance, and
reliability of evidence
• Creative use of technology to accomplish objectives
• Need for enhanced communication
• Timing
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Internal Controls - Tips in a Changing Environment• Keep things in perspective
• Consider the following:• What’s the length of time new controls were in
place?
• What’s the level of business activity during that time?
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Internal Controls - Tone at the Top
• What was the message from the government?
• What was the message from key officials (City Manager, Director of Finance, etc.) to accounting personnel?
• Were employees well informed?
• Did employees receive training on a remote working environment?
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Internal Controls - Obtaining an Understanding
• Usual requirements/variety of tools• Observation (video)
• Inspection (video, scanned documents)
• Inquiry (phone, video, email)
• Reperformance/recalculation
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Professional Skepticism
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AICPA Professional Ethics - Interpretations with Delayed Effective Dates
36
SLG Client Affiliates -ET 1.224.020
• Now effective for fiscal years beginning after 12/15/21
• Implementation guide and practice aid coming in 2nd quarter
Leases - ET 1.260.040
• Now effective for fiscal years beginning after 12/15/20
Information System Services - ET
1.295.145 • Now effective on
1/1/22
PEEC approved effective date extensions of these interpretations.
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AICPA Professional Ethics - SLG Client Affiliates
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Entity not included in the FSAC’s F/S:• material to
the client and
• the client has MTMI over entity
Entity included in the FSAC’s f/s: • make
reference• material to
the client and
• client has MTMI over entity
Investment that the investor:• controls and is
more than TCI to investor's f/s
or • has significant
influence over and is material to investor's f/s
IMPORTANT: THERE ARE MANY OTHER CONSIDERATIONS IN THIS INTERPRETATION THAT WILL NEED YOUR ATTENTION!
Entity included in FSAC’s F/S with no reference to another auditor’s report
Affiliates
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Summary of Key YB Changes
New format and organizationIndependence requirements related to nonaudit servicesCPEPeer review requirementsFinding guidanceWaste and abuseStandards for reviews of financial statementsPerformance auditsOther
38
Effective for financial statements audits of fiscal years ending on or after 6/30/20
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Is the nonaudit service preparing the F/S (in their entirety) from a client provided trial balance or underlying accounting records?
Evaluate threat for significance
Is the threat significant?
Document evaluation and
proceed
Identify and apply safeguards
Assess effectiveness of safeguards(s)Is threat eliminated or reduced to an acceptable level?
Independence impairment - Do not proceed
Document nature of threat and any safeguards applied
Proceed
Yes
No
2018 YB Figure 2 - Revised evaluation of nonaudit services related to preparing accounting records and F/S
NEW
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2018 YB Resources
Take advantage of following archived GAQC Web events to do a deep dive into the 2018 YB• Considering and Documenting Nonaudit Services
under Government Auditing Standards• Understanding the Changes to Yellow Book
Independence• The 2018 Yellow Book: What You Need to Know
Access these Web events
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AICPA Audit and Accounting Guide, State and Local Governments
41
Key resource for auditors of SLGs; you should be using this Guide!
New edition expected in late Summer
Key changes made:
• Effect of newly effective GASB standards
• Appendix discussing GASB Statement No. 87, Leases
• Appendix discussing SAS Nos. 134, 135, 137, 138, 139 and 140
• Order now at: http://www.aicpastore.com/
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Panel discussion – How is the remote working environment affecting your audit engagements?
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Accounting Developments
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GASB 95 - Deferral of Effective Dates
GASB Statement No. 95, Postponement of the Effective Dates of Certain Authoritative Guidance (Issued May 2020)
The following standards are delayed for one year:
• GASB Statements Nos. 83, 84, 88, 89, 90, 91, 92, 93
• Implementation Guide Nos. 2017-3, 2018-1, 2019-1, 2019-2
The following standards are delayed for 18 months:
• GASB Statement No. 87
• Implementation Guide No. 2019-3
44
Early application is permitted
and encouraged to the extent specified in
each originally
issued standard
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GASB 84 Implementation
Now effective for December 31, 2020 year ends
To implement or not to implement?
• What has the government done to prepare to date?
• What resources does the government have to finish the implementation process?
Primary government and component unit implementation
45
Implement Now
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GASB 84 Implementation
Exposure Draft, Certain Component Unit Criteria, and Accounting and Financial Reporting for Section 457 Plans
• Potential defined contribution plan relief
• 457 Plans
AICPA TQA 6950.23-.24, Auditor Assessment of a Special-Purpose Government's Only Immaterial Fiduciary Fund
Listen to recent GAQC Web event on fiduciary activities for a deeper dive46
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GASB 87 - Don’t Wait to Start!
47
Start reviewing existing leases as soon as possible
Implement IC to identify leases &
lease modifications
Update accounting
systems for new information needs
Consider impact on capitalization
policy
Consider impact of reporting lease
liabilities on:
Debt limitationsBond covenants
Grant agreements
Don't forget guidance in IG 2019-3 and 2020-1
GAQC archived web event on leases
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GASB 91, Conduit Debt Obligations
48
Clarifies the definition of conduit debt obligations
Establishes conduit debt is not a liability of
the issuer
Issuers make limited
commitments
Sometimes issuers also make
additional voluntary
commitment, which may
require recognition as a
liability
Effective for reporting periods beginning after December 15, 2021
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Key clarifications include
the following:
Reporting of intra-entity transfers of assets
between (non)employer contributing entity and DB pension/OPEB plan
within the same financial reporting
entity
Applicability of GASB 73 to assets
accumulated for DB pension/OPEB plans
not administered through qualifying
trusts
Liability recognition for Fiduciary activities
reporting assets accumulated for DB pension/OPEB plans
not administered through a qualifying
trust
Applicability of financial reporting
requirements in GASB 84 to DC
pension/OPEB plans
GASB 92, Omnibus 2020
49
Effective for fiscal years beginning
after 6/15/21
Effective for reporting periods beginning
after 6/15/21
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GASB 93, Replacement of Interbank Offered RatesAddresses implication resulting from the replacement of LIBOREffective Dates:• Paragraph 11b first effective for reporting
periods ending January 31, 2022• Paragraphs 13 and 14 first effective for fiscal
years ending June 30, 2022• All remaining paragraphs first effective for
reporting periods ending July 31, 202050
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GASB 94, Public-Private and Public-Public Partnerships and Availability Payment ArrangementsFirst effective for fiscal years ending June 30, 2023, with early application encouraged.Provides accounting guidance for PPPs and APAsDefines SCAs as a specific type of PPP and supersedes GASB Statement No. 60, Accounting and Financial Reporting for Service Concession ArrangementsGuidance aligned with GASB Statement No. 8751
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GASB IGs
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Comprehensive Implementation Guide
Guidance in IGs is considered Category B GAAP• All IGs are posted on www.gasb.org
Critical to read and understand
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On the Horizon
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AICPA ASB - Auditing Standards Early implementation
is permitted.SAS No. Topic AU- C Section Affected Issued
134 Auditor Reporting 700, 701(new), 705, 706 May 2019
135 Omnibus SAS Various May 2019
136 EBP ERISA Audits 703 (new) July 2019
137 Other Information 720 July 2019
Effective for audits of financial statements for periods ending on or after December 15, 2021.
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AICPA ASB - Auditing Standards
SAS No. Topic AU- C Section Affected Issued
138 Description of the Concept of Materiality
200, 320, 450, 600, 700, 703
December 2019
139Incorporate Auditor Reporting Standards to Various AU-C sections
800, 805, and 810 March 2020
140Incorporate Auditor Reporting Standards to Various AU-C sections
725, 730, 930, 935, and 940 April 2020
141Amendment to the Effective Date of SAS Nos. 134 Through 140
Various April 2020
Effective for audits of financial statements for periods ending on or after December 15, 2021 (except for SAS 141 which is effective upon issuance)
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Early implementation
is permitted.
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GASB Q2 2020 Issuances
56
• Revenue and Expense RecognitionPreliminary
Views
• Financial Reporting Model• Conceptual Framework: Recognition
Exposure Draft
• Certain CU and 457 Plans• Subscription-based IT ArrangementsFinal
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GASB Projects – Practice Issues
57
Compensated Absences-
Reexamination of Statement 16
ED expected February 2021
Prior-period Adjustments,
Accounting Changes, and Error Corrections-
Reexamination of Statement 62
ED expected March 2021
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Panel discussion - What do you think is the most important takeaway from today’s Web Event?
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Resources
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“Summer Fun” CPE rebroadcast week (all times Eastern) - watch for registration GAQC Alert
Monday, June 15th
• 1-3pm - Considering and Documenting Nonaudit Services under Government Auditing Standards
Tuesday, June 16th
• 11am to 1pm - Single Audit Lightning Round
• 1-3pm - When You Think It, Ink It! Best Practices in Single Audit Documentation
Wednesday, June 17th
• 11am to 1pm - Risk Assessment Considerations in a SLG Financial Statement Audit
• 1-3pm - Using Part 6 of the New Compliance Supplement on Internal Control
Thursday, June 18th
• 11am to 1pm - Heard in the Hallways: Commonly Asked Yellow Book Questions
• 1-3pm – Smart Sampling in a Single Audit
Friday, June 19th • 11am to 1pm - 2020 State and Local Government
Audit Planning Considerations
• 1-3pm - 2020 GAQC Annual Update Webcast
60
A chance to catch up on GAQC events you or your staff missed!
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Other GAQC Resources
Illustrative Auditors Reports• Single Audit, Yellow Book, SLG, HUD
2019 Compliance Supplement Tool
SEFA Practice Aids (for both auditors and auditees)
Quality Control Tools• Tips for Getting Through a Quality Control Review
• Peer Review Checklists
• Practice Aid - Establishing and Maintaining a System of Quality Control
Marketing information for members• Includes logos and usage guidelines
61
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Other AICPA resources
62
COVID-19 Resource Center
• Includes audit and accounting resources
Audit and Attest Web page
A&A Technical Hotline (877) 242-7212 [email protected]
Ethics Division Web Page (includes AICPA Code)• Ethics Hotline - [email protected] or
888.777.7077
Exam-Based Single Audit Certificates offered at Intermediate and Advancedlevels
Not-for-Profit Certificate Program - On-demand learning program
Not-for-Profit Section - For individuals interested in NFP A&A
EAQ Web site
Peer Review Web page
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AICPA 2020 Conferences
63
AICPA Not-for-Profit Industry Conference, June 22-24, 2020, virtual offering only due to COVID-19
AICPA National Governmental Accounting and Auditing Update Conference, August 17 - 18, 2020, virtual offering only due to COVID-19
AICPA National Governmental and Not-for-Profit Training Program, October 19 - 21, 2020, MGM Grand, Las Vegas, NV *
GAQC members get a discount when using code “GAQC” at checkout
*The COVID-19 outbreak may eventually affect whether this event will occur in person or, instead, only virtually. Check the conference web links for the latest information going forward
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AICPA - Peer Review - Governmental Checklists
64
Section Number Section Title
20,500 4/2019 (prev. 9/2018) Governmental Audit Engagement Checklist
22,110 4/2019 (prev. 5/2016)
Supplemental Checklist for Review of Audit Engagements Performed in Accordance with Government Auditing Standards (Yellow Book) December 2011 Revision
22,130 4/2019 (prev. 4/2018)
Supplemental Checklist for Review of Audit Engagements of State and Local Governments Participating in Pension Plans and/or Postemployment Benefits Other Than Pensions (OPEB)
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