Kế toán, kiểm toán - Chapter 13: Auditing; tax - Exempt organizations; and performance evaluation

Essentials of Accounting for Governmental and Not-for-Profit OrganizationsChapter 13Auditing; Tax-Exempt Organizations;and Performance EvaluationCopyright © 2015 McGraw-Hill Education. All rights reserved.Chapter 13 – Learning objectivesDescribe the unique characteristics of audits of governmental and not-for-profit entitiesDescribe the major requirements of the Single Audit ActDescribe the reporting requirements of tax-exempt entities.Identify when a not-for-profit organization is subject to the unrelated business income tax and describe how the tax is determined.Chapter 13 – Learning objectives continuedIdentify financial ratios commonly used to evaluate governments and not-for-profits and describe how they are calculated and interpreted.Identify the elements of service efforts and accomplishments reporting and explain why governments and not-for-profits report nonfinancial performance measuresPart 1: Governmental AuditingSource of Auditing StandardsAICPA – Statements of Auditing Standards (GAAS)GAO – Government Auditing Standards (GAGAS)AICPA Audit and Accounting GuidesAudits of State and Local GovernmentsNot-for-profit OrganizationsGovernment Auditing Standards: aka The Yellow Book Government Auditing Standards, issued by the GAO, incorporate AICPA auditing standards and provide extensions that are necessary due to the unique nature of public entitiesDifferences in Public Sector AuditsAuditors must possess knowledge of government accounting and auditingPublic availability of audit reportsWritten evaluations of internal controlsDistribution of audit reports and availability of working papers to federal authoritiesTypes of EngagementsFinancial AuditsProvide reasonable assurance that financial statements are presented fairly in all material respects and comply with GAAP.Attestation Engagements Include Reporting on:Internal controlsCompliance with laws and regulationsProspective financial informationCosts under contractsTypes of Engagements, cont’dPerformance AuditsEconomy and efficiency audits –involve aspects of appropriate acquisition, use, and safeguarding of resourcesProgram audits –assess the degree to which mission objectives have been achieved while adhering to applicable laws and regulationsNonaudit ServicesProviding or explaining information Providing advice or assistance to managementFinancial Statement AuditsAuditors must first determine a level of materiality for each opinion unitFinancial statement audits involve examination of transactions on a test basis,forming judgments about internal controls and compliance with laws and regulations, and rendering an opinion about whether the financial statements are prepared fairly in accordance with GAAP. Opinion UnitsBecause of the various levels of reporting (government-wide, fund-type, and individual fund) the auditor must determine a level of materiality for each.A separate materiality evaluation is made for:Governmental activitiesBusiness-type activitiesEach major fundAggregate component unitsThe aggregate of all remaining fund informationOpinion units, cont’dOne effect of reporting on opinion units is that some opinion units may receive unqualified opinions while others receive modified opinions.For example: failure to report infrastructure assets could result in an adverse opinion regarding the governmental activities (government-wide statements) and an unqualified opinion for all other opinion units.The Auditor Is Required to Prepare up to Five ReportsA report containing an opinion on the financial statements. A report discussing the evaluation and testing of internal control and compliance with laws and regulations. A report discussing significant deficiencies in internal controls. A report describing instances of fraud, illegal acts, or other material noncompliance.A report containing the views of responsible officials of the audited organization regarding any reported significant deficiencies. Types of Audit Opinions on Overall StatementsUnmodified – Statements appear to be in conformity with GAAP -- no qualifying language.Qualified – Largely in conformity with GAAP except for some specified item(s).Adverse – Not in accordance with GAAP.Disclaimer – Not able to express an opinion, usually because the auditor was precluded from doing some necessary procedure. Purpose of Single Audit ActBefore 1984, State and local governments and Not-for-profits receiving financial aid from several different federal agencies, had multiple audits.The initial Single Audit Act sought to impose one set of stringent audit guidelines so that only one audit would have to be conducted to satisfy multiple grantor agencies.Single Audit: DevelopmentThe initial Single Audit Acts in OMB circulars A-128 and A-133 required a single audit if federal financial assistance was over $100,000. In 1996 Circular A-133 was revised and replaced with Circular A-128. The current threshold for a single audit is federal financial assistance EXPENDITURES of over $500,000.If federal assistance is > $500,000, but is all from one agency, a program audit may be used instead of a single audit. Who Receives the Audit Reports?Cognizant agencyEntities with $50 Million or more of federal awards are monitored by a cognizant agency – This is usually the agency with largest grants.Otherwise the entity is assigned an Oversight agency Again, this is typically the agency with largest grantsThe Auditor Is to Follow a Risk-Based Audit ProcessThe auditor must identify MAJOR programsThe auditor must group programs using a risk-based approachType A - larger programsType B - smaller programs and low risk large programsType A programs receive closer auditing than Type B’s Selecting Programs for AuditGenerally, the auditor is required to express an opinion on compliance on major programs which must add up to 50% of the federal funds expended by the audited organizationHowever, if the audited organization is determined to be “low risk,” the percentage is lowered to 25%Part 2: Taxation & not-for-profit  organizationsTax-Exempt OrganizationsMost nonprofits file IRS form 1023 Application for Recognition of Exemption to obtain favorable tax treatment for donorsTax exempt status permits the donors to deduct their contributions to the Not-for-profit organization when determining the donor’s income taxesLocal law governs exemptions from sales tax and property tax. Tax-Exempt Organizations – Filing RequirementsNFPs must file an IRS Form 990 information returnNFPs with over $1000 of unrelated business income file Form 990-T.Other reports may be filed with the state.Tax Code: Types of Non-ProfitsThe tax code specifies several different classes of nonprofit organizations by purpose.The most common are §501(c)(3) organizations§501(c)3 OrganizationsInclude religious, charitable, scientific, literary, educational, amateur sports organizations, orgs for prevent of cruelty to children or animals.Requires that earnings not be distributed to owners and the organization does not engage io substantial political activity.501(c)(3)’s status allows donors to take a charitable deduction on their U.S. tax return for donations.Form 990 Information ReturnRequires financial statement information similar to that required by GAAP.The 990 also provides information to make sure the organization is still operating in accordance with its exempt mission. Also discloses information about the compensation of the highest paid employees and contractors.Taxpayer Bill of Rights 2 (1996) requires that 990s must be made available to those who request it – they are most commonly posted to a web site.Types of Forms 990Form 990: Titled “Return of Organization Exempt from Income Tax” this return provides the public with financial information and is also used by the IRS with information to monitor the activities of tax exempt organizations.Form 990-EZ: Shorter than the Form 990, this is available for tax exempt not-for-profits with annual gross receipts under $ 500,000 and total assets of less than $2.5 million.Form 990-N: This “electronic postcard” is available for tax exempt not-for-profits with annual gross receipts under $ 50,000 ($ 25,000 for tax years prior to 2011).Unrelated Business Income TaxTax-exempt organizations are required to pay tax (at the corporate rate) on income generated from a trade or business unrelated to the entity’s tax-exempt purposes The purpose of the tax is to prevent nonprofits from having an “unfair” tax advantage over business enterprises with competing goods and servicesUnrelated Business Income Tax Even unrelated business income will be exempt from income tax if the activity is:Not carried on regularlyRun by volunteersInvolves sales of donated itemsOperated for convenience of employees and patrons. Income Exempt from UBITSome income is given specific exemption:Royalties, dividends, interest and annuitiesResearch revenuesIncome from public entertainment at a fairRevenues from labor, agriculture, or business trade showsIncome from rental or exchange of membership lists Part 3: Performance EvaluationCommon size analysisIn common size analysis, all items on a financial statement are scaled, typically by the largest amount appearing on that statement. Items on balance sheets are divided by total assets Items appearing on operating statements are commonly divided by total revenuesThese amounts are then compared to:Earlier yearsOther governments Financial ratios are used to convert information to a more understandable form. The most straightforward form of ratio analysis is common size analysis.Performance Evaluation - RatiosTo compare entities of varying size, it is useful to compute financial ratiosThe relevance of financial ratios depends on the type of organization:Not-for-profit RatiosGovernmental RatiosNot-for-Profit RatiosA. Program Expense Ratio: Program Service Expenses Total Expenses What proportion of each dollar is used on programs? B. Fundraising Efficiency: Fundraising Expenses Contribution Revenue How much does it cost to raise a dollar of contributions? Not-for-Profit Ratios, cont’dWorking Capital Ratio (Current Assets – Current Liabilities) Total ExpensesIf multiply by 12 months: How many months of operating expenses are available in working capital?Governments:Users of Financial StatementsCitizens/votersLegislative and oversight officialsInvestors and CreditorsBond Markets and Financial AnalysisThe CAFR is a major data source for professional bond rating agencies such asMoody’s, Standard and Poor’s, Fitch’s Investors ServicesBonds are rated from Aaa to C The financial condition of state and local governments affects the cost of debt and/or bond insurance. Common Financial Ratios –  Financial positionGovernment-wide statements (governmental activities)Unrestricted Net Position: Total Expenses: Governmental Activities General Fund fund-basis statements Unassigned Fund Balance Total Expenditures + Other Financing UsesThis ratio may be calculated on government-wide or fund levelThis is a measure of the availability of resources to meet expenses. Larger values indicate stronger financial condition.Common Financial Ratios –  Liquidity: Quick RatioCash + Current InvestmentsCurrent LiabilitiesA measure of the government’s ability to finance short-term obligations. Higher values indicate greater liquidity.Common Financial Ratios –  Solvency - LeverageTotal Liabilities – Deferred OutflowsTotal Assets – Deferred InflowsThis should be measured on the government-wide level since governmental funds do not report long-term liabilitiesA measure of the proportion of a government’s assets that are financed with debt. Small values indicate greater solvency.Common Financial Ratios –  Solvency - Coverage ratio – debt service coverageEnterprise fund Statement of Cash Flows:Cash Flows from Operations Interest Paid + Payments of Principal This ratio may only be directly measured for the enterprise funds since those funds prepare statements of cash flowIndicates the availability of cash generated to meet current obligations on outstanding debt. Higher values indicate greater solvencyCommon Financial Ratios –  Solvency - Debt service to total expendituresPrincipal and Interest ExpenditureTotal Expenditures: General and Debt Service FundThis information is drawn from the fund-basis financial statements of the governmental type fundsA measure of the degree to which governmental expenditures are committed to debt service. Low values indicate greater flexibility and ability to manage additional debt.Ability to Pay Debt per capitaTotal LiabilitiesPopulationThis should be measured on the government-wide level since governmental funds do not report long-term liabilitiesA measure of the government’s ability to service debt or incur additional debt. Low values indicate greater flexibility and ability to manage additional debt.Ability to Pay Debt to assessed value of propertyTotal LiabilitiesAssessed Value of PropertyThis should be measured on the government-wide level since governmental funds do not report long-term liabilitiesA measure of the government’s ability to service debt or incur additional debt. Low values indicate greater flexibility and ability to manage additional debt.Service Efforts and Accomplishments ReportingBecause the bottom line is not a good indicator of government performance, governments often provide non-financial performance measures.SEA Levels of ReportingInput – resources dedicated to a problemOutput – the quantity of service providedOutcome – the extent to which results are achieved or needs are satisfiedEfficiency – relate costs (inputs) to output measuresCost Outcome – relate inputs to outcomes