A look inside the audit process - presented to the RI Government Finance Officers Association.

1. March 9, 2012
Presented by:
Susan Johnson, Principal
Judith Ventura Enright, Senior Manager

2. • Deliverables
• Audit Phases and Timeline
• Readiness Recommendations
• Government-wide Conversion
2

3. • Audit report, including report on supplementary information
• Report of deficiencies noted in internal control
• Business advice
• Single Audit reports
• Agreed Upon Procedures report for UCOA
• If engaged, draft financial statements, including notes and
supplemental schedules. Supplemental safeguards required.
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4. • Planning and Interim
• Fieldwork
• Completion and Presentation to Governing Bodies
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5. • Planning and Interim - May
• Client Preparation – June to September
• Fieldwork – Mid-September
• Completion and Presentation to Governing Bodies –
November/December
Current timeline often lacks flexibility for governing body
meetings and results in last minute submittal to State
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6. • Communicate planning process to governing bodies
• Obtain/update understanding of client and industry
• Preliminary analytical procedures
• Risk assessments
• Create/modify audit program
• Agree upon scheduling of fieldwork
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7. Activities performed:
• Meet with members of governing body
• Read minutes – Town Council, Audit Committee, School
Committee, and others as necessary
• Read major agreements and contracts
Bonds issued, significant grants, significant additions/disposals
of property, etc.
• Analytical procedures on interim account balances
• Single audit considerations - interim Schedule of
Expenditures of Federal Awards
7

8. Activities performed:
• Inquiries of personnel performing significant processes (i.e.
payroll) and walkthrough of internal controls
• Inquiries of members of management and governing body
• Identification of confirmations deemed necessary (i.e. cash,
investments, debt) and related follow-up
• Review schedules and analysis required and agree upon
timeline for completion.
8

9. • Test significant account balances, classes of transactions, and
disclosures
• Obtain source documents
• Obtain explanations from client, corroborate where necessary
• Coordinate testing with Single Audit
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10. Significant Areas Tested:
• Cash and investments
• Taxes and other significant accounts receivable and related
revenue
• Capital assets
• Financing
• Accounts payable, accrued expenses and other liabilities (i.e.
claims), including compensated absences
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11. Significant Areas Tested:
• Interfund balances
• Fund balances/net assets
• General procedures, revenue and expense analytical
procedures and testing of significant journal entries
• Procedures specific to Trust Funds (i.e. Private Pensions,
OPEB)
• Disclosures in the financial statements
11

12. Activities Performed:
• Test accuracy of templates prepared by client that include
ending balances and footnote presentation
• Test client’s cash reconciliations
• Agree investment balances and details to confirmations or
original statements
• Test insured/collateralized status
• If significant, test interest income
12

13. Activities Performed:
• Test accuracy of tax roll-forward schedule to source
documents (financial statement format)
• Verify current tax levy through minutes and certified
“Assessor’s Statement of Assessed Values & Tax Levy”
• Test 60-day revenue
• Test significant abatements to authorizations
• Evaluate reasonableness of allowance for taxes receivable
13

14. Activities Performed:
• Evaluate existence and collectability of significant receivables
(subsequent cash receipts)
• Test recording of other significant receivables based on
measurement basis (i.e.– collected within reasonable period
of time after year end (60 days) (deferred revenue)
• Apply analytical procedures to identify activity outside
historical/normal trends
• Substantive testing of cash collections and application to
taxpayers’ accounts, if necessary
14

15. Activities Performed:
• Test accuracy of roll-forward schedule (financial statement
format)
• Vouch significant additions and disposals
• Evaluate depreciation methods and lives in accordance with
GAAP
• Obtain/test accuracy of information needed for government-wide
conversion
Depreciation by function
Capital asset additions by function
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16. Activities Performed:
• Test accuracy of roll-forward schedule (financial statement
format)
• Test new additions to source documents, including bond
premiums/discounts
Includes capital leases
• Agree ending balances and details to confirmations
• Test interest expense and accrued interest
16

17. Activities Performed:
• Search for unrecorded liabilities – subsequent disbursements
journal
• Test accrued payroll
• Test accrued compensated absences
• Analytical procedures applied to identify activity outside
historical/normal trends
• Inquiry of legal counsel
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18. Activities Performed:
• Agree all balances to respective trial balances and ensure
balances net to zero between funds
• Includes Due to/from accounts and transfers
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19. Activities Performed:
• Test roll-forward of balances from prior year’s financial
statements
• Test classification of balances among categories (GASB 54)
for fund balances (Fund financial statements) and net assets
(government-wide financial statements)
• Test disclosure of deficit fund balances
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20. Activities Performed:
• Reconcile wages paid per payroll records to wages recorded
in trial balances, if deemed necessary
• Test significant journal entries
• Apply analytical procedures (on amounts not tested
elsewhere):
Actual expenditures to budgeted expenditures
Actual expenditures to prior year expenditures
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21. Activities Performed:
• Review reconciliation of contributions to trust reports and the
fund making the contributions
General Fund or School Unrestricted Fund
• Review reconciliation of distributions to trust reports
• Test eligibility, participant contributions and distributions
• Read actuarial valuations and compare to disclosure in footnotes
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22. Activities Performed:
• Workpapers structured to support balances and disclosures
• Need latest State pension report
• Test completeness of commitment and contingency disclosures
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23. Activities Performed:
• Final analytical procedures
• Discuss with management adjustments and waived adjustments (throughout
engagement)
• Agree amounts and disclosures in draft financial statements to audited trial
balances and workpapers
 Management responsible for preparation of draft financial statements, but may engage
accountants, if safeguards are implemented
• Presentation of financial statements and control deficiencies identified to
governing bodies
 Important to discuss who has authority to accept the draft financial statements (i.e.
Town Administrator, Audit Committee, Town Council)
• Issuance of the financial statements and other deliverables
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24. • Establish policies & procedures for reconciling significant
account balances and classes of transactions on a monthly basis
Reconciliation of taxes receivable and revenue - include tax collection
system, assessment system, and general ledger
Reconciliation of interfund balances (Due to/From)
 Reconciled on periodic basis (at least quarterly)
 For accounts with a high volume of transactions, reconcile monthly (i.e. Town General
Fund and School Unrestricted Fund)
 Create checklist for normal/recurring interfund transactions and use to ensure entries are
current (i.e. allocation of payroll, insurance)
 Year-end reconciliation should occur as soon as June is closed so variances can be
researched and corrected (impacts ability to provide final trial balances to auditors)
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25. • Schedule of Expenditures of Federal Awards
Update details as awards are received
Enter amounts after year-end close
• Update capital asset system as expenditures are made
• Set up an “Audit” folder on your internal network
Save audit relevant information as soon as it is received (significant grant
agreements, bond documents, purchase and sales agreements)
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26. • Prioritize work based on when it can be done, following can be
done in July:
Cash and investments
Financing flow-through
Accrued Compensated absences
Tax roll-forward and reconciliation – can be principally done in July and
then adjusted for 60-day rule, if applicable
Capital asset flow-through
Recording of pay-as-you-go payments to OPEB
Reconciling contributions received by Private Trusts to expenditures in the
Fund that makes them
Compare trial balances for current year to final audited prior year trial
balance to help identify items that may require follow-up – as soon as
June is closed
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27. • Maintain funds on the accounting basis applicable to them throughout
the year, i.e. Enterprise and Trust Funds on the accrual basis of
accounting
• Roll and revisit the MD & A during the year so that narrative
information presented is fresh, relevant, and focused on the
significant activities during the year
• Provide original and amended budgets, exported to Excel, to auditors
on first day of fieldwork. Final amendments can be provided later, if
necessary.
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28. 28

29. • Government-wide, Proprietary Funds, and Fiduciary
Funds:
economic resources/full accrual
• Governmental Funds:
financial resources/modified accrual
• Budgetary Statement:
budgetary basis with modified accrual
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30. • Economic resources/full accrual:
Focus on total economic resources and recognition of increases and
decreases in economic resources as soon as the underlying event or
transaction occurs
• Financial resources/modified accrual:
Focus on resources available for spending and recognition of increases
and decreases in financial resources only to the extent they reflect near-term
inflows or outflows of cash
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31. 31
Total Governmental
Funds- Per Balance
Sheet Governmental
Funds Debt
Capital
Assets
Deferred
Revenue
Governmental
Activities Per
Statement of Net
Assets
Assets
Cash and cash equivalents $ 17,340,000 $ 17,340,000
Investments 4,382,000 4,382,000
Property taxes receivable 1,468,000 1,468,000
Other receivables 2,310,000 2,310,000
Due from other funds 1,946,000 1,946,000
Capital assets net of depreciation $ 29,825,000 29,825,000
Total Assets 27,446,000 - 29,825,000 - 57,271,000
Liabilities and Fund Balances
Liabilities:
Accounts payable and accrued expenses 983,000 983,000
Due to other funds 2,546,000 2,546,000
Deferred revenue 1,390,000 $ (1,290,000) 100,000
Long term obligations $ 17,000,000 17,000,000
Total liabilities 4,919,000 17,000,000 - (1,290,000) 20,629,000
Total fund balances/net assets 22,527,000 (17,000,000) 29,825,000 1,290,000 36,642,000
Total liabilities and fund balances/net
assets $ 27,446,000 - $ 29,825,000 - $ 57,271,000

32. 32
Total Governmental
Funds- Per Statement of
revenues, expenditures,
and changes in fund
balances Debt
Capital
Assets
Deferred
Revenue
Governmental
Activities Per
Statement of
Activities
Revenues
Property Taxes $ 28,500,000 $ 225,000 $ 28,725,000
Grants 1,200,000 25,000 1,225,000
Licenses, permits, and fees 975,000 975,000
Other 225,000 225,000
Total Revenues 30,900,000 - - 250,000 31,150,000
Expenditures:
Expenditures (general, public safety, education, etc) 27,200,000 $ 1,000,000 28,200,000
Debt Service 1,950,000 $ (1,200,000) 750,000
Capital Outlay 1,650,000 (1,650,000) -
Total Expenditures 30,800,000 (1,200,000) (650,000) 28,950,000
Excess of revenues over expenditures 100,000 1,200,000 650,000 250,000 2,200,000
Other financing sources (uses):
Bond Proceeds 1,000,000 (1,000,000)
Total other financing sources (uses) 1,000,000 (1,000,000) - - -
Excess of revenues and other financing sources over
expenditures and other financing uses 1,100,000 200,000 650,000 250,000 2,200,000
Fund balances, beginning of the year 21,427,000 (17,200,000) 29,175,000 1,040,000 34,442,000
Fund balances, end of year $ 22,527,000 $ (17,000,000) $ 29,825,000 $ 1,290,000 $ 36,642,000

33. • General information
 Prior year outstanding balance $17,200,000
 Current year new bond issuances $1,000,000
 Current year principal payments $1,200,000
 Current year outstanding balance $17,000,000
• Accounting in fund financial statements
 Outstanding balance is not recorded
 Principal payments are recorded as expenditures
 New issuances are recorded as other financing sources
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34. • Accounting in government-wide financial statements
 Outstanding balance is recorded as liabilities
 Principal payments are recorded as a reduction of liabilities
 New issuances are recorded as an addition to the liabilities
• Conversion
 Add outstanding balance to statement of net assets
 Remove principal payments from expenditures
 Remove new issuances from other financing sources
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35. 35
Long term obligations per the fund financial statements -
Add prior year balance $ 17,200,000
Add current year debt issuances 1,000,000
Less current year principal payments (1,200,000)
Long term obligations per the government-wide financial statements $ 17,000,000
Debt service expenditures per fund financial statements $ 1,950,000
Less current year principal payments (1,200,000)
Debt service expense per government wide-financial statements * $ 750,000
* Remaining debt service on the government -wide financial statements should be interest expense
Other financing sources per fund financial statements $ 1,000,000
Less current year debt issuances (1,000,000)
Other financing sources per government wide-financial statements -

36. • General information
 Prior year capital assets, net of depreciation $29,175,000
 Current year additions of $1,650,000
 Current year depreciation expense of $1,000,000
 Current year capital assets, net of depreciation $29,825,000
• Accounting in fund financial statements
 Current year additions are expenditures
 Depreciation is not recorded
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37. • Accounting in government-wide financial statements
 Current year additions are recorded as assets
 Depreciation is recorded
• Conversion
 Current year additions removed from expenditures and
added to assets
 Depreciation recorded
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38. 38
Capital assets, net of depreciation per fund financial statements -
Add prior year capital assets, net of depreciation $ 29,175,000
Add current year additions 1,650,000
Less current year depreciation (1,000,000)
Capital assets, net of depreciation per government-wide financial statements $ 29,825,000
Capital outlay per fund financial statements $ 1,650,000
Less current year capital assets (1,650,000)
Capital outlay per government-wide financial statements -
Expenditures per fund financial statements (general, public safety, education, etc.) $ 27,200,000
Add current year depreciation 1,000,000
Expenses per government-wide financial statements (general, public safety, education, etc.) $ 28,200,000

39. • General information
 Prior year grant receivable not received within 60 days
$40,000
 Current year grant receivable not received within 60 days
$65,000
 Prior year taxes receivable not received within in 60 days
$1,000,000
 Current year taxes receivable not received within 60 days
$1,225,000
 Current year grant revenue received but for which all grant
requirements have not yet been met $100,000
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40. • Accounting in fund financial statements
Property tax revenue - recognized when susceptible to accrual.
Susceptibility occurs when revenues are both measurable and available for
liquidating liabilities of the current period.
 “Measurable” means the amount of the transaction can be determined, and
 “Available” means collectible within the current period or soon enough thereafter to be
used to pay liabilities of the current period (i.e. 60 days).
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41. • Accounting in fund financial statements
 Grants
Where expenditure is the prime factor in determining eligibility, grant revenue is
recognized as allowable expenditures are made, provided the grants are collected during
the year or within 60 days subsequent to year-end.
 Prior to allowable expenditure, proceeds are recorded as deferred revenues.
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42. • Accounting in government-wide financial statements
Property taxes are recognized as revenue in the year for which they are
levied.
Grants and similar items are recognized as revenue as soon as all
eligibility requirements imposed by the grantor have been met.
• Conversion
Remove amounts deferred in the prior year due to the period availability
Add amounts deferred in the current year due to the period of availability
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43. 43
Deferred revenue per fund financial statements $ 1,390,000
Less taxes receivable not received within 60 days of year end $ (1,225,000)
Less grant revenue not received within 60 days of year end (65,000) (1,290,000)
Deferred revenue per government-wide financial statements * $ 100,000
* Remaining amount represents grant money received in advance of meeting
grant requirements (i.e. unearned revenue)

44. 44
Tax revenue per fund financial statements $ 28,500,000
Less prior year deferred revenue received in current year $ (1,000,000)
Add current year taxes receivable not received within 60 days
of year end 1,225,000 225,000
Tax revenue per government-wide financial statements * $ 28,725,000
* Tax revenue on government-wide should equal current year assessment,
less abatements, plus interest on past due amounts

45. 45
Grant revenue per fund financial statement statements $ 1,200,000
Less prior year deferred revenue received in the current year $ (40,000)
Add current year grant receivable not received within 60 days of
year-end 65,000 25,000
Grant revenue per government-wide financial statements * $ 1,225,000
* Grant revenue on government-wide financial statements should be equal to the total amount
of revenue for which all grant requirements have been met; regardless of when the cash is received.

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Susan Johnson: sjohnson@lgcd.com
Judith Ventura Enright: jenright@lgcd.com
LGC+D LLP
CPAs/Business Advisors
10 Weybosset Street ∙ Suite 700 ∙ Providence ∙ RI ∙ 02903
P [401] 421-4800 ∙ F [401] 421-0643
www.lgcd.com