Audit and Accounting Guide: State and Local Governments 2018

932 Pages·2018·6.46 MB·English

by  AICPA

Audit and
Accounting Guide

State and Local Governments
March 1, 2018
23574-349
Copyright © 2018 by
American Institute of Certified Public Accountants. All rights reserved.
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ISBN 978-1-94830-625-6
StateandLocalGovernments iii
Preface
(UpdatedasofMarch1,2018)
Prepared by the State and Local Government Audit Guide Revision
TaskForce.
About AICPA Guides
ThisAICPAGuidehasbeendevelopedbytheAICPAStateandLocalGovern-
ment Audit Guide Revision Task Force (task force) to assist practitioners in
performing and reporting on their audit engagements and to assist manage-
mentinthepreparationoftheirfinancialstatementsinconformitywithU.S.
generallyacceptedaccountingprinciples(GAAP).
An AICPA Guide containing auditing guidance related to generally accepted
auditing standards (GAAS) is recognized as an interpretive publication as
defined in AU-C section 200, Overall Objectives of the Independent Auditor
andtheConductofanAuditinAccordanceWithGenerallyAcceptedAuditing
Standards.1Interpretivepublicationsarerecommendationsontheapplication
ofGAASinspecificcircumstances,includingengagementsforentitiesinspe-
cializedindustries.
InterpretivepublicationsareissuedundertheauthorityoftheAICPAAuditing
StandardsBoard(ASB)afterallASBmembershavebeenprovidedanoppor-
tunitytoconsiderandcommentonwhethertheproposedinterpretivepublica-
tionisconsistentwithGAAS.ThemembersoftheASBhavefoundtheauditing
guidanceinthisguidetobeconsistentwithexistingGAAS.
Although interpretive publications are not auditing standards, AU-C section
200 requires the auditor to consider applicable interpretive publications in
planningandperformingtheauditbecauseinterpretivepublicationsarerele-
vanttotheproperapplicationofGAASinspecificcircumstances.Iftheauditor
doesnotapplytheauditingguidanceinanapplicableinterpretivepublication,
1 AllAU-CsectionscanbefoundinAICPAProfessionalStandards.
©2018, AICPA AAG-SLG
iv StateandLocalGovernments
the auditor should document how the requirements of GAAS were complied
withinthecircumstancesaddressedbysuchauditingguidance.
TheASBisthedesignatedseniorcommitteeoftheAICPAauthorizedtospeak
fortheAICPAonallmattersrelatedtoauditing.Conformingchangesmadeto
theauditingguidancecontainedinthisguideareapprovedbytheASBChair
(orhisorherdesignee)andtheDirectoroftheAICPAAuditandAttestStan-
dardsStaff.Updatesmadetotheauditingguidanceinthisguideexceedingthat
ofconformingchangesareissuedafterallASBmembershavebeenprovidedan
opportunitytoconsiderandcommentonwhethertheguideisconsistentwith
theStatementsonAuditingStandards(SASs).
Anyauditingguidanceinaguideappendixorchapterappendixinaguide,orin
anexhibit,althoughnotauthoritative,isconsideredan"otherauditingpubli-
cation."Inapplyingsuchguidance,theauditorshould,exercisingprofessional
judgment, assess the relevance and appropriateness of such guidance to the
circumstancesoftheaudit.Althoughtheauditordeterminestherelevanceof
otherauditingguidance,auditingguidanceinaguideappendixorexhibithas
beenreviewedbytheAICPAAuditandAttestStandardsstaffandtheauditor
maypresumethatitisappropriate.
AnAICPAGuidecontainingattestationguidanceisrecognizedasaninterpre-
tive publication as defined in AT-C section 105, Concepts Common to All At-
testationEngagements(AICPA,ProfessionalStandards).Interpretivepublica-
tionsarerecommendationsontheapplicationofStatementsonStandardsfor
AttestationEngagements(SSAEsorattestationstandards)inspecificcircum-
stances,includingengagementsforentitiesinspecializedindustries.Interpre-
tive publications are issued under the authority of the ASB.The members of
theASBhavefoundtheattestationguidanceinthisguidetobeconsistentwith
existingSSAEs.
A practitioner should be aware of and consider the guidance in this AICPA
Guide applicable to his or her attestation engagement. If the practitioner
does not apply the attestation guidance included in an applicable interpre-
tivepublication,thepractitionershoulddocumenthowtherequirementsofthe
SSAEwerecompliedwithinthecircumstancesaddressedbysuchattestation
guidance.
Anyattestationguidanceinaguideappendixorchapterappendixinaguide,
orinanexhibit,althoughnotauthoritative,isconsideredan"otherattestation
publication."Inapplyingsuchguidance,thepractitionershould,exercisingpro-
fessionaljudgment,assesstherelevanceandappropriatenessofsuchguidance
tothecircumstancesoftheengagement.Althoughthepractitionerdetermines
therelevanceofotherattestationguidance,suchguidanceinaguideappendix
or exhibit has been reviewed by the AICPA Audit and Attest Standards staff
andthepractitionermaypresumethatitisappropriate.
TheASBandAICPAAccountingandReviewServicesCommittee(ARSC)are
the designated senior committees of the AICPA authorized to speak for the
AICPAonallmattersrelatedtoattestation.Conformingchangesmadetothe
attestationguidancecontainedinthisguideareapprovedbytheASBChair(or
hisorherdesignee)andtheDirectoroftheAICPAAuditandAttestStandards
Staff.Updatesmadetotheattestationguidanceinthisguideexceedingthatof
conformingchangesareissuedafterallASBmembershavebeenprovidedan
opportunitytoconsiderandcommentonwhethertheguideisconsistentwith
theSSAEs.
AAG-SLG ©2018, AICPA
StateandLocalGovernments v
TheFinancialReportingExecutiveCommittee(FinREC)isthedesignatedse-
niorcommitteeoftheAICPAauthorizedtospeakfortheAICPAintheareasof
financialaccountingandreporting.Conformingchangesmadetothefinancial
accountingandreportingguidancecontainedinthisguideareapprovedbythe
FinRECChair(orhisorherdesignee).Updatesmadetothefinancialaccount-
ingandreportingguidanceinthisguideexceedingthatofconformingchanges
are approved by the affirmative vote of at least two-thirds of the members of
FinREC.
Thisguidedoesthefollowing:
(cid:2)
IdentifiescertainrequirementssetforthinGAAPforgovernmen-
(cid:2) talentities.
Describes FinREC's understanding of prevalent or sole industry
practiceconcerningcertainissues.Inaddition,thisguidemayin-
dicate that FinREC expresses a preference for the prevalent or
soleindustrypractice,oritmayindicatethatFinRECexpresses
apreferenceforanotherpracticethatisnottheprevalentorsole
industrypractice;alternatively,FinRECmayexpressnoviewon
(cid:2) thematter.
Identifies certain other, but not necessarily all, industry prac-
ticesconcerningcertainaccountingissueswithoutexpressingFin-
(cid:2) REC'sviewsonthem.
Provides guidance that has been supported by FinREC on the
accounting,reporting,or disclosure treatment of transactions or
eventsthatarenotsetforthinGAAPforgovernmentalentities.
Accounting guidance for governmental entities included in an AICPA Guide,
andclearedbyGASB,isasourceofauthoritativeGAAPdescribedincategory
BofthehierarchyofGAAPforstateandlocalgovernmentalentitiesasdefined
in GASB Statement No.76,The Hierarchy of Generally Accepted Accounting
PrinciplesforStateandLocalGovernments.Theaccountingprovisionsofthis
guide that have been cleared by GASB are formatted in orange font for the
reader within the text of the guide and are noted in appendix B, "Category
B Guidance." AICPA members should be prepared to justify departures from
GAAPasdiscussedinthe"AccountingPrinciplesRule"(ETsec.1.320.001and
2.320.001).2
AICPA Guides may include certain content presented as "Supplement," "Ap-
pendix," or "Exhibit." A supplement is a reproduction,in whole or in part,of
authoritative guidance originally issued by a standard setting body (includ-
ing regulatory bodies) and applicable to entities or engagements within the
purviewofthatstandardsetter,independentoftheauthoritativestatusofthe
applicableAICPAGuide.Bothappendixesandexhibitsareincludedforinfor-
mationalpurposesandhavenoauthoritativestatus.
Purpose and Applicability
TheAICPAdevelopedthisguidetohelpauditorsunderstandtheGAAPappli-
cabletothefinancialstatementsofstateandlocalgovernmentsandauditand
report on those financial statements in accordance with GAAS.This guide is
designedasatoolforauditorsofgovernmentalentitiesofallsizes.Thenature,
2 AllETsectionscanbefoundinAICPAProfessionalStandards.
©2018, AICPA AAG-SLG
vi StateandLocalGovernments
timing,andextentofauditingproceduresinaparticularengagementaremat-
tersofprofessionaljudgmentandwillvarydependinguponnumerousfactors,
including the size of the entity and its organizational structure and internal
control,materialityconsiderations,theauditor'sassessmentofrisk,andappli-
cablelaws,regulations,andprovisionsofgrantsandcontracts.
Thisguideappliestoallstateandlocalgovernmentsasdefinedinchapter1,
"OverviewandIntroduction."CertainotherAICPAGuidesalsoapplytoaudits
of certain state and local governments,as discussed in chapter 1.In particu-
lar,auditors who perform audits under Government Auditing Standards,the
Single Audit Act Amendments of 1996,and Title 2 U.S.Code of Federal Reg-
ulationsPart200,UniformAdministrativeRequirements,CostPrinciples,and
AuditRequirementsforFederalAwards,shouldrefertotheAICPAAuditGuide
GovernmentAuditingStandardsandSingleAudits.
Limitations and Coverage
This guide is designed to provide guidance to auditors who are new to state
and local governmental accounting and auditing as well as to auditors expe-
rienced in state and local governmental accounting and auditing.This guide
assumesthattheauditorhasexpertiseinaccountingandauditing,ingeneral,
butnotnecessarilyinthespecializedaccountingandauditingpracticesappli-
cabletostateandlocalgovernments.Therefore,theguideconcentratesonthe
accountingstandardsandauditingproceduresthatareuniquetoorsignificant
forthosegovernments.Thisguidealsoisintendedtobeusefulinprovidingac-
countingandfinancialreportingguidancetopreparersofgovernmentalfinan-
cialstatements.Theguidancepresentedhereisnotallinclusive;itislimitedto
certainmattersthatwarrantspecialemphasisorthatexperiencehasindicated
maybeuseful.Althoughthisguidedoesnotincorporate,repeat,orsummarize
all authoritative pronouncements that apply to state and local governments,
itdoesconsiderrelevantguidancecontainedinauthoritativepronouncements
throughthoseindicatedinthispreface.
Authoritativepronouncementsshouldbeappliedbasedontheeffectivedates
inthepronouncements.TheAICPAstaffwillmakeconformingchangestothis
guideannuallytoincorporaterelevantguidanceinnewaccountingandaudit-
ing pronouncements.Users of this guide should consider pronouncements is-
suedafterthoselistedinthisprefacetoconsidertheireffectonstateandlocal
governments.
Recognition
2018GuideEdition
AICPASeniorCommittees
AuditingStandardsBoard
MichaelJ.Santay,Chair
MarciaL.Marien,Member
FinancialReportingExecutiveCommittee
JimDolinar,Chair
TheAICPAgratefullyacknowledgesJohnGoodforhisvaluableassistancein
updatingthe2018editionoftheguide.
The AICPA also gratefully acknowledges those members of the AICPA State
andLocalGovernmentExpertPanelwhoreviewedorotherwisecontributedto
AAG-SLG ©2018, AICPA
StateandLocalGovernments vii
thedevelopmentofthiseditionoftheguide:CoreyArvizu,JoelBlack,Stephen
Blann,David Bullock,Edward Chait,Sharon Edmundson,Michelle Horaney,
JeffMarkert,TamaraMiramontes,FloOstrum,ChrisPembrook,ReemSamra,
RobertScott,KevinSmith,MichelleWatterworth,WalkerWilkerson,andthe
chairoftheExpertPanel,HeatherAcker.
AICPAStaff
ShavonnR.Pegram
Manager
ProductManagementandDevelopment—PublicAccounting
LauraHyland
SeniorManager
GovernmentalAuditingandAccounting—PublicAccounting
andStaffLiaisontothe
AICPAStateandLocalGovernmentExpertPanel
Guidance Considered in This Edition
ThiseditionoftheguidehasbeenmodifiedbytheAICPAstafftoincludecer-
tainchangesnecessaryduetotheissuanceofauthoritativeguidancesincethe
guidewasoriginallyissued,andotherrevisionsasdeemedappropriate.Rele-
vant guidance issued through March 1,2018,has been considered in the de-
velopmentofthiseditionoftheguide.However,thisguidedoesnotincludeall
audit,accounting,reporting,andotherrequirementsapplicabletoanentityor
aparticularengagement.Thisguideisintendedtobeusedinconjunctionwith
allapplicablesourcesofrelevantguidance.
Relevant guidance that is issued and effective on or before March 1,2018,is
incorporateddirectlyinthetextofthisguide.Additionally,authoritativeguid-
anceforthefollowingGASBstatementsarealsoincorporateddirectlyintothe
textofthisguide:GASBStatementNos.75,AccountingandFinancialReport-
ingforPostemploymentBenefitsOtherThanPensions;85,Omnibus2017;and
86,CertainDebtExtinguishmentIssues(alleffectiveforperiodsbeginningafter
June15,2017).AuthoritativeguidanceforSASNo.133,AuditorInvolvement
WithExemptOfferingDocuments(AU-Csec.945),effectiveforexemptoffering
documents initially distributed, circulated or submitted on or after June 15,
2018,isalsoincorporateddirectlyintothetext.
Relevantguidanceissuedbutnotyeteffectiveasofthedateoftheguideand
not becoming effective until after June 30,2018,is referenced in a "guidance
update"box;thatis,aboxthatcontainssummaryinformationontheguidance
issuedbutnotyeteffective.
In updating this guide,all guidance issued up to and including the following
wasconsidered,butnotnecessarilyincorporated,asdeterminedbasedonap-
plicability:
(cid:2)
GASBStatementNo.87,Leases
(cid:2)
GASBInterpretationNo.6,RecognitionandMeasurementofCer-
tain Liabilities and Expenditures in Governmental Fund Finan-
cialStatements—aninterpretationofNCGAStatements1,4,and
5; NCGA Interpretation 8; and GASB Statements No. 10, 16,
and18
©2018, AICPA AAG-SLG
viii StateandLocalGovernments
(cid:2)
GASBTechnicalBulletinNo.2008-1,DeterminingtheAnnualRe-
(cid:2) quiredContributionAdjustmentforPostemploymentBenefits
GASBConceptsStatementNo.6,MeasurementofElementsofFi-
(cid:2) nancialStatements
GASBImplementationGuideNo.2017-3,AccountingandFinan-
cial Reporting for Postemployment Benefits Other Than Pensions
(cid:2) (andCertainIssuesRelatedtoOPEBPlanReporting)
(cid:2) SASNo.133
Statement of Position 13-2,Performing Agreed-Upon Procedures
Engagements That Address the Completeness, Mapping, Consis-
tency,orStructureofXBRL-FormattedInformation(AICPA,Pro-
(cid:2) fessionalStandards,AUDsec.55)
SSAENo.18,AttestationStandards:ClarificationandRecodifica-
tion(AICPA,ProfessionalStandards)
Usersofthisguideshouldconsiderguidanceissuedsubsequenttothoseitems
listed previously to determine their effect, if any, on entities covered by this
guide.Indeterminingtheapplicabilityofrecentlyissuedguidance,itseffective
dateshouldalsobeconsidered.
The changes made to this edition of the guide are identified in the Schedule
ofChangesappendix.Thechangesdonotincludeallthosethatmightbecon-
sidered necessary if the guide were subjected to a comprehensive review and
revision.
GASBstandardsquotedarefromtheGASBStatements,ConceptsStatements,
Interpretations,andTechnicalBulletins,©2017,FinancialAccountingFounda-
tion.Allrightsreserved.Usedbypermission.
Terms Used to Define Professional Requirements
in This AICPA Guide
Any requirements described in this guide are normally referenced to the ap-
plicablestandardsorregulationsfromwhichtheyarederived.Generally,the
termsusedinthisguidedescribingtheprofessionalrequirementsoftherefer-
encedstandardsetter(forexample,theASB)arethesameasthoseusedinthe
applicablestandardsorregulations(forexample,mustorshould).
Readersshouldrefertotheapplicablestandardsandregulationsformorein-
formation on the requirements imposed by the use of the various terms used
todefineprofessionalrequirementsinthecontextofthestandardsandregula-
tionsinwhichtheyappear.
Certainexceptionsapplytothesegeneralrules,particularlyinthosecircum-
stanceswhentheguidedescribesprevailingandpreferredindustrypractices
fortheapplicationofastandardorregulation.Inthesecircumstances,theap-
plicableseniorcommitteeresponsibleforreviewingtheguide'scontentbelieves
theguidancecontainedhereinisappropriateforthecircumstances.
Applicability of Quality Control Standards
QCsection10,AFirm'sSystemofQualityControl(AICPA,ProfessionalStan-
dards),addressesaCPAfirm'sresponsibilitiesforitssystemofqualitycontrol
for its accounting and auditing practice.A system of quality control consists
AAG-SLG ©2018, AICPA
StateandLocalGovernments ix
ofpoliciesthatafirmestablishesandmaintainstoprovideitwithreasonable
assurancethatthefirmanditspersonnelcomplywithprofessionalstandards,
aswellasapplicablelegalandregulatoryrequirements.Thepoliciesalsopro-
vide the firm with reasonable assurance that reports issued by the firm are
appropriateinthecircumstances.
QCsection10appliestoallCPAfirmswithrespecttoengagementsintheirac-
countingandauditingpractice.Inparagraph.13ofQCsection10,anaccount-
ingandauditingpracticeisdefinedas"apracticethatperformsengagements
covered by thissection,which are audit,attestation,compilation,review,and
anyotherservicesforwhichstandardshavebeenpromulgatedbytheAICPA
ASBortheARSCunderthe"GeneralStandardsRule"(ETsec.1.300.001)or
the"ComplianceWithStandardsRule"(ETsec.1.310.001)oftheAICPACode
of Professional Conduct. Although standards for other engagements may be
promulgatedbyotherAICPAtechnicalcommittees,engagementsperformedin
accordance with those standards are not encompassed in the definition of an
accountingandauditingpractice."
InadditiontotheprovisionsofQCsection10,readersshouldbeawareofother
sectionswithinAICPAProfessionalStandardsthataddressqualitycontrolcon-
siderations,includingthefollowingprovisionsthataddressengagementlevel
quality control matters for various types of engagements that an accounting
andauditingpracticemightperform:
(cid:2)
AU-Csection220,QualityControlforanEngagementConducted
(cid:2) inAccordanceWithGenerallyAcceptedAuditingStandards
(cid:2) AT-Csection105
AR-C section 60,General Principles for Engagements Performed
inAccordanceWithStatementsonStandardsforAccountingand
ReviewServices(AICPA,ProfessionalStandards)
Because of the importance of engagement quality,this guide includes an ap-
pendix,"OverviewofStatementsonQualityControlStandards."Thisappendix
summarizes key aspects of the quality control standard.This summarization
shouldbereadinconjunctionwithQCsection10,AU-Csection220,AT-Csec-
tion105,andAR-Csection60,asapplicable.
AICPA.org Website
TheAICPAencouragesyoutovisititswebsiteataicpa.org,theGovernmental
AuditQualityCenter(GAQC)websiteatwww.aicpa.org/gaqc,andtheFinancial
ReportingCenteratwww.aicpa.org/frc.The"GASBMatters"pageontheGAQC
websitewillbeofparticularinteresttoauditorsofstateandlocalgovernments.
The GAQC is a voluntary membership center for CPA firms and state audit
organizationsdesignedtoimprovethequalityandvalueofgovernmentalau-
dits.ForthepurposesoftheGAQC,governmentalauditsareperformedunder
GovernmentAuditingStandardsandareauditsandattestationengagements
of federal,state,or local governments;not-for-profit entities;and certain for-
profitorganization,suchashousingprojectsandcollegesanduniversitiesthat
participateingovernmentalprogramsorreceivegovernmentalfinancialassis-
tance.TheGAQCwebsiteprovidesinformationandresourcestothoseperform-
inggovernmentalaudits.
The Financial Reporting Center supports members in the execution of high-
quality financial reporting. Whether you are a financial statement preparer
©2018, AICPA AAG-SLG
x StateandLocalGovernments
or a member in public practice, this center provides exclusive member-only
resources for the entire financial reporting process and timely and relevant
news,guidance,andexamplessupportingthefinancialreportingprocess.An-
other important focus of the Financial Reporting Center is keeping those in
publicpracticeuptodateonissuespertainingtopreparation,compilation,re-
view,audit,attestation,assurance,andadvisoryengagements.Certaincontent
ontheAICPA's websites referenced inthisguidemayberestricted to AICPA
membersonly.
Select Recent Developments Significant to This Guide
Attestation Clarity Project
To address concerns over the clarity,length,and complexity of its standards,
the ASB established clarity drafting conventions and undertook a project to
redraftallthestandardsitissuesinclarityformat.TheredraftingofSSAEsin
SSAENo.18representstheculminationofthatprocess.
TheattestationstandardsaredevelopedandissuedintheformofSSAEsand
arecodifiedintosections.SSAENo.18recodifiesthe"AT"sectionnumbersdes-
ignatedbySSAENos.10–17usingtheidentifier"AT-C"todifferentiatethesec-
tionsoftheclarifiedattestationstandards(AT-Csections)fromtheattestation
standardsthataresupersededbySSAENo.18(ATsections).
The AT sections in AICPA Professional Standards remain effective through
April2017,bywhichtimesubstantiallyallengagementsforwhichtheATsec-
tionswerestilleffectiveareexpectedtobecompleted.Theclarifiedattestation
standardsfoundinAT-Csectionsareeffectiveforpractitioners'reportsdated
onorafterMay1,2017.
AAG-SLG ©2018, AICPA