AICPA National Governmental and

Not-for-Profit Training Program

NPO ADVANCED AUDITING

October 23, 2007

Presented by:
Flo Ostrum, Grant Thornton LLP
Objectives

• Economic and Industry Developments

• Affect of new auditing standards
• New regulatory developments
• Future auditing standards

© Grant Thornton
Economic And Industry Developments

• The State of the Economy

• The State of the Not-for-profits

© Grant Thornton
The State of the Economy

• In planning their audits, auditors need to

understand the economic conditions facing the
industry in which the client operates

© Grant Thornton
The State of the Economy

• Economic activities relating to factors such as

– interest rates,
– consumer confidence,
– overall economic expansion or contraction,
– inflation, and
– the labor market
• Are likely to have an impact on the organization’s
financial statements being audited.

© Grant Thornton
Critical strains to economy and business
environment

• Rising interest rates continuing from the prior year.

• Soaring gasoline prices, which may threaten
consumer spending, a vital tower of strength for
the U.S. economy also continued from the prior
year.
• Dangerously high and rising consumer debt levels.
• Negative savings rate.
• A softening housing boom in some markets.

© Grant Thornton
Risks

• Although the U.S. economy on the whole has been

quite favorable, these strains could upset economic
growth, possibly affecting your client’s operations
and therefore possibly impacting audit risk

•Such strains may impact discretionary consumer

spending and thereby decrease the willingness of
consumers to make contributions to not-for-profit
organizations

© Grant Thornton
Risks

• Decreased giving may:

– increase risk to improperly access restricted
funds
– increase risk to properly recognize restrictions
– increase risk in false reporting to obtain grants
– increase risk in false reporting to meet matching
requirements

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The State of Not-for-profits

• Growth industry
• As of 9/30/06 – 1.6 million
• Auditor expectations:
– regional and national conditions
– health of local labor market

© Grant Thornton
The State of Not-for-profits

• Corporate sponsorship
– goals of sponsors = goals of organization
• Funding Administrative Costs
• Retiring workforce
• Cyber donations

© Grant Thornton
Internet Fund-Raising

• The Internet - great way for charities to:

– raise awareness about a charity’s mission
– communicate with supporters
– email appeals, supplying new donors
– compelling government to give more, and
– stimulating donations

© Grant Thornton
Internet Fund-Raising

• Following Hurricane Katrina

– 45 percent of the funds that the Red Cross
received were through online fundraising
– 22 percent of funds raised online during the
2004 tsunami
– internet increasingly effective measure of
collecting funds in times of need

© Grant Thornton
E-Philanthropy

• Internet proven to be a powerful tool for helping not-

for-profits raise significant dollars
……auditor faces new challenges

© Grant Thornton
E-Philanthropy

• Not-for-profits with online donation transactions

may automatically
– initiate
– authorize
– record
– summarize, and
– settle transactions electronically without human
intervention or physical documentation

© Grant Thornton
E-Philanthropy

• Pay Pal offering services

•organization has an account

© Grant Thornton
E-Philanthropy

• As a result, key audit evidence in electronic form

may exist only for a limited amount of time

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E-Philanthropy

• Key audit evidence in electronic form may exist

only for a limited amount of time
• Traditionally, audit procedures are performed after
fiscal year-end.
• Waiting may be too late to obtain competent
sufficient evidence of controls or transactions.
• The not-for-profits conducting e-philanthropy may
not have hard-copy or paper evidence of
transactions
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Risks

• Use of Internet may:

– increase risk of maintaining adequate support
contributions
– increase risk of maintaining adequate support of
restrictions
– increase risk of generating computer documents
as support for nonexistent transactions

© Grant Thornton
Risks

• Use of Internet may:

– increase risk of manipulating computer
information
– increase risk of reliance upon use of specialists
to audit electronic transactions

© Grant Thornton
Objectives

• Economic and Industry Developments

• Affect of new auditing standards
• New regulatory developments
• Future auditing standards

© Grant Thornton
Audit And Attestation Issues And
Developments

• Alternative Investments - Auditing

• Implementation of New Standards
• Risks

© Grant Thornton
 Alternative investments
Quick overview

• AICPA Alternative Investment Practice Aid

• AICPA NFP Accounting and Audit Guide - Chapter 8
– Investments not covered by SFAS Nos. 124 (Marketable Debt and
Equity Securities ) or 133 (Derivatives and Hedging Activities) are
“other investments”
• What are some examples?
– Real estate, mortgage notes, venture capital funds, partnership
interests and equity securities that do not have a readily determinable
fair value

© Grant Thornton
 Alternative investments
Quick overview
Fair Value of equity security is "readily determinable" if:
• Sales price or bid/ask quotation is currently available on a securities
exchange registered with SEC or in over-the-counter market, provided
those prices or quotes for the OTC market are publicly reported by
NASDAQ systems or by the National Quotation Bureau, or
• Traded only in foreign market---that foreign market is a of a breath and
scope comparable to one of U.S. markets referred to above, or
• Mutual fund – FV per share is determined and published and is basis for
current transaction

© Grant Thornton
 Alternative Investments
Quick overview summary

• Generally investment vehicles other than stock, bonds, and mutual funds
– Not a defined GAAP or GAAS term
– Not traded on a national exchange such as NYSE or Nasdaq
Hedge funds
Fund of funds
(LPs, LLPs, LLC, Ltds, Inc.)

Private equity funds Trusts (other than charitable)

Venture capital funds Commodity funds

© Grant Thornton
Applying lessons learned…

1 2 3 4 5

Management : should, must, prepare, consider, assess, do, view,

complete…management, management, management!
• Auditors can not audit what management has not done!

6 7 8 9 10
© Grant Thornton
Applying lessons learned…

1 2 3 4 5

Management can never, ever prepare TOO much documentation for its
alternatives

6 7 8 9 10
© Grant Thornton
Applying lessons learned…

1 2 3 4 5

Good internal controls include having STRONG documentation

6 7 8 9 10
© Grant Thornton
Applying lessons learned…

1 2 3 4 5

If management uses 3rd party investment managers, they must

develop appropriate monitoring controls over them

6 7 8 9 10
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Applying lessons learned…

1 2 3 4 5

Management must have a sufficient complement of personnel---

investment, accounting, finance

6 7 8 9 10
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Applying lessons learned…

1 2 3 4 5

Transparency means more than seeing the underlyings

6 7 8 9 10
© Grant Thornton
Applying lessons learned…

1 2 3 4 5

Excerpt from investee's fund's offering document does NOT constitute

adequate valuation policies and procedures

6 7 8 9 10
© Grant Thornton
Applying lessons learned…

1 2 3 4 5

Cannot ignore controls when auditing alternatives

6 7 8 9 10
© Grant Thornton
Applying lessons learned…

1 2 3 4 5

'One-size-fits-all' audit approach may not be appropriate or even

possible

6 7 8 9 10
© Grant Thornton
Applying lessons learned…

1 2 3 4 5

Auditing alternatives is like auditing AIR…you know it's there, you just
can't see or get your hands around it

6 7 8 9 10
© Grant Thornton
Guidance and focus

• Current guidance (Practice Aid) focuses on due diligence,

oversight and transparency
–Transparency-an issue that should be considered
BROADLY to incorporate all forms of information
–Importance of DOCUMENTED management-developed
risk assessment
–Management MUST establish controls and processes
• Initial due diligence
• Ongoing monitoring
• Financial reporting
Guidance:
http://www.aicpa.org/members/div/auditstd/alternative_investme
nts.htm.
© Grant Thornton
Management and auditor roles

Management Auditor

© Grant Thornton
What management must do

• Existence and valuation is management's

responsibility
– Must be prepared to take responsibility
in its own right for the valuation
• Management must find other information or
conduct other activities that will provide
information on its alternative investments
• Outsourced oversight
– Management must develop appropriate
monitoring controls and
Management DOCUMENTATION over it's 3rd party
service provider

© Grant Thornton
What management must do

• Controls and process

– Establish strong procedural controls
– Design controls that are appropriate
for each type of alternative
– Ensure effective process to have
sufficient understanding
• Regardless of how they do it, it is still
their responsibility for:
– Performing sufficient due diligence
Management – Making informed investment choice
– Documenting process
© Grant Thornton
What auditors must do

• Auditor's evaluation includes-

– Adequacy of management's process
and related documentation AND,
– Quantity and quality of audit evidence
available FROM MANAGEMENT
• Auditor's risk assessment should address
at least:
– Materiality and significance
– Nature and extent of management's
process and controls
– Degree of transparency to
management to support its valuation
Auditor process and conclusions
– Nature, complexity and liquidity

© Grant Thornton
What auditors must do

• Understand and document controls

– Facts and circumstances based
– Must fully (robustly!) document our
solid understanding of management's
initial due diligence, on-going
monitoring, and financial reporting
process and controls
• Understanding will affect and
determine nature, timing and
Auditor extent of audit procedures

© Grant Thornton
What auditors must do

• Level of comfort obtained from

understanding controls drives auditor to
help determine nature and extent of
other procedures performed and audit
evidence to be obtained
• Audit evidence
• Greater the risk, the more
audit evidence required
• Higher the quality of audit
Auditor
evidence, the less the quantity
of audit evidence
Considerable judgment is involved here!
© Grant Thornton
What the auditors must do….continued

• Auditor should not rely exclusively on fund

manager-provided information while ignoring
investor controls
• Investor entity's financial statements
– Obtain management's documented
reconciliation

• Why send a confirmation?

– Interpretation (and clarified by PA) requires it
– Information can corroborate or be helpful
Auditor • Security-by-security confirmation – generally, by
itself, does not provide adequate information as
to existence and valuation

© Grant Thornton
Summary

• Obtain management's risk assessment

• Review and assess risk assessment and corroborate / test
the information
• Design efficient and effective procedures to address the
unique risks associated with each investment

© Grant Thornton
Alternative Investments - Risks

• is the NFP acting as a prudent investor?

• valuations of the alternative investments
• potential effects on the organization’s ability to
continue as a going concern
• unrelated business income

© Grant Thornton
 Statement 158 - Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans

Overview
Statement 158 represents Phase I of a comprehensive project
on employers’ accounting for postretirement benefit plans
Phase I Phase II
Requires: May reconsider all aspect of
• recognition of the funded status postretirement benefit
on the statement of financial accounting including
position measurement issues
• recycling of amounts recognized
in other comprehensive income
• alignment of the measurement
date with the date of the
statement of financial position
© Grant Thornton
Applying Statement 158

Objective

• Improve the employer’s statement of financial

position by recognizing the over-funded or under-
funded statuses of defined benefit postretirement
plans as assets or liabilities
• Does not change…
– Measurement of plan assets, benefit obligations, or
net periodic benefit cost
– Accounting and reporting with respect to
multiemployer plans
© Grant Thornton
Applying Statement 158

Primary changes

Statements 87, 88, 106 Statements 158

Deferred recognition of prior Immediate recognition of the funded
status with offsetting entry to equity
service costs, gains and through other comprehensive
losses and transition income
amounts
Recognition of a minimum No minimum liability required
liability for pensions
No consideration of Recognized net of deferred
deferred taxes for tax impact (and any
"unrecognized" effects allowance)
© Grant Thornton
Applying Statement 158

Primary changes, continued

Statements 87, 88, 106 Statement 158

Amortization of certain Recycling of certain amounts
"unrecognized amounts" into recognized in comprehensive
earnings
income into earnings

Measurement date up to 90 days Measurement date and the

prior to the balance sheet date balance sheet date will be the
allowed
same

Reconciliation of the funded status New disclosure requirements

to the amounts recognized based on recycling
© Grant Thornton
Effective dates

• Recognition of funded status and disclosure

–as of the end of the fiscal year ending after June
15, 2007
• Changing the measurement date
– effective for fiscal years ending after
December 15, 2008

© Grant Thornton
Applying Statement 158

Debrief

• Apply Statement 158 last

– Apply Statements 87, 88, 106 and 132R first
– Transition amount is an adjustment to Accumulated Other
Comprehensive Income
– Do NOT include the amount in other comprehensive income
• Recycle prior service costs and gains and losses (Third time’s a
charm)
• Select either an additional measurement (stub period) or an extended
measurement period
• Remember that Statement 157, Fair Value Measurements, will apply
to the fair value of plan assets

© Grant Thornton
SAS 103 Audit Documentation

• December 2005 SAS No. 103, Audit Documentation. SAS

No. 103 supersedes SAS No. 96, Audit Documentation, and
amends SAS No. 1, Codification of Auditing Standards and
Procedures, “Dating of the Independent Auditor’s Report.”

•Statement establishes standards and provides guidance to

auditors of nonissuers on audit documentation

•The SAS is effective for audits of financial statements for

periods ending on or after December 15, 2006

© Grant Thornton
Practice Alert 07-1, Dating of the Auditor's
Report and Related Guidance

• suggests a possible revision to firm's process

•Guidance:
– audit report date
– evidence supporting FS
– FS prep and management's assertions
– evidence that audit documentation has been
reviewed
•www.aicpa.org/download/auditstd/pract_alert/pa_20
07_1.pdf
© Grant Thornton
Implementation of New Standards

• SAS 114
• SAS 112 practice issues
• Risk assessment standards (applicable June 2008)
• Practice Alert 07-1

© Grant Thornton
SAS 114, "The Auditor's Communication with
Those Charged with Governance"

• Effective for periods beginning on or after

December 15, 2006
• Supersedes SAS 61
• Includes required communications, form and
timing, and to whom

© Grant Thornton
SAS 112, "Communicating Internal Control
Related Matters Identified in an Audit"

• Effective for periods ending on or after December

15, 2006
• How revisions will affect practice:
– significant deficiencies and material weaknesses
– communications
– more time evaluating deficiencies

© Grant Thornton
SAS 112, "Communicating Internal Control
Related Matters Identified in an Audit"

• Discussions with management and others

• Issues for audits of smaller entities
– ??? increased costs
– drafting of financial statements
– possible opportunities
• AICPA Risk Alert

© Grant Thornton
Guidance on Evaluating Control Deficiencies
in a Single Audit

• GAQC Alert #62

• Evaluation guidance
– factors that may affect the likelihood that a
control, or combination of controls, could fail to
prevent or detect noncompliance
– factors that affect the magnitude of
noncompliance

© Grant Thornton
Guidance on Evaluating Control Deficiencies
in a Single Audit (cont.)

• For purposes of deficiencies in a single audit the following

areas ordinarily are at least significant deficiencies in
internal control:
– Policies and procedures that are incomplete,
inadequate, or outdated for the activities subject to a
type of compliance requirement.
– Inadequate segregation of duties over a type of
compliance requirement.
– Controls over complex types of compliance
requirements.
– IT controls relating to the activity subject to the type of
compliance requirement.
© Grant Thornton
Risk Assessment Standards

• SAS No. 104 – SAS No. 111

• Effective for periods beginning on or after
December 15, 2006
• Some highlights
– requires auditor to understand and respond to
risk
– more emphasis on understanding internal
controls (no more default to maximum control
risk)
– significant changes to audit methodology and
training
© Grant Thornton
Risk Assessment Standards

• Guidance:
– AICPA Audit Risk alert
– AICPA Audit Guide
• understand and implement
• examples
• in-depth case study

© Grant Thornton
What's not coming up.

• Proposed FSP FAS 154-a—Considering the

Effects of Prior-Year Misstatements When
Quantifying Misstatements in Current-Year
Financial Statements
– FASB removed this item from the agenda

© Grant Thornton
Objectives

• Economic and Industry Developments

• Affect of new auditing standards
• New regulatory developments
• Future auditing standards

© Grant Thornton
Internal Revenue Service Activities

• Pension Protection Act of 2006 (August 17, 2006)

– Controlling organizations
– 990T now available for public inspection
– private foundation and excess penalty excise
taxes doubled
– Donor advised, supporting, and credit
organizations
– 2007- donors must have written documentation
for all contributions
© Grant Thornton
Internal Revenue Service Activities

• changes to the Form 990

– compensation of officers, directors, etc from
related organizations
– Supporting organization must generally file a
Form 990 or 990-EZ
– new lines to complete if donor advised funds
– if controlled entities, must still file a 990
– travel and entertainment payments reported
separately
© Grant Thornton
2007 IRS Activities

• implementing new legislation

•gaming
•employment taxes
•telephone excise tax refund
•community foundations
•college UBIT

© Grant Thornton
Other

• Frequently asked questions about exempts

•www.irs.gov/charities/article/0,,id=96583,00.html
•Report on Exempt Organizations Executive
Compensation Compliance Project – released March
2007
•Electronic filing requirement for small organizations
– 990-N

© Grant Thornton
Internet Based Workshop for Exempt Orgs

• tax-exempt status
• UBIT
• employment issues
• Form 990
• required disclosures
• www.stayexempt.org

© Grant Thornton
Independent Sector

• issued in June 2005

• April 2006 additional recommendations issued
• www.nonprofitpanel.org

© Grant Thornton
Risks

• Initiatives may increase risk:

– of misstatement of use of expenditures to
support purpose
– in misstatement of donations
– in use of tax-exempt bonds
– reporting of funded status of pension plan

© Grant Thornton
AICPA Governmental Audit Quality Center

• Launched in late September 2004

• Membership growing (740+)
• Membership is voluntary for CPA firms
• Center a resource for members including
monthly newsletters and periodic alerts for
important events, comprehensive Web site,
member discussion forum, annual Webcast,
etc.

© Grant Thornton
AICPA GAQC Home Page

© Grant Thornton
Center Resources

• E-mail Alerts on current audit and regulatory

developments  
• Dedicated Center Web sites with a complete listing
of CPA firm members in your state
• Online Member Discussion Forums for sharing
best practices and discussing issues you are facing 
• Web seminars, webcasts, and teleconferences
updating you on a variety of technical, legislative,
regulatory, and practice management subjects

© Grant Thornton
Center Resources

• Governmental Audit Quality Article Collection

– How to reissue a single audit report
– GAQC member update on the National
Statistical Sample of Single Audits
– Audit Quality Issue: Basis of Accounting
– Applying the 50% / 25% rule for selecting
federal programs to test

© Grant Thornton
Center Resources

• Teleconferences
–  What You Should Know About the 2007
Revision of Government Auditing Standards
– Impact of SAS 112 on Governmental Financial
Audits
– What You Should Know about Recent Proposed
FASB NPO Exposure Drafts on Accounting for
Mergers and Acquisitions
– Avoiding the Most Common Single Audit
Deficiencies
© Grant Thornton
GAQC Updates and Alerts

• Accounting and auditing matters

• Governance issues
• OMB A-133 guidance:
– Compliance Supplement
– Federal Agency waivers
• HUD guidance
• GASB
– New Statements
– meeting minutes
– implementation guides
© Grant Thornton
 AICPA Governmental Audit Quality Center

• For more information go to www.aicpa.org/GAQC

• Inquiries can also be sent to GAQC@aicpa.org
• Firms join via the Center Web site
• Demonstrate your commitment to audit quality by
joining the Center!

© Grant Thornton
AICPA Assistance

• AICPA Audit Guide, Government Auditing

Standards and OMB Circular A-133 Audits
• GAS/A133 Audit Risk Alert
• Practice Aid: Auditing Recipients of Federal
Awards: Practical Guidance for Applying OMB
Circular A-133 – 2005 -2006 Edition
• Federal single audit roundtable
• Government Audit Quality Center

© Grant Thornton
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