Accounting Question

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Auditing of Governmental and
Not-for-Profit Organizations
Overview: Audits
Governments & Not-For-Profits Vs. Business
▪ Audit:
-“examination of records or accounts for accuracy.”
▪ Business sector audits:
– characterized by attest function (i.e. “to affirm to be
true.”)
▪ Government/Not-for-Profit sector audits:
– Auditors not only “attest” BUT ALSO independently
evaluate.
– Auditors assess whether auditees have achieved the
objectives.
Source: https://www.slideserve.com/mervyn/chapter-1-auditing-and-assurance-services
Types of Audits
Government Auditing Standards (GAS or GAGAS)
characterize government audits into three
categories:
▪ Financial Audits: determines if financial statements are
in accordance with GAAP.
▪ Attestation engagements: Examine, review, perform
agreed-upon procedures
▪ Performance Audits:
• Effectiveness of internal controls
• Effective usage of entity’s resources (Efficiency)
• Verifying that organization is complying with terms of the law,
grants, and contracts.
• GAGAS standards place much more emphasis on
compliance with laws and regulations than do GAAS
Unique Aspects of GAGAS
• GAGAS (Generally Accepted
Government Auditing Standards) place
much more emphasis on
compliance with laws and
regulations than do GAAS
(Generally Accepted Auditing Standards)
• Positive assurance
“In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
XYZ Investment Company as of December 31, 20X2, and the
results of its operations, changes in its net assets, and its cash
flows for the year then ended in accordance with accounting
principles generally accepted in the United States of America.”
• Negative assurance
Independent Accountant’s Review Report Appropriate Addressee ] I (We) have reviewed the
accompanying financial statements of XYZ Company, which comprise the balance sheets as
of December 31, 20X2 and 20X1, and the related statements of income, changes in
stockholders’ equity, and cash flows for the years then ended, and the related notes to the
financial statements. A review include s primarily applying analytical procedures to
management’s (owners’) financial data and making inquiries of company management
(owners). A review is substantially less in scope than an audit, the objective of which is the
expression of an opinion regarding the financial statements as a whole. Accordingly, I (we) do
not express such an opinion.
-Based on my (our) reviews, I am (we are) not aware of any material modifications that
should be made to the accompanying financial statements in order for them to be in
accordance with accounting principles generally accepted in the United States of America.
©2020, Association. Unauthorized copying prohibited.
Reporting standards for financial audits under
Government Auditing Standards differ from reporting
standards under generally accepted auditing
standards in that Government Auditing Standards
require the auditor to
(AICPA 2015)
A. Describe the scope of the auditor’s tests of
compliance with laws and regulations.
B. Provide positive assurance that the entity’s audit
committee is adequately informed about the effects of
any illegal acts.
C. Present the results of the auditor’s tests of economy
and efficiency regarding the use of the entity’s resources.
D. Provide negative assurance that the auditor
discovered no transactions that were indicative of illegal
acts.
Types of Audits and Engagements
Financial
Audits
Financial
statement
audits
Attestation
Engagements
Performance
Audits
Internal
control
Effectiveness
and results
Compliance
audits
MD & A
Economy
and
efficiency
Special
reports
Final contract
costs
Internal
control and
compliance
Objective of a Financial Audit
Financial statements that have been audited
provide financial statement users with a higher
level of confidence in the information contained
within the statements.
The independent auditor’s objective is to render a
report expressing an opinion that the financial
statements present fairly the financial position,
changes in financial position, and, where
applicable, cash flows of the organization
– “Present fairly” means in conformity with appropriate
generally accepted accounting principles (GAAP)
– Opinions are based on reasonable assurance that the
statements are free from material misstatements
Authoritative Sources
Category A
• Category A: The first level of authoritative
rules is made up of the official statements of
the GASB.
• Category A is made up of GASB Statements
of Governmental Accounting Standards
• 98 standards as of January 2022.
(http://www.gasb.org/cs/ContentServer?c=Page&cid=1176160042391&d=&pagename=GASB%2FPage%2FGASBSectionPage)
• Previously issued GASB Interpretations are
also included in Category A
• although the Board does not anticipate
issuing additional interpretations in the
future
Authoritative sources
Category B
• Category B: The second level is made up of
• GASB Technical Bulletins
• Technical bulletins serve much the same function as
interpretations.
• GASB Implementation Guides
• Implementation guides clarify, explain, or elaborate on
existing U.S. GAAP for state and local governments.
• Any literature of AICPA cleared by GASB.
• To establish validity of a proposed reporting
treatment, accountants and auditors first look to
Category A and, then, only to Category B if no
answer is found at the first level.
Non-authoritative sources
• Nonauthoritative sources of GAAP can be
used if authoritative GAAP does not provide a
definitive answer.
• The list of these sources include
• GASB Concepts Statements
• Pronouncements of other accounting bodies such
as FASB and the IASB
• Practices that are prevalent in state and local
governments
• Published literature of professional associations
and regulatory agencies, and accounting textbooks
and articles.
GAAP for Nongovernmental Entities
The FASB Accounting Standards
Codification is the source of authoritative
GAAP to be applied by
nongovernmental entities.
Rules and interpretive releases of the
SEC under authority of federal securities
laws are also sources of authoritative
GAAP for SEC registrants.
Materiality
• Definition: In the auditor’s judgment, the level at
which the quantitative and qualitative effects of
misstatements will have a significant impact on
users’ evaluations
• AICPA Audit and Accounting Guide State and Local
Governments requires auditors to make separate
materiality determinations for each opinion unit.
These are:
– Governmental activities
– Business-type activities
– Aggregate discretely presented component units
– Each major governmental and enterprise fund
– The aggregate remaining fund information
Materiality
Materiality must be determined for every opinion unit
Governmental Business-type
activities
activities
Aggregate
discretely
presented
component
units
Each major The aggregate
governmental
remaining
and enterprise
fund
fund
information
MD&A
• MD&A are outside the scope
of the financial statement audit
• Auditors apply certain limited
procedures in connection to
RSI to provide assurance that
they are fairly presented in
relation to the basic financial
statements
Audit Opinion
New Government Auditing Standards Reports
• Government Auditing Standards Report
Illustrations (including a financial statement
report illustration for a government and a notfor-profit entity)
– https://us.aicpa.org/content/dam/aicpa/interestareas/
governmentalauditquality/resources/illustrativeaudito
rsreports/downloadabledocuments/illustrativegovernment-auditing-standards-reports.pdf
• Unmodified Opinions on Basic Financial
Statements Accompanied by Required
Supplementary Information and Other
Information—State or Local Governmental
Entity
Types of Governmental Audits
• Financial – Provides an opinion about whether an
entity’s financial statements are presented fairly in all
material respects in conformity with an applicable financial
reporting framework
• Attestation engagement – Provides a report and
assertion about subject matter that is the responsibility
of another party;
– Internal controls
– Compliance
– MD&A
– Contract amounts
• Performance – Provides findings or conclusions
based on an evaluation of sufficient, appropriate evidence
against criteria
Government and Not-for-profit Audits
Single Audit
Act
Generally
Accepted
Auditing
Standards
(GAAS)
Generally
Accepted
Government
Auditing
Standards
(GAGAS)
Generally Accepted Auditing Standards
• Audits of state and local governments may be
performed by independent certified public
accountants (CPAs) or by state or federal audit
agencies.
• The AICPA’s Code of Professional Conduct requires
CPAs to follow generally accepted auditing
standards (GAAS)—standards approved by AICPA
Council.
• State or federal auditors, whether or not they are
CPAs, are also required to follow GAAS if GAAS are
prescribed by law or policy for the audits they
conduct.
Generally Accepted Auditing Standards
• Failure to follow GAAS can result in severe
sanctions, including the loss of the auditor’s license
to practice as a CPA.
• It is the auditor’s duty to adhere to auditing
standards, and it is his or her technical
qualifications and independence from the entity
being audited that add credibility to reported
financial information and increase financial
statement users’ confidence in the information.
• GAAS provide general guidelines for audits and
address the minimum responsibilities of the
auditor, as well as objectives and requirements.
Generally Accepted Auditing Standards
(GAAS)
• Auditors performing financial audits
follow GAAS, reflected in Statements
of Auditing Standards (SASs)
issued by the AICPA
• 10 standards (expanded on by more
than 120 SASs)
• 3 general standards
• 3 field work standards
• 4 reporting standards
10 standards
• 3 general standards
– Training
– Independence
– Professional Care
• 3 field work standards
– Planning and Supervision
– Internal Control (Entity, and Environment)
– Evidence
• 4 reporting standards
– Accounting = GAAP
– Consistency
– Disclosure
– Express Opinion
https://us.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledocuments/au-00150.pdf
Generally Accepted Auditing
Standards (GAAS)
Generally Accepted Auditing
Standards (GAAS)
Government Auditing Standards
• Generally Accepted Government
Auditing Standards (GAGAS)
• Standards issued by the U.S.
Government Accountability Office
(GAO) in its “Yellow Book”
• States may also require “Yellow Book”
audits of their local governments
Government Auditing Standards
• Audit standards that are to be followed by
auditors of federal organizations, programs,
activities, and functions are broader in scope
than GAAS.
• Generally accepted government auditing
standards (GAGAS) are set forth and explained
in the publication Government Auditing
Standards.
GAGAS Yellow Book
Generally Accepted Government Auditing Standards
(GAGAS) or Government Auditing Standards (GAS)
Issued by the Government Accountability Office (GAO).
▪ Prescribes accounting standards and practices for ALL
federal agencies (as required by law, regulation,
agreement, contract, or policy)
▪ Mirror GAAS in discussion of:
o Auditor’s professional qualifications
o Quality of audit effort,
o Characteristics of
professional/meaningful
audit reports
Generally Accepted Government
Auditing Standards
Legislators, oversight bodies, those charged with
governance, and the public need to know whether
(1) management and officials manage government
resources and use their authority properly and in
compliance with laws and regulations;
(2) government programs are achieving their objectives
and desired outcomes; and
(3) government services are provided effectively, efficiently,
economically, ethically, and equitably.
Government auditing is essential in providing government
accountability to legislators, oversight bodies, those
charged with governance, and the public.
-From the introduction to the yellow book
Generally Accepted Government Auditing
Standards (GAGAS)
▪ Contains a total of 32 standards for
both financial and performance
audits.
▪ Government auditing standards are
divided into:
o General standards
o Field work standards
o Reporting standards
Generally Accepted Government Auditing
Standards (GAGAS) Broader than GAAS:
This gives an overview of the breadth and depth of GAGAS.
Financial
Audits
Attestation
Engagements
Performance
Audits
GAAS
GAGAS
GAAS
GAGAS
GAAS
GAGAS
General
Standards
3
4
5
5
0
4
Field Work
Standards
3
5
2
7
0
4
Reporting
Standards
4
11
4
9
0
4
Totals
10
20
11
21
0
12
GAAS v/s GAGAS
• General
-Training and
Proficiency
• Independence
• Due Professional
Care
• General
-Qualifications:
o Professional
Proficiency
o Knowledge of
government programs
o CPE requirements
• Independence
• Due Professional
Care
• Quality Control
GAGAS General Standards
General Standards
• Independence standard:
– In all matters relating to audit work, the audit
organization and the individual auditor must
be independent in mind and in appearance.
• Professional judgment
– Auditors must use professional judgment in
planning and performing audits and in
reporting the results.
GAGAS General Standards
• Professional competence requires auditors to have:
– The staff assigned to perform the audit must collectively possess
adequate professional competence needed to address the audit
objectives and perform the work in accordance with GAGAS.
– A thorough knowledge of governmental auditing and the specific or
unique environment in which the audited entity operates
– At least 80 hours of CE (CPE) every two years, of which at least 20
hours must be completed in each of the two years and at least 24 hours
of which must be related directly to the gov. audit environment
•
Quality control and assurance:
–
The audit organization must establish and maintain a system of quality
control and have an external peer review at least once
every 3 years.
GAAS v/s GAGAS
Field Work
▪ Adequate planning
and supervision
▪ Evaluate internal
control
▪ Obtain competent
evidence
Field Work
▪ Adequate planning
and supervision
▪ Evaluate internal
control
▪ Obtain competent
evidence
▪ Supplemental
Standards:
o Planning –
consideration of
government programs
o Compliance testing
GAAS v/s GAGAS
Reporting
▪ Adherence to GAAP
▪ Consistent application
▪ Adequate disclosure
▪ Expression of opinion
Reporting
▪ Adherence to GAAP
▪ Consistent application
▪ Adequate disclosure
▪ Expression of opinion
▪ Report distribution not
restricted
▪ “In accordance with
GAAS and GAGAS”
▪ Report on compliance
and internal control
Critical Terminology: Unconditional
Requirements
• GAGAS use the words “must” or “is
required” to specify an unconditional
requirement.
–Required compliance in all cases in
which the circumstances exist to which
the unconditional requirement
applies.
Critical Terminology: Presumptively
Mandatory
▪ GAGAS use the word “should” to specify a
presumptively mandatory requirement
▪ Throughout the “Yellow Book”, the
professional requirements are identified by
this terminology.
▪ May depart from presumptively mandatory
requirement if they document:
• the justification for the departure, and
• describe how the alternative procedures
performed in the circumstances were
sufficient to achieve the objectives in the
presumptively mandatory requirement.
Generally accepted government auditing
standards use which of the following terms
to describe a professional requirement to
comply with a standard or provide a special
explanation for not doing so?
(AICPA 2014)
A. Explanatory requirement.
B. Conditional requirement.
C. Unconditional requirement.
D. Presumptively mandatory requirement.
Critical Terminology: Explanatory Material
▪ GAGAS use the words “may,” “might,” or “could” to
describe explanatory information.
▪ The explanatory information is provided to:
– Provide further explanation and guidance on the
professional requirements, or
– Identify/describe other procedures or actions
relating to the activities of the auditor/audit organization.
▪ Explanatory material is used to document the objective of
a requirement, explain why particular procedures might be
considered/used in certain circumstances, or add
supplemental information to consider in exercising
professional judgment.
Additional GAGAS Requirements
for Performing Financial Audits
Importance of communication
Follow-up on prior findings and
recommendations
Detection of material misstatements
Development of the elements of a
deficiency finding
Documentation
GAGAS Requirements for Performing
Financial Audits
• Pertinent information should be
communicated to individuals contracting
for or requesting the audit.
• During audit planning, the auditors should
evaluate whether the audited entity has taken
appropriate corrective action to address
findings and recommendations from
previous engagements that could have a
material effect on the financial statements.
GAGAS Requirements for Performing
Financial Audits
• Auditors should extend the AICPA requirements
pertaining to the auditors’ responsibilities for laws
and regulations to also apply to compliance with
provisions of contracts or grant agreements.
• When audit findings involve deficiencies in
internal control; noncompliance; fraud; auditors
should plan and perform procedures to develop
the elements (criteria, condition, cause and effect)
of the findings that are relevant and necessary to
achieve the audit objectives.
GAGAS Requirements for Performing
Financial Audits
• Documentation should be provided
concerning evidence of supervisory
review of work performed.
• For any departures from the
GAGAS requirements, auditors
should document the impact on the
audit and on the auditors’
conclusions.
An entity has failed to provide documentation for
a newly acquired material asset and informs its
auditors that the documentation is lost. According
to generally accepted government auditing
standards what would this situation typically
indicate to the auditors?
(AICPA 2015)
A. Fraudulent activity.
B. Abusive activity.
C. Misappropriation of assets.
D. A heightened risk of fraud.
Additional GAGAS Requirements
for Reporting on Financial Audits
Reporting on compliance
Internal controls
Report requirements
Distribution
GAGAS Requirements for Reporting
on Financial Audits
• Must state compliance with GAGAS in the report when
required to follow GAGAS, or representing to others that
the audit followed GAGAS requirements.
• “We conducted our audit in accordance with auditing
standards generally accepted in the United States of
America and the standards applicable to financial
audits contained in Government Auditing
Standards, issued by the Comptroller General of
the United States. Those standards require that we
plan and perform the audit to obtain reasonable
assurance about whether the financial statements are
free from material misstatement”
GAGAS Requirements for Reporting on
Financial Audits
• When audits are conducted in accordance with
GAGAS, a reference to GAGAS should be
made in the audit report.
• When the financial statement audit report
contains an opinion or a disclaimer of opinion,
a report on internal control over financial
reporting and on compliance with laws,
regulations, and provisions of contracts and
grants must be provided as part of the report
or as a separate report.
Types of Opinions
Unmodified (or Unqualified)
opinion
Qualified opinion
Adverse opinion
Disclaimer
https://us.aicpa.org/content/dam/aicpa/interestareas/governmentalauditqualit
y/resources/illustrativeauditorsreports/downloadabledocuments/illustrativegovernment-auditing-standards-reports.pdf
Why Not an Unmodified Opinion?
• Material departure from GAAP
• Material change between accounting
periods in accounting principles or their
method of application
• Scope of the examination was
affected by conditions that prevented
the auditor from conducting necessary
audit procedures
GAGAS Requirements for Reporting on
Financial Audits
• Based on the audit work performed, a report
should be made on significant
deficiencies and material weaknesses in
internal control, and instances of fraud;
noncompliance with provisions of laws and
regulations; or violations that are material.
• When reporting deficiencies in internal
control, the views of responsible officials
concerning the audit report and any plans for
corrective action should be included.
GAGAS Requirements for Reporting
on Financial Audits
• Material weaknesses: a deficiency such
that there is a reasonable possibility that a
material misstatement of the entity’s financial
statements will NOT be prevented on a timely
basis
• Significant deficiencies: a deficiency that is
less severe than a material weakness, yet
important enough to merit attention by those
charged with governance
For financial statement audits performed in
accordance with generally accepted
government auditing standards, auditors should
report which of the following? (AICPA 2019)
A. All violations of private grant agreements,
regardless of materiality.
B. Suspected illegal acts.
C. Significant deficiencies in internal
control.
D. Significant changes in the entity’s internal
control policies.
GAGAS Requirements for Reporting on
Financial Audits
• When applicable, the report should indicate
that confidential or sensitive information
has been omitted from the report and the
reason that such an omission is necessary.
• Submission of reports should be made to
appropriate officials, and audits should be
made available to the public.
– Auditors should document any limitation on
report distribution.
Government Audit Process
Determine
appropriate
GAAP
Establish
scope
Determine
materiality
Establish
audit
procedures
Conduct
examination
Issue opinion
Unique Aspects of GAGAS
• GAGAS standards place
much more emphasis on
compliance with laws and
regulations than do GAAS
Unique Aspects of GAGAS
• The competence standard requires,
among other things, that auditors have:
– A thorough knowledge of governmental
auditing standards and the specific or
unique environment in which the audited
entity operates
– At least 80 hours of CE (CPE) every two
years of which
– At least 20 hours must be completed in each
of the two years
– At least 24 hours must be related directly to
governmental auditing or the unique
environment in which the audited entity
operates
GAO Independence Standards
• Independence is covered in 4 sections:
– a conceptual framework;
– guidance for internal audit organizations
– guidance when performing nonaudit
services
– requirements and guidance on
documentation to support consideration
of auditor independence
GAO Independence Standards–
Conceptual Framework
• GAGAS establish a conceptual framework
that requires auditors to identify, evaluate,
and apply safeguards to appropriately
address threats to independence.
• Threats to independence are
circumstances that could impair
independence.
– They include self-interest threat, self-review
threat, bias threat, familiarity threat, undue
influence threat, management participation
threat, and structural threat
GAO Independence Standards–
Conceptual Framework
• Safeguards are controls designed to
eliminate or reduce threats to
independence
• If threats to independence are not at
an acceptable level, the auditors
should document the threats identified
and the safeguards applied to eliminate
the threats or reduce them to an
acceptable level.
GAO Independence Standards–
Nonaudit Work
DEFINITION: Work solely performed for the benefit of
the entity requesting the work and which does not
provide for a basis for conclusions, recommendations,
or opinions as would a financial audit, attestation
engagement, or performance audit
• Auditors are prohibited from assuming a
management responsibility (i.e., making significant
decisions regarding the acquisition, deployment, and
control of resources), because the management
participation threat would be so severe that NO
safeguards could reduce the threats to an acceptable
level
Which of the following services would
constitute a management function under
Government Auditing Standards, and result in
the impairment of a CPA’s independence if
performed by the CPA? (AICPA 2015).
A. Developing entity program policies.
B. Providing methodologies, such as practice
guides.
C. Providing accounting opinions to a
legislative body.
D. Recommending internal control procedures.
GAO Independence Standards–
Nonaudit Work
• GAGAS identify examples of nonaudit services
that could potentially impair the auditors’
independence in the government environment:
– preparing accounting records and financial statements
– internal audit services
– internal control monitoring and assessments
– information technology systems services, and
– valuation services
• Auditors should use the conceptual framework
to assess independence for services not
specifically addressed by these categories
GAO Independence Standards–
Documentation
• The auditor is required to document conclusions regarding
compliance with independence, including:
– Discussion of threats identified and safeguards in place or
applied that eliminated the threat or reduced it to an acceptable
level
– Safeguards required for an audit organization that is structurally
located within a government entity
– Consideration of audited entity management’s ability to
effectively oversee a nonaudit service to be provided by the
auditor
– The auditor’s understanding with an audited entity for which
the auditor will perform a nonaudit service
Fundamental Ethical Principles
Public interest
Integrity
Objectivity
Proper use of government
information, resources and
position
Professional behavior
Each of the following is an ethical principle
that should guide the work of auditors in
the conduct of audits under government
auditing standards, except (AICPA 2015)
A. Materiality.
B. Integrity.
C. The public interest.
D. Proper use of government information.
Single Audit:
Compliance Component for
“Major Programs”
What is the Purpose of a Single Audit?
• Provide all federal awarding agencies a
single report of a recipient of federal
awards to satisfy a program’s audit
requirements
– Establish uniform requirements for audits
of federal financial assistance provided to state
and local governments.
• Replace a multitude of grant-by-grant audits
with a single, comprehensive, entity-wide
audit
• Improve the efficiency and effectiveness of
governmental audit effort
History of the Single Audit
Amendments and Revisions
The 1984 Single Audit Act was amended and
revised in 1996, 1997, 2003, 2013 and most
recently in 2021.
The current guidance for single audits is
contained within an extensive OMB document,
Uniform Administrative Requirements, Cost
Principles, and Audit Requirements for Federal
Awards, also known as the “super circular” or
“omni circular.”
2 CFR 200 Uniform Administrative Requirements (https://www.ecfr.gov/cgi-bin/textidx?tpl=/ecfrbrowse/Title02/2cfr200_main_02.tpl)
Reform of Federal Policies related to Grants
and Cooperative Agreements
• On December 26, 2013 OMB released the ‘final
guidance’ on Uniform Administrative
Requirements, Cost Principles and Audit
Requirements for Federal Awards
• §200.110 Effective/applicability date
• Federal Agencies must implement by December
26, 2014
74
Changes apply to new awards
• Audits toward a risk-based
approach
• Greater transparency of audit
results (i.e.- single audit reports
made available to the public online)
75
Single Audit Act Amendments
• Establishes a risk-based approach for
audit testing, thus placing greater audit
coverage on high risk programs
• Improves the contents and timeliness of single
audit reporting
• Permits the Office of Management and
Budget (OMB) to administratively revise Single
Audit requirements without requiring additional
legislation
• See OMB Circular A-133 and the related
Compliance Supplement for implementation
guidance
Determining Who Must Have a Single Audit
• State and local governments, not-forprofit organizations, including colleges and
hospitals, that expend more than $750,000
in federal financial assistance in a year
– Federal agencies must agree to this process.
– Applies to both direct and indirect recipients of
federal $$$
• If expended only for one program or one
program cluster, the entity may have a
program audit, otherwise the audit must be a
single audit
Who Must Have a Single Audit?
State or local government or
not-for-profit organization?
yes
Expended at least
$750,000 in federal awards
during year?
no
Comply with any
nonfederal audit
requirements
Yes
Perform either single
audit or program-specific
audit
yes
Expended from only one
program or program
cluster?
No
Perform
single audit
GAAS – GAGAS – Single Audit Relationships
-Financial Audits
GAAS
-General Internal Control Audit
-General Compliance Audit with Laws and Regulations
GAGAS
FOR “MAJOR PROGRAMS”
-Internal Control Audit
-Compliance Audit with Laws and Regulations
-Schedule of Questioned Costs
Single Audit
GAGAS Incorporates GAAS – and includes additional requirements
Single Audit Incorporates GAGAS – and includes additional requirements
A CPA was engaged to audit the financial statements
of a municipality that received federal financial
assistance and that required a Single Audit for
compliance with the terms of the financial
assistance. Which of the following guidelines should
the CPA consider?
(AICPA 2017)
Generally Accepted
Auditing Standards
A.
Yes
B.
Yes
C.
No
D.
No
Government Auditing
Standards
Yes
No
Yes
No
Single Audit Act
▪ Two main components:
– Audit conducted under GAGAS
– Compliance Audit of federal financial
awards/major programs (Single Audit component)
▪ Understand the characteristics of a single audit,
including:
– the purpose
– which entities must have a single audit
– what auditing work is required
– how major programs are selected for audit
– what reports must be rendered, when, and to
whom
Single Audit Requirements
Audit conducted under GAGAS
• Auditors must follow GAGAS (Yellow Book
standards)
• Audit must be conducted by an independent
auditor
• Annual audit encompassing the entity’s
financial statements and schedule of
expenditures of federal awards
• Auditor must determine whether financial
statements present fairly in conformity with
GAAP and the schedule of federal financial
awards is presented fairly in relation to the
financial statements
Single Audit Requirements
Audit conducted under GAGAS
• Auditor must obtain an understanding
of internal controls pertaining to the
compliance requirements for each
major program, and assess control
risk and perform tests of control
• Federal and nonfederal “Pass-through”
agencies are assigned certain
responsibilities for compliance.
Compliance Audits
(as Part of Single Audit)
For each major program the auditor
must test whether the program:
– Was administered in conformity with the
appropriate OMB Circular
– Complied with detailed requirements in the
A-133 Compliance Supplement and
other specified requirements
• Audit enough major programs to ensure
that at least 40% of total federal award
expenditures are audited
Required Reporting Under Single Audit
• Both auditee and auditor have
responsibilities for the “reporting
package” that must be filed
electronically and sent to the single
audit clearinghouse
• Reporting package consists of:
– Financial statements and schedule of
expenditures of federal awards
– Auditor’s reports
– Summary schedule of prior audit findings
– Corrective action plan
Required Reports for Single Audit
Financial statements
and schedule of
expenditures of federal
awards
Summary schedule of prior
audit findings
Auditor’s reports
Corrective action plan
Must be submitted
electronically to the federal
clearinghouse designated by
the OMB within the earlier of
30 days after receipt of the
auditor’s report(s) or nine
months after the end of the
audit period
Required Reporting Under Single Audit
• Schedule of findings and questioned costs
– Describes such matters as internal control
weaknesses, instances of noncompliance,
questioned costs, fraud, and material
misrepresentations by the auditee
– Internal control weaknesses are reported as
either:
• material weaknesses: a deficiency such that there is a
reasonable possibility that a material misstatement of
the entity’s financial statements will NOT be prevented
on a timely basis), or
• significant deficiencies: a deficiency that is less
severe than a material weakness, yet important enough
to merit attention by those charged with governance
Required Reporting Under Single Audit
• Schedule of Findings and Questioned
Costs
– A questioned cost usually involves an instance
of noncompliance with a law or regulation
where the costs are either not allowable, are
unreasonable, or are NOT supported by
adequate documentation.
– Known questioned costs greater than $25,000
or likely costs greater than $25,000 must be
reported in the schedule of findings and
questioned costs
Chapter 16
Granof-5e
89
Single Audit Act:
Four Reports Produced:
1) Opinion on the Financial Statements and on the Schedule of
Expenditures of Federal Awards
▪ The schedule includes a list of total expenditures of the organization
▪ Proper categorization of expenses
2) Report on Compliance and on Internal Control over Financial Reporting
▪ Directed towards the basic financial statements
▪ Based on audit requirements of Governmental Auditing Standards
▪ Include any material weaknesses in the controls
3) Report on Compliance with Requirements of “Major Programs”
▪ Explain the nature of the examination
▪ Auditors express an opinion
▪ Include any “reportable conditions”
4) Schedule of Findings and Questionable Costs
▪
▪
▪
▪
Most distinctive and informative
Summary of the results
Describe reportable conditions
Include findings pertaining to major programs
Selection of “Major Programs”
▪ Using a sliding scale identify “Type A” and “Type B”
programs
▪ Identify low-risk programs (based on no audit
findings in most recent audit and absence of certain
risk factors)
▪ Assess risk of Type B programs (major programs
that are not Type A programs)
▪ At a minimum, audit
▪
▪
as major programs all Type A programs NOT identified as
low risk, and
high-risk Type B programs totaling at least one-fourth the
number of low-risk Type A programs.
▪ Audit at least enough major programs to ensure that
at least 40% of total federal award expenditures are
audited
Risk-Based Approach
Step 1:
Identify (larger) Type A Programs
Step 2:
Identify “low-risk” Type A programs
Step 3:
Identify “high-risk” Type B programs
Step 4:
Select for audit as major programs a minimum
of all “high-risk” Type ‘A programs not
identified as “low-risk” in Step 2, plus certain
“high-risk” Type B programs.
Type A Thresholds (200.518)
Risk-Based Approach for Selecting
Major Programs for Audit
Step 2 :
Identify low-risk Type A programs:
• Programs previously audited in at least one of the two
most recent audit periods as a major program, with NO
internal control deficiencies identified as major
weaknesses, opinion modifications, or significant
questioned costs in the most recent audit period;
– Consequently, a type A program will be major at least once
every three years.
• Programs with NO significant changes in personnel or
systems that would have significantly increased risk;
• Programs that, in the auditor’s professional judgment, are
low risk.
Risk-Based Approach for Selecting
Major Programs for Audit
Step 3:
• Identify Type B programs that, based on the
auditor’s professional judgment and criteria
discussed above, are high risk.
• Risk assessments are performed only for
those Type B programs that exceed 25% of
the Type A threshold determined in Step 1.
– The auditor is NOT expected to perform risk
assessments on relatively small federal
programs.
Risk-Based Approach for Selecting
Major Programs for Audit
Step 4:
At a minimum, audit as major programs
1. All Type A programs NOT identified
as low risk, and
2. (Certain) High-risk Type B programs
totaling at least one-fourth the number
of low-risk Type A programs identified
as low-risk in Step 2.
Risk-Based Approach for Selecting
Major Programs for Audit
• The percentage of coverage rule requires the
auditing of as many major programs as
necessary to ensure that at least 40 percent of
total federal awards expended are audited.
• In addition to the possibility of reduced audit
coverage resulting from individual Type A
programs being classified as low risk, the
Uniform Guidance also provides that the
auditee itself can be classified as low risk and
thereby receive even greater reduction in
audit coverage.
Single Audit Quality
• The President’s Council on Integrity and
Efficiency’s report on the national single audit
sampling project found
– 48.6% of single audits were of acceptable quality
– 16.0% were of limited reliability
– 35.5% were of unacceptable quality
• Recommendations on improving single audit
quality
– Improve the single audit standards and guidance
– Establish minimum training requirements
– Establish consequences for submitting
unacceptable audits
Impact of Sarbanes-Oxley Act on
Government and NFPs
▪ Even though the Sarbanes-Oxley Act (Act) applies
only to publicly traded corporations, it’s impact is
being felt by government and NFP organizations.
▪ Key provisions of the Act that are relevant to
government and NFP organizations include:
– Section 404 which emphasizes the importance of sound
internal controls
– Responsibility of audit committees
– the Act mandates that CEO and CFO certify the financial
statements
– the Act provides “whistle-blower” protection to employees.
▪ Perhaps most importantly the Act changed the
climate of all organizations.
Impact of Sarbanes-Oxley Act
SOX applies to publicly-held companies,
but many governments are adapting
some “best practices” in the areas of:
–Audit Committees – subsets of the
governing council that appoint, oversee, and
work with the external auditor throughout the
year
–Internal Controls – OMB Circular A-123
Management’s Responsibility for Internal
Control is one example of a review and
tightening of internal controls in the
government sector
Summary
▪
▪
▪
▪
▪
▪
▪
Auditors add value to information by being independent and
conforming to professional auditing standards (GAAS or
GAGAS)
GAGAS are broader than GAAS in that they include
standards for financial and performance audits established
by the government through the GAO’s Yellow book.
Performance audits differ in concept from financial audits.
It makes assessments about an entity’s programs.
Under the Single Audit Act, GAGAS has to be adhered to
in all audits of both governments and not-for-profit
organizations.
Single audits comprise of 2 elements: an audit of financial
statements and an audit of federal financial awards that
follows the provisions of OMB Circular.
The single audit improves both the efficiency and
effectiveness of audits of nonfederal entities with significant
expenditures of federal award.
The Sarbanes-Oxley Act does not apply to government
and not-for-profit organizations but has affected their
culture.
When preparing your presentation, you MAY (but, are NOT required to) consider the
following questions.
1. Analysis of Government Financial Performances
A. Socioeconomic factors.
What have been the trends in demographic and economic indicators, such as real
estate values, building permits, retail sales, population, income per capita, percent
of population below the poverty level, average age, average educational level,
employment level, and business licenses? (Note: Many of these items and other
potentially useful information can be obtained from the Census Bureau’s website
www.census.gov)
B. Analysis of revenues and revenue sources.
(1) How stable and flexible are the city’s revenue sources in the event of adverse
economic conditions?
(2) Is the revenue base well diversified, or does the city rely heavily on one or two
major sources?
(3) Has the city been relying on intergovernmental revenues for an excessive
portion of its operating expenditures?
(4) What percentage of total expenses of governmental activities is covered by
program revenues? By general revenues?
(5) Do any extraordinary or special items reported in the statement of activities
deserve attention?
C. Analysis of expenditures and expenses
(1) Do any components of expenditures and, at the government-wide level
expenses exhibit sharp growth?
(2) How flexible are expenditures? That is are there large percentages of
nondiscretionary expenditures, such as for interest and public safety?
(3) How does the growth pattern of operating expenditures and expenses over the
past 10 years compare with that of revenues?
D. Analysis of reserves.
(1) Are the levels of financial reserves (i.e., unrestricted, assigned, committed,
and restricted fund balances, contingency funds, and unrestricted net position)
adequate to meet unforeseen operational requirements or catastrophic events?
(2) Do total governmental fund revenues exceed total governmental fund
expenditures? Do General Fund revenues exceed General Fund expenditures?
What has been the trend in the ratio of revenues to expenditures?
(3) Is an adequate amount of cash and securities on hand or could the city borrow
quickly to cover short-term obligations?
E. Analysis of debt burden.
(1) What has been the 10-year tend in general obligation long-term debt relative
to trends in population and revenue capacity?
5
(2) Are significant debts of other governments (e.g., a school district. a county)
supported by the same taxable properties? What has been the trend for this
“overlapping” debt?
(3) Are there significant levels of short-term operating debt? If so, has the amount
of this debt grown over time?
(4) Are there any significant debts (e.g., lease obligations, unfunded pension
liabilities, accrued employee benefits) or contingent liabilities?
(5) Are any risky investments such as derivatives disclosed in the notes to the
financial statements?
(6) What are the BOND RATINGS, in any?
F. Potential “red flags” or warning signs.
(1) Decline in revenues.
(2) Decline in property tax collection rate.
(a) Less than 92 percent of current levy collected?
(b) Property taxes more than 90 percent of the legal tax limit?
(c) Decreasing tax collections in two of the last three years?
(3) Expenditures increasing more rapidly than revenues.
(4) Declining balances of liquid resources and fund balances.
(a) General Fund assigned and unassigned fund balance deficit in two or
more of the last five years?
(b) General Fund assigned and unassigned fund balance less than 5
percent of General Fund revenues and other financial sources?
(5) Reliance on nonrecurring (e.g., special items and asset sales) revenues to
support current-period operations.
(6) Growing debt burden.
(a) Short-term debt more than 5 percent of operating revenues?
(b) Two-year trend of increasing short-term debt?
(c) Short-term interest and current-year debt service on general obligation
debt more than 20 percent of operating revenues?
(d) Debt per capita ratio 50 percent higher than four years ago?
(7) Growth of unfunded pension and other employee-related benefits such as
compensated absences and postemployment health care benefits.
(8) Deferral of needed maintenance on capital plant.
(9) Decrease in the value of taxable properties, retail sales levels, or disposable
personal income.
(10) Decreasing revenue support from federal or state government.
(11) Increasing unemployment.
(12) Unusual climatic conditions or the occurrence of natural or other disasters
(eg. pandemic, wild fires etc).
(13) Ineffective management and/or dysfunctional political circumstances.
In addition, you MIGHT want to consider the following questions. (Optional)
1. Introduction
‘Introductory Section’
– What has the city (or the county) included in the introductory section of its ACFR?
6
‘Financial Section’
– Audit Report: Are the financial statements in the report audited by an independent CPA, state
auditors, or auditors employed by the government being audited? Does the audit indicate that the
financial statements were prepared in accordance with GAAP? Has the city (or the county)
received an unmodified audit report?
– Basic Financial Statements: Does the ACFR contain both government-wide financial statements
and fund statements? How many financial statement have been included as part of the basic
financial statements section of the ACFR?
– Notes to the Financial Statements: How many notes follow the required basic financial statement?
Is them a phrase at the bottom of the basic financial statements indicating that the notes are an
integral part of the financial statements?
– Other Supplementary Information: Following the notes to the financial statements, does the ACFR
provide other supplementary information, such as combining and individual fund statements?
– Management’s Discussion and Analysis (MD&A): Does the ACFR contain an MD&A? If so,
where is it located and what type of information does it contain?
‘Statistical Tables’
– What information has been included in this section of the ACFR?
2.
–
–
–
–
Financial reporting for State and Local Governments
Government-wide Statements: What are the titles of the two government-wide statements? Are
total assets larger for governmental activities or business-type activities? Which function or
program has the highest net cost? What kinds of general revenues are available to cover the net
cost of governmental activities? Were business-type activities “profitable”? That is, is the excess
of revenues over expenses positive’?
Governmental Funds: Does the report state the basis of accounting used for the General Fund?
What types or assets and liabilities are included on the governmental funds balance sheet? Is this
reporting consistent with the basis of accounting being followed?
Identify which of the major funds, if applicable, are special revenue fund, debt service funds,
capital projects funds, and permanent funds. Are you able to determine which funds are considered
non-major? (Hint: Look for supplementary information.) What fund balance categories are being
used?
Proprietary Funds: List the names of the proprietary fund types included in the financial
statements. Do the financial statements provide evidence that all proprietary funds use accrual
accounting?
Fiduciary Funds: List the names of the fiduciary funds included in the fund financial statements.
Identify whether each of these is a custodial fund, investment trust fund, pension (and other
postemployment benefit) trust fund, or private-purpose trust fund. Do the financial statements
provide evidence as to what basis of accounting these funds use?
Notes to the Financial Statements: What significant accounting policies are discussed in the first
note? With regard to revenue recognition, how do the notes define the term available for paying
current period obligations?
3. Governmental Operating Statement Accounts
Statement of Activities at the Government-wide Level.
– What is the most costly governmental function or program operated by the government? Do any of
the functions/programs have net revenue? How much of the cost of governmental activities was
borne by taxpayers in the form of general revenues? Did the entity increase or decrease its
governmental activities unrestricted net position this year? Did the entity increase or decrease its
business-type activities unrestricted net position this year?
Statement of Revenues, Expenditures, and Changes in Fund Balances for Governmental Funds.
– (1) Revenues: What system of classification of revenues is used in the governmental fund financial
statements? List the three most important sources of General Fund revenues and the most
important source of revenue for each major governmental fund. Does the reporting entity depend
on any single source for as much as one-third of its General Fund revenues? What proportion of
revenues is derived from property taxes? Do the notes clearly indicate recognition criteria for
7
primary revenue sources? Are charts, graphs, or tables included in the statistical section of the
ACFR that show the changes over time in reliance on each revenue source? What have been the
trends in revenue sources over time?
– (2) Expenditures: What level of classification of expenditures is used in the governmental fund
financial statements (e.g., fund, function or program, organization unit, activity, character, object)?
List the three largest categories of General Fund expenditures; list the largest category of
expenditure of each major governmental fund.
Are charts, tables, or graphs presented in the statistical section of the ACFR to show the trend of
General Fund expenditures, by category, for a period of 10 years? What has been the trend in
expenditure categories? How does the trend in expenditures compare to the trend in revenues? Is
expenditure data related to nonfinancial measures such as population of the government or
workload statistics (e.g., tons of solid waste removed or number of miles of street constructed)?
– (3) Other Financing Sources (Uses): Are other financing sources and uses re-ported in a separate
section of the statement of revenues, expenditures, and changes in fund balances, below the
revenues and expenditures sections? Do the line items indicate the nature of each financing source
or use?
– (4) Special or Extraordinary items: Are any special or extraordinary items listed? What note
disclosures are provided to help explain the items?
Budgetary Comparison Schedule or Statement.
– Does the government present budgetary comparisons as a basic governmental fund financial
statement or as required supplementary information (RSI) immediately following the notes to the
financial statements? Is the budgetary comparison title a schedule rather than a statement? Does
the budgetary comparison present the original budget and the final amended budget? Does the
budgetary schedule present actual data using the budgetary basis of accounting? Has the
government presented one or more variance columns? Does the ACFR indicate that budgetary
reporting practices differ from GAAP reporting practices? If so, does it explain how the practices
differ?
4.
–
–
–
Accounting for Governmental Operating Activities
Governmental Activities, Government -wide Level: (1) Are governmental activities reported in a
separate column from business-type activities in the two government-wide financial statements?
(2) Are assets and liabilities reported either in the relative order of their liquidity or on a classified
basis on the statement of net position? (3) Are deferred outflows of resources or deferred inflows
of resources re-ported? If so, are they presented apart from assets and liabilities? (4) Is information on expenses for governmental activities presented at least at the functional level of
detail? (5) Are program revenues segregated into (a) charges for services, (h) operating grants and
contributions, and (c) capital grants and contributions on the statement of activities?
General Fund: (1) What statements and schedules pertaining to the General Fund are presented?
(2) What purpose is each statement and schedule intended to serve? (3) Are any noncurrent or
non-liquid assets included in the General Fund balance sheet? If so, are they offset by equal
amounts classified as “non-spendable” fund balances? (4) Are any noncurrent liabilities included
in the General Fund balance sheet? If so, describe them. (5) Are deferred outflows of resources or
deferred in-flows of resources reported? If so, are they presented apart from assets and liabilities?
(6) Are revenue classifications sufficiently detailed to be meaningful? (7) Has the government
refrained from reporting expenses rather than expenditures?
Special Revenue Funds: (1) What statements and schedules pertaining to the special revenue funds
are presented? (2) Are these only combining statements, or are there also statements for individual
special revenue funds? (3) Are expenditures classified by character (i.e., current,
intergovernmental, capital outlay, and debt service)? (4) Are current expenditures further
categorized at least by function?
Every student is expected to fill out and submit the evaluation of the presentations
(ONLY MS WORD file; NO PDF file; NO Hard Copy) to Canvas by 11:00 PM on
March 14th (Th), 2024
8
•
Not-for-profit Organization Financial Statement Analysis Presentation
(Group Presentation) – 75 points:
Every group will present financial statement analysis for a non-governmental not-forprofit organization (except LA Food Bank). Each group is expected to download
most recent Audited Financial Statement (and annual report if available) of a nongovernmental not-for-profit organization and Form 990 for the organization in the
internet. You might be able to obtain Form 990 at www.guidestar.org. Your choice of
NFP organization will be handled on a first-come, first-served basis.
Each group is expected to notify the choice of NFP organization for presentation to
the instructor by e-mail by April 3rd (W), 2024. Each group is expected to assess
financial health and performance of the organization. Answering for the following
questions might be helpful. (but NOT required to cover all the questions)
1. Mission
o What is your organizational mission?
o Is the mission consistent with the stakeholder’s values?
o How does that translate into goals and objectives?
o What is the business model/strategy?
o What are present obstacles to fulfilling the mission?
2. Service Delivery
o What is the demand for these services?
o What type, volume and quality of services are delivered?
o Are these services compatible with mission?
o Are they meeting goals and objectives (are $ spent on right stewardship things)?
o What are present obstacles in service delivery?
3. Organizational Management
o What is the experience and expertise of management?
o What is the quality of internal support systems (NOT internal control system)?
o What is the administrative efficiency?
o What is the appropriateness of compensation?
4. Organizational Funding
o What cash funds are available?
o What non-cash contributions (goods, services volunteers) are used and available?
o How financial supportive are board and community?
o How financial supportive are commercial activities?
o Is there continuity of support and diversity of income streams?
o How compatible is the funding with the mission?
o How efficiency is fundraising and development?
o What are present obstacles in funding and support?
5. Financial Health
o What is the cash flow position?
o How financially stable is the organization?
o Does it have accumulated wealth to sustain it if funding is reduced?
9
6. Financial Management
o What is the quality of internal control system?
o How prudent is the cash and investment management?
o Are non-financial assets prudently managed?
When preparing your presentation, you may (but, not required to) consider some
issues covered in class or the instructor’s PowerPoint slides provided. Each group
should include several RATIO ANALYSES (See PPT slides for Ch.18).
Ratio Analysis should be based on past performance and TRENDS over time (e.g.,
5 or 10 year trends) within the organization. Ratios should be BENCHMARKED
against average data for similar not-for-profit organization(s). Ratios might be also
compared to targeted values (if target data is available) for performance indicators. It
is also recommended that you review ‘Independent Auditor’s Report’.
Each group will prepare 20-30 pages PowerPoint slides and e-mail the ppt file to
the instructor by 2:00 PM on April 29th (M), 2024 so that the instructor can post the
presentation slides on Canvas. The presentation time should be 15-20 minutes
(absolutely NO longer than 20 minutes), and all team members MUST speak in the
presentation.
Every student is expected to fill out and submit the evaluation of the presentations
(ONLY MS WORD file; NO PDF file; NO Hard Copy) to Canvas by 11:00 PM on
May 9h (Th), 2024
Grading Policy:
Grades will be determined based on the exams, two presentations, and class participations
as follows: Grades will NOT be curved nor rounded.
Exams and Assignments
Points available
Midterm Exam
150 points
Final Exam
150 points
ACFR Presentation
75 points
NFP Organization F/S Analysis Presentation
75 points
Attendance & Presentation Evaluations
50 points
Total Points available
500 points
Grade
A
A–
B+
B
B–
C+
C
D
F
%
93% –
90 – 92.9%
85 – 89.9%
80 – 84.9%
75 – 79.9%
70 – 74.9%
60 – 69.9%
50 – 59.9%
Below 50%
Points
465 points or above
450 to 464.9 points
425 to 449.9 points
400 to 424.9 points
375 to 399.9 points
350 to 374.9 points
300 to 349.9 points
250 to 299.9 points
Below 250 points
Incomplete (I) or Withdrawal (W): A grade of ‘Incomplete’ (I) will be considered only in RARE NON-ACADEMIC and UNAVOIDABLE
situations. The approval by instructor for Withdrawal (W) after the twentieth day of instruction will be considered only in legitimate circumstances.
10
Chapter 18
Accounting and
Reporting for Private
Not-For-Profit
Organizations
Large Nonprofits
Approximately 1.6 million not-for-profits exist just in
the U.S.
Total charitable giving by donor source is estimated
to be $410 billion.
Charitable Contributions
• The amount of money and other resources
given to not–for–profit entities each year is
staggering.
• Total estimated giving in 2020 totaled $471.44
billion. This generosity comes from a wide
array of donors.
Charitable Contributions
Not-for-Profit Organizations
• A nonprofit (not-for-profit)
organization is a legal and
accounting entity that is operated for
the benefit of society as a whole,
rather than for the benefit of an
individual proprietor or a group of
partners or stockholders.
• Nonprofit organizations constitute a
significant segment of the U.S.
economy.
Not-for-Profit Organizations
• According to FASB, Not-for-profit organizations
include
– cemetery organizations,
– civic organizations,
– colleges and universities,
– cultural institutions,
– fraternal organizations,
– hospitals
– labor unions,
– libraries,
– museums,
– political parties,
– private and community foundations etc
Not-for-Profit Organizations
• General Characteristics
–They receive contributions from
donors who do not expect a
return of equal financial value
–Their operating purpose is not
providing goods and services for
profit
–They do not have ownership
interests as do for- profits
Characteristics of
Nonprofit Organizations
• Hybrid of governmental entities and
business enterprises.
• Service to Society
– Nonprofit organizations render services
to society as a whole.
– The services are of benefit to many
rather than the few.
Characteristics of
Nonprofit Organizations
• No Profit Motivation
– Nonprofit organizations do NOT operate with
the objective of earning a profit.
• The concept of net income is NOT meaningful
for a nonprofit organization.
• Nonprofit organization generally strives only to
obtain revenues sufficient to cover its expenses.
– Consequently, nonprofit organizations are
exempt from federal and state income
taxes.
Characteristics of
Nonprofit Organizations
• Governance by board of directors
– As with a business corporation, a private
nonprofit corporation is governed by
elected or appointed directors or
trustees.
– Private nonprofit organization normally
does NOT answer to a lawmaking body
as does a governmental entity.
Characteristics of
Nonprofit Organizations
• Financing by the citizenry
– As with governmental entities, most nonprofit
organizations depend on the general
population for a substantial portion of their
support.
– The citizenry’s contribution to nonprofit
organizations are voluntary contributions.
– They receive contributions from donors
who do NOT expect a return of equal
financial value.
Characteristics of
Nonprofit Organizations
• They do NOT have ownership
interests as do for-profits organization
• Stewardship for resources
– Because a substantial portion of the
resources of a nonprofit organization is
donated, the organization must account
for the resources on a stewardship basis
similar to that of governmental entities.
– Some of the resources given to a
not-for-profit organization include
donor-imposed restrictions.
Stakeholders of NFP Organizations
Donors
Other resource
providers
Grantors
Consumers
Members
Lenders
The primary purpose of a not-forprofit organization’s statement of
activities is to provide relevant
information to its
(AICPA 2019)
A. Resource providers.
B. Managers.
C. Beneficiaries.
D. State regulatory body.
Characteristics of
Nonprofit Organizations
• Use of accrual basis of accounting
– Nonprofit organizations employ the same
accrual basis of accounting used by business
enterprises.
• Measurement of expenses
–Expenses, rather than expenditures are reported
in the statement of activities of most nonprofit
organizations.
– Allocation of expenses and revenues to the
appropriate accounting period is a common
characteristic of nonprofit organization and
business enterprises.
A nongovernmental not-for-profit
organization may report on which of the
following basis and remain in compliance
with generally accepted accounting
principles (GAAP)?
(AICPA 2021)
A. Cash
B. Accrual
C. Modified cash
D. Modified accrual
A Little History….
• For many years, the GAAP were NOT considered
to be entirely applicable to nonprofit organizations.
• In the period of 1972 to 1974, the unsettled state of
accounting for nonprofit organizations was
improved by the AICPA’s issuance of three Audit
and Accounting Guides or Industry Audit
Guides:
– Hospital Audit Guide.
– Audits of Colleges and Universities.
– Audits of Voluntary Health and Welfare
Organizations.
• All three guides were amended later.
A Little History….
• In 1978, AICPA issued Statement of Position 78-10, later
incorporated in “Audits of Certain Nonprofit Organizations”
– applied to at least 18 types of nonprofit organizations (ranging from
cemetery societies to zoological and botanical societies).
– Until 1993, there was a confusing variety of private not-for-profit
accounting practices.
• In 1993, FASB tried to resolve inconsistencies in
FOUR Statements of Financial Accounting
Standards.
– In that year, FASB issued guidance to
• standardize this reporting, and
• emphasize reporting the operations and financial
position of the entire entity, and
• allow the use of many of the same accrual-based
techniques utilized by for-profit entities.
FASB Standards for Nonprofit
Organizations
• ASC 958 (SFAS #93), “Recognition of
Depreciation by Not-For-Profit Organizations.”
• ASC 958 (SFAS #116), “Accounting for
Contributions Received and Contributions
Made.”
• ASC 958 (SFAS #117), “Financial Statements
of Not-For-Profit Organizations.”
• ASC 958 (SFAS #124), “Accounting for Certain
Investments Held by Not-For-Profit
Organizations.”
Authoritative Jurisdiction
Not-For-Profits
Public
Not-For-Profits
Private
Not-For-Profits
GASB has
jurisdiction.
FASB has
jurisdiction.
Changes to existing authoritative GAAP for
nonissuer, nongovernmental entities are
communicated by the Financial Accounting
Standards Board through the issuance of:
(AICPA 2020)
A. Exposure Drafts.
B. Concept Statements.
C. Accounting Standards Updates.
D. Statements of Financial Accounting
Standards.
Financial Reporting
FASB’s framework for not-for-profit standards:
The financial
statements
should focus on
the entity as a
whole.
Reporting
requirements for notfor-profits should be
similar to business
entities, unless there
are critical differences
in the needs of users.
Framework for Not-for-Profit
Organizations
• Several basic goals form the framework for
GAAP for private not-for-profit entities,
including:
– Financial statements should focus on the entity as
a whole.
– Reporting requirements for private not-for-profit
entities should be similar to those applied by forprofit businesses unless critical differences exist
in the nature of the transactions or the informational
needs of financial statement users.
Financial Statement Goals
• The first goal establishes that the financial
statements should NOT highlight individual
funds the organizations use for internal recordkeeping.
– For external reporting purposes, FASB emphasized
the operations and financial position of the entire
organization.
• The second goal allows the use of many of the
same accounting techniques utilized by forprofit entities.
– Existing authoritative literature for capital leases, pensions,
contingent liabilities, and similar issues have NOT been
rewritten for private not-for-profit entities.
Financial Reporting
FASB requires
three financial
statements for
not-for-profits.
• Statement of Financial
Position
– Uses “Net Assets” instead of
owners’ equity or fund balance.
• Statement of Activities (and
Changes in Net Assets)
• Statement of Cash Flows
• Statement of Functional
Expense (required ONLY for
Voluntary Health and Welfare
Organizations).
VHWO
• A Voluntary Health and Welfare Organization
(VHWO) is formed for the purpose of performing
voluntary services for various segments of society and
that is tax-exempt (organized for the benefit of the
public), supported by the public, and operated on a
not-for-profit basis.
• Most VHWO entities concentrate their efforts and
expend their resources in an attempt to solve health
and welfare problems of our society.
• VHWO entities include those NFPs that derive their
revenue primarily from voluntary contributions from
the general public to be used for general or specific
purposes connected with health, welfare, or
community services.
VHWO
• Examples of VHWO include the following:
– Salvation Army
– Red Cross
– Goodwill Industries
– United Way
– LA Regional Food Bank
– Nonprofit organizations whose purpose is to find a
cure for or help people who have diseases such as
cancer, diabetes, heart disease, or muscular
dystrophy.
Nongovernmental not-for-profit organizations are
required to provide which of the following external
financial statements? (AICPA 2011)
A. Statement of financial position, statement
of activities, statement of cash flows
B. Statement of financial position, statement of
comprehensive income, statement of cash flows
C. Statement of comprehensive income,
statement of cash flows, statement of gains and
losses
D. Statement of cash flows, statement of
comprehensive income, statement of unrelated
business income
Which of the following not-for-profit
entities is required to prepare a statement
of functional expense? (AICPA 2009)
A. An art museum.
B. A shelter for the homeless.
C. A private foundation.
D. A public golf course.
Statement of Financial Position
• Reports assets, liabilities, and net assets.
• Uses term net assets rather than owners’
equity.
• Restrictions by outside donors results in net
assets classified as:
– Without donor restrictions
– With donor restrictions
• Can be purpose restricted (for a particular purpose).
• Can be time restricted (for use in a future time period).
– Can be permanently restricted (expected to remain restricted for
as long as the organization exists).
Statement of Financial Position
Report assets,
liabilities, and
net assets.
Net assets are presented
in 2 categories:
Use the term “Net
assets” rather than
owners’ equity or
fund balance.
?
?
(1) Net Assets With
Donor Restrictions
(2) Net Assets Without
Donor Restrictions
Which of the following financial categories are
used in a nongovernmental not-for-profit
organization’s statement of financial position?
(AICPA 2012)
A. Net assets, income, and expenses.
B. Income, expenses, and unrestricted net
assets.
C. Assets, liabilities, and net assets.
D. Changes in unrestricted, temporarily
restricted, and permanently restricted net assets.
The purpose of a statement of financial position for a
nongovernmental not-for-profit entity is to provide
relevant information about (AICPA 2016)
A. The cash receipts and cash payments during a period
in time.
B. The effects of transactions and other events and
circumstances that change the amount and nature of net
assets.
C. The assets, liabilities, and net assets, and about
their relationships to one another at a moment in
time.
D. The changes in permanently restricted net assets,
temporarily restricted net assets, and unrestricted net
assets for a period of time.
• The net assets represent the difference
between the not-for-profit organization’s
assets and liabilities
• Net assets of a nongovernmental not-for-profit
organization are most appropriately
characterized as the residual interest of the
not-for-profit entity.
• The ownership interests of not-for-profit
organizations are unlike business enterprises.
• Resources do NOT belong to a defined class
of owners, only the not-for-profit entity itself
and the mission for which it was formed.
What is the appropriate
characterization of the net assets
of a nongovernmental not-forprofit organization? (AICPA 2017)
A. Residual interest.
B. Ownership interest.
C. Donor’s interest.
D. Equity interest.
Not-for-Profit (NFP) Organization
Financial Reporting
Reporting requirements unique to NFP organizations
• Demonstrating accountability for donor-imposed restrictions by
reporting net assets and changes in net assets in the three
categories of
(1) Permanently restricted,
(2) Temporarily restricted, and
(3) Unrestricted
• ASU 2016-14, Not-for-Profit Entities (Topic 958) – Presentation
of Financial Statements of Not-for-Profit Entities
– Effective Date: For annual financial statements issued for fiscal years
beginning after December 15, 2017, and for interim periods within
fiscal years beginning after December 15, 2018; Early application is
permitted.
– Reduces Net Asset Classes to TWO
(1) Net Assets With Donor Restrictions
(2) Net Assets Without Donor Restrictions
• Reporting program service expenses separately from
supporting service expenses.
– The latter include overhead (such as, non-program management and
general expenses) and fund-raising expenses
Statement of Financial Position
• Restrictions must be imposed by
outside donors before an asset is
classified as “restricted”
– For financial statement purposes, boarddesignated or internally restricted
assets continue to be classified as
“unrestricted”
– Net Assets Without Donor Restrictions
• Officials of the organization can make
whatever use they wish of these resources.
A $100,000 gift was received by Group Home Projects,
a nongovernmental not-for-profit organization. Group’s
board of directors stipulated that this gift must be
invested for a period of four years, with the income to be
used for general operations. How should the gift be
reported in Group Home’s statement of activities?
(AICPA 2014)
A. Unrestricted contribution.
B. Restricted contribution.
C. Unrestricted contribution of $25,000 and restricted
contribution of $75,000.
D. Deferred revenue.
A nongovernmental not-for-profit college has a portfolio
of bond investments that had an original cost of
$2,000,000. The college’s board of trustees voted to
hold the principal of this fund intact in perpetuity and
designated the earnings to reimburse faculty for travel to
academic conferences. During the year, interest of
$50,000 was earned in cash. The fair value of the bonds
was $1,980,000. What amount should the college report
as permanently restricted net assets at year end?
(AICPA 2015)
A. $0
B. $1,980,000
C. $2,000,000
D. $2,030,000
Whitestone, a nongovernmental not-for-profit
organization, received a contribution in
December, Year 1. The donor restricted use of
the contribution until March, Year 2. How should
Whitestone record the contribution? (AICPA
2010)
A. Footnote the contribution in Year 1 and record
as revenue when it becomes available in Year 2.
B. No entry required in Year 1 and record as
revenue in Year 2 when it becomes available.
C. Report as revenue in Year 1.
D. Report as deferred revenue in Year 1.
Statement of Financial Position
• Net Assets With Donor Restrictions
– For a particular purpose OR for use in a
future time period
– When the restriction is satisfied (or
withdrawn), these resources are switched
to unrestricted net assets.
– When the appropriate time has passed or
the gift is used as stipulated, restricted net
assets are reclassified as unrestricted
net assets
Reclassification
“Net Assets Released from Restrictions”
indicates the reclassification of temporarily
restricted support to unrestricted support in
the year in which the donor stipulations
were met.
Reclassifications may be due to
(1)satisfaction of program or purpose
restrictions,
(2)satisfaction of time restrictions
The net asset reclassifications of a
nongovernmental not-for-profit
organization would be reported on which
of the following? (AICPA 2016)
A. Statement of financial position.
B. Statement of activities.
C. Statement of cash flows.
D. Statement of functional expenses.
In the preparation of the statement of activities
for a nongovernmental not-for-profit
organization, all expenses are reported as
decreases in which of the following net asset
classes? (AICPA 2007)
A. Total net assets.
B. Unrestricted net assets.
C. Temporarily restricted net assets.
D. Permanently restricted net assets.
How should operating expenses for a
nongovernmental not-for-profit organization
be reported? (AICPA 2010)
A. Change in temporarily restricted net
assets.
B. Change in unrestricted net assets.
C. Change in permanently restricted net
assets.
D. Contra-account to associated revenues.
How should a nongovernmental not-for-profit
organization report depreciation expense in its
statement of activities? (AICPA 2009)
A. It should not be included.
B. It should be included as a decrease in
unrestricted net assets.
C. It should be included as an increase in
temporarily restricted net assets.
D. It should be reclassified from unrestricted net
assets to temporarily restricted net assets,
depending on donor-imposed restrictions on the
assets.
Hann School, a nongovernmental not-for-profit
organization, spent $1 million of temporarily
restricted cash to acquire land and building. How
should this be reported in the statement of
activities? (AICPA 2008)
A. Increase in unrestricted net assets.
B. Increase in temporarily restricted net assets.
C. Increase in permanently restricted net assets.
D. Decrease in permanently restricted net
assets.
Endowment
• Endowment in perpetuity:
– increase in net assets with donor
restrictions
• Quasi-endowment:
– A fund which the governing board of an institution or
foundation establishes to function as an endowment in
that the principal is to be retained and invested
– However, the entire principal and income may be spent
at any time at the discretion of the governing board
– increase in net assets without donor
restrictions
A nongovernmental, not-for-profit entity calculated a $4,000 increase in net
assets with donor restrictions for the current fiscal year before consideration
of the following:
• A cash donation designated by the donor as an endowment in perpetuity
$28,000
• Net assets released from restrictions $12,000
• A donation received that was designated as a quasi-endowment $21,000
Which of the following should be reported as the increase in
net assets with donor restrictions in the current year statement
of activities?
(AICPA 2022)
A. $16,000
B. $20,000
C. $37,000
D. $41,000
A nongovernmental, not-for-profit entity should
report a reclassification of net assets in its
statement of activities if a donor: (AICPA 2023)
A. Makes payment on an outstanding pledge.
B. Contributes cash for a perpetual endowment.
C. Withdraws previously imposed
restrictions on a gift of cash.
D. Pledges equity stock for the purchase of
equipment in two years.
A nongovernmental, not-for-profit entity recorded the following transactions
during its first year of operation:
• Donor A contributed $1,000,000 to acquire the necessary assets to expand
the entity’s services to a nearby city. The project was completed during Year
1 at a total cost of $1.25 million.
• The entity’s board of directors designated $250,000 of net assets to
complete the expansion project.
• Donor B contributed $500,000 to establish a perpetual endowment fund
whose investment returns must be used for the maintenance of a building
owned by the entity.
What amount should be reported as the balance in net assets with donor
restrictions in the year-end statement of financial position?
(AICPA 2023)
A. $500,000
B. $750,000
C. $1,500,000
D. $1,750,000
A nongovernmental, not-for-profit health care entity reported the following items in its trial balance:
Account
Amount
Notes
Cash and cash equivalents
$98,000
Includes $22,000 restricted for building improvements
Grants receivable
$20,000
Owed by the state for specified capital expenditures
incurred during the year
Land, buildings, and equipment $250,000
Long-term investments
$130,000
Marketable securities
$90,000
The donor allowed this temporary investment in
high-quality debt investments until the cash is
needed for building construction; construction is
scheduled to begin late in the next fiscal year
Prepaid insurance
$15,000
Remaining term of policy is two years from fiscal
year-end
What amount should the entity report as total noncurrent assets in its yearend statement of financial position?
(AICPA 2023)
A. $499,500
B. $477,500
C. $507,000
D. $519,500
Statement of Activities and
Changes in Net Assets
Change in net assets =
difference between
revenues and expenses
Change in net assets is
reported instead of net
income.
Donors’ unconditional
promises to give are
recognized as both a
revenue and a receivable
in the period of promise.
(FASB No. 116)
Revenues &
expenses are
measured on the
accrual basis.
The primary purpose of a not-forprofit organization’s statement of
activities is to provide relevant
information to its
(AICPA 2019)
A. Resource providers.
B. Managers.
C. Beneficiaries.
D. State regulatory body.
What is a primary purpose and focus of the statement
of activities for a nongovernmental, not-for-profit
organization?
(AICPA 2018)
A. To demonstrate the ability of the organization to
meet donor-imposed restrictions on resources.
B. To demonstrate how the organization’s resources
are used in providing various programs and services.
C. To provide relevant information about the cash
receipts and cash payments of the organization during
a period.
D. To provide a cost-benefit analysis of the use of the
organization’s resources.
A nongovernmental not-for-profit
organization’s statement of activities is
similar to which of the following for-profit
financial statements? (AICPA 2009)
A. Balance sheet.
B. Statement of cash flows.
C. Statement of retained earnings.
D. Income statement.
A statement of activities prepared by a
nongovernmental not-for-profit
organization is most similar to which of the
following financial statements prepared by
a for-profit entity?
(AICPA 2021)
A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of changes in stockholders’
equity
Which of the following financial statements
would provide information about the ongoing
revenues and expenses associated with a
voluntary health and welfare organization?
(AICPA 2017)
A. The statement of activities.
B. The statement of cash flows.
C. The statement of functional expenses.
D. The statement of financial position.
Statement of Activities and
Changes in Net Assets
Change in net assets =
difference between
revenues and expenses
Donors’ unconditional
promises to give are
recognized as both a
revenue and a receivable
in the period of promise.
(FASB No. 116)
Expenses are presented
in 2 categories:
Program Services
Supporting Services
Statement of Activities and
Changes in Net Assets
Program Services
Activities relating to
social services,
research, or other
objectives of the
organization.
Supporting Services
Administrative costs
and fund-raising
expenses.
Statement of Cash Flows
Statement of Cash Flows
Use the
standard FASB
classifications.
Can use either
the direct method
or the indirect
method.
Sokro, a nongovernmental not-for-profit
organization, uses the indirect method to prepare
its statement of cash flows. In determining its net
cash provided (used) by operating activities,
Sokro must add back which of the following to the
change in net assets?
(AICPA 2019)
A. Purchase of equipment.
B. Payment on long-term debt.
C. Depreciation.
D. Decrease in accounts payable.
How should a nongovernmental, not-forprofit organization report donorrestricted cash contributions for longterm-purposes in its statement of cash
flows? (AICPA 2008)
A. Operating activity inflow.
B. Investing activity inflow.
C. Financing activity inflow.
D. As a noncash transaction.
How should a nongovernmental, not-for-profit
organization report amounts paid for interest in
a statement of cash flows prepared using the
indirect method?
(AICPA 2023)
A. As a disclosure in the required supplemental
information section of the financial statements
B. As a supplemental disclosure of cash flow
information
C. As a cash flow from operating activities
D. As a cash flow from investing activities
Box, a nongovernmental not-for-profit organization, had the
following transactions during the year:
•
•
•
•
Proceeds from sale of investments $80,000
Purchase of property, plant and equipment $10,000
Proceeds from long-term debt $100,000
Loss on sale of investment $5,000
What amount should be reported as net cash provided by
financing activities in Box’s statement of cash flows?
(AICPA 2019)
A. $70,000
B. $75,000
C. $80,000
D. $100,000
Statement of Functional Expense
(ONLY for voluntary health and welfare organizations)
Statement of
Functional Expenses
A detailed analysis
of expenses by
both function and
object (or nature).
Allocation of joint
fund-raising &
program service
costs is permitted
only when certain
criteria are met.
Financial statements prepared by a
voluntary health and welfare
nongovernmental not-for-profit organization
must report expenses by the following
classification(s):
(AICPA 2019)
Functional
A.
Yes
B.
Yes
C.
No
D.
No
Natural
Yes
No
Yes
No
Which of the following comprise functional
expense categories for a nongovernmental notfor profit organization?
(AICPA 2008)
A. Program services, management and
general, and fund-raising.
B. Membership dues, fund-raising, and
management and general.
C. Grant expenses, program services, and
membership development.
D. Membership development, professional fees,
and program services.
Kind Nurses Assoc. is a voluntary health and
welfare organization. Nurses are paid to visit
homes of elderly people and are reimbursed
for mileage and supplies. Which of the
following items should Kind record as a
support activity expense in its statement of
functional expense? (AICPA 2017)
A. Nurses’ mileage expense.
B. Payment for nurses’ employee benefits.
C. Payment for nurses’ supplies.
D. Fundraising costs.
Which of the following costs should a
nongovernmental not-for-profit organization
report as a supporting service expense?
(AICPA 2019)
A. Salary paid to a program director.
B. Cost for the annual fund-raising dinner.
C. Printing cost incurred to create educational
fliers on the prevention of illness.
D. Cost incurred to advertise the programs of
the organization.
Arkin Corp. is a nongovernmental not-for-profit
organization involved in research. Arkin’s
statement of functional expenses should classify
which of the following as support services?
(AICPA 2009)
A. Salaries of staff researchers involved in
research.
B. Salaries of fundraisers for funds used in
research.
C. Costs of equipment involved in research.
D. Costs of laboratory supplies used in research.
Fenn Museum, a nongovernmental not-for-profit organization,
had the following balances in its statement of functional
expenses:
Education
$300,000
Fundraising
250,000
Management and general 200,000
Research
50,000
What amount should Fenn report as expenses for support
services? (AICPA 2011)
A. $350,000
B. $450,000
C. $500,000
D. $800,000
Which of the following statements about a
nongovernmental not-for-profit organization’s financial
reporting is correct?
(AICPA 2023)
A. Supporting services are activities other than
program services.
B. Program service expenses include only direct costs
relating to providing program services.
C. Organizations are required to report expenses by
functional classification in the notes to financial
statements.
D. Organizations are required to report expense
information by functional and natural classification in a
separate financial statement using a matrix format.
On a nongovernmental, not-for-profit entity’s
statements of activities, which of the following
amounts should NOT be netted together under
any circumstances? (AICPA 2020)
A. Revenues and expenditures from the sale of
used equipment.
B. Revenues and expenditures from an annual
fundraising campaign.
C. Investment income, custodial fees, and other
advisory expenditures.
D. Gains and losses from exchange rates or
other foreign currency translations.
Accounting for Contributions
•
Contributions should be recognized as
(support) revenues when received.
–
–
•
“There must be sufficient evidence in the form of
verifiable documentation that a promise was
made and received” (FASB, ASC 958-605-25-8).
“A communication that does not indicate clearly
whether it is a promise is considered an
unconditional promise to give if it indicates an
unconditional intention to give that is legally
enforceable”(ASC 958-605-25-9).
Restricted contributions are recognized as
revenue within Net Assets With Donor
Restrictions.
Accounting for Contributions
•
•
•
•
Unconditional promises from a donor
should be reported immediately as both a
receivable and a revenue.
If NOT to be collected within one year, the
promise should be recorded at the present
value of the future cash flows.
Estimated uncollectible balances should
also be deducted.
Conditional promises are NOT recognized
until the conditions are substantially met.
Exercise
• Received pledges for $126,000 in
unrestricted donations.
• Of the pledges,10 percent are paid
immediately with 90 percent to be
received and used in future years.
• Present value of the receivable is
$98,000.
• Officials estimate that $9,000 of this
money will never be collected.
Exercise
• Received pledges for $126,000 in unrestricted
donations. Of the pledges,10 percent are paid
immediately with 90 percent to be received and
used in future years. Present value of the receivable
is $98,000. Officials estimate that $9,000 of this
money will never be collected.
Cash
12,600
Pledges Receivable (present value)
98,000
Contribution
— Net Assets Without Donor Restrictions
Contribution
— Net Assets With Donor Restrictions
Allowance for Uncollectible Pledges
12,600
89,000
9,000
Pahn, a nongovernmental not-for-profit organization,
received an unconditional pledge of $50,000. The donor
stipulated that the pledge must be used in the next fiscal
year. Pahn received and spent the $50,000 in the next
year. For the current fiscal year, what element of Pahn’s
statement of financial position will increase as a result of
the unconditional pledge? (AICPA 2014)
A. Cash and cash equivalents.
B. Pledge receivables.
C. Unrestricted support.
D. Deferred contributions.
How should unconditional pledges received by a
nongovernmental not-for-profit organization that
will be collected over more than one year be
reported?
(AICPA 2008)
A. Long-term pledges receivable, valued at the
expected collection amount.
B. Pledges receivable, valued at their present
values.
C. Deferred revenue, valued at present value.
D. Pledges receivable, valued at the amount
pledged.
The Cats and Dogs League was organized as a
nongovernmental not-for-profit organization. The
League received a pledge of $10,000 to be used
to build an addition to the kennel. This donation
will not be received for three years. How should
this pledge be recorded? (AICPA 2016)
A. As temporarily restricted support of the
present value of $10,000.
B. As temporarily restricted support of $10,000.
C. As a conditional promise to give of $10,000.
D. It should not be accounted for until it is
received
On January 1, Read, a nongovernmental notfor-profit organization, received $20,000 and
an unconditional pledge of $20,000 for each of
the next four calendar years to be paid on the
first day of each year. The present value of an
ordinary annuity for four years at a constant
interest rate of 8% is 3.312. What amount of
restricted net assets is reported in the year the
pledge was received? (AICPA 2012)
A. $66,240
B. $80,000
C. $86,240
D. $100,000
Arc Hospital received an unconditional pledge for
$1 million, which will be paid in four installments
of $250,000 over four years. What amount of
installment pledge revenue should be recognized
in the second year?
(AICPA 2021)
A. $0
B. $250,000
C. $500,000
D. $1,000,000
When should a conditional pledge to a
nongovernmental not-for-profit
organization be recognized as revenue?
(AICPA 2017)
A. Immediately.
B. When the cash is received.
C. When the pledge conditions are
met.
D. At the beginning of the next fiscal
period.
In Year 1, a donor promised to give $100,000 to a
nongovernmental, not-for-profit kitchen if it provides
20,000 meals by March 31, Year 2. At the end of
Year 1, the kitchen had provided 20,000 meals. In
which line item, if any, should the contribution be
reported in the kitchen’s statement of financial
position at the end of Year 1?
(AICPA 2022)
A. Cash.
B. Deferred revenue.
C. Contributions receivable.
D. The contribution should not be reported in the
statement of financial position.
In Year 4, a nongovernmental, not-for-profit school began a campaign to raise funds
for a proposed capital addition. The following information is available as of June 30,
Year 4:
Information
•
Received on February 1, Year 4: cash contributions from parents and alumni
•
Received on February 1, Year 4: unconditional promises to give, of which
$300,000 was received as of June 30, Year 4
•
Received on March 1, Year 4: a promise from a Year 1 alumnus to give
$50,000 if other Year 1 alumni give a total of $50,000 before September
30, Year 5
•
Received on June 30, Year 4: cash contributions from Year 1 alumni in
response to March 1, Year 4, alumni challenge
Amount
$450,000
$600,000
$50,000
$20,000
What amount of contributions for this campaign should the school report
in its June 30, Year 4, statement of activities?
(AICPA 2022)
A. $770,000
B. $1,050,000
C. $1,070,000
D. $1,090,000
Gridiron University is a private university. A successful
alumnus has recently donated $1,000,000 to Gridiron
for the purpose of funding a “center for the study of
sports ethics.” This donation is conditional upon the
university raising matching funds within the next 12
months. The university administrators estimate that
they have a 50% chance of raising the additional
money. How should this donation be accounted for?
(AICPA 2009)
A. As a temporarily restricted support.
B. As unrestricted support.
C. As a refundable advance.
D. As a memorandum entry reported in the footnotes.
During the current fiscal year, Foxx, a nongovernmental
not-for-profit organization, received unrestricted
pledges of $300,000. Of the pledged amount,
$200,000 was designated by donors for use during the
current year, and $100,000 was designated for next
year. Five percent of the pledges are expected to be
uncollectible. What amount should Foxx report as
restricted support (contributions) in the statement of
activities for the current year? (AICPA 2009)
A. $200,000
B. $190,000
C. $100,000
D. $95,000
18-89
Accounting for Contributions
Cash is
recorded as
revenue in
the period
received.
Conditional
promises to
give are
recognized as
revenue when
the conditions
are met.
Restricted gifts are
NOT the same as
conditional gifts.
Unconditional
promises to
give are
recognized as
revenue when
the promise is
made.
Pledges that allow donors
to change their minds are
not unconditional.
Accounting for Contributions
A $1,000,000 pledge was made by a donor to be paid in
six months. The money is restricted to operate a new tax
education program at a private university. Another
$500,000 pledge was made and will be paid if the program
obtain a special accreditation.
Date
Date
Description
Description
Debit
Debit
Pledge Receivable
1,000,000
Record the entry for the school.
Net Assets With Donor Restrictions
– Contributions
Credit
Credit
1,000,000
Accounting for Contributions
• Donated assets are recorded at fair
market value.
• Art works, historical treasures, and the
like are NOT recorded if three conditions
are met.
– The items are added to a collection for public
exhibition, education, or research.
– The items are protected and preserved.
– If sold, receipts must be used to acquire other
collection items.
At what value should a nongovernmental notfor-profit organization record shares of stock
when received?
(AICPA 2019)
A. Donor’s basis.
B. Average of donor’s basis and fair value on
date of donation.
C. Fair value at end-of-year.
D. Fair value on the date of donation.
Chris donated securities with a cost of
$20,000 and a fair market value of $50,000
to a local civic theater. Chris’s tax deduction
was limited to $35,000. At what amount
should the theater record the securities at
the date of donation?
(AICPA 2018)
A. $0
B. $20,000
C. $35,000
D. $50,000
Ragg Coalition, a nongovernmental not-for-profit
organization, received a gift of treasury bills.
The cost to the donor was $20,000, with an
additional $500 for brokerage fees that were paid
by the donor prior to the transfer of the treasury
bills. The treasury bills had a fair value of
$15,000 at the time of the transfer. At what
amount should Ragg report the treasury bills in
its statement of financial position? (AICPA 2012)
A. $15,000
B. $15,500
C. $20,000
D. $20,500
At which of the following amounts should a
nongovernmental not-for-profit organization
report investments in debt securities? (AICPA
2013)
A. Potential proceeds from liquidation sale.
B. Discounted expected future cash flows.
C. Quoted market prices.
D. Historical cost.
A nongovernmental, not-for-profit organization received the following donations
of corporate stock during the year:
Donation 1
Donation 2
Number of shares
2,000
3,000
Adjusted basis
$8,000
$5,500
Fair market value at time of donation
$8,500
$6,000
Fair market value at year end
$10,000
$4,000
What net value of investments will the organization report at the
end of the year? (AICPA 2010)
A. $12,000
B. $13,500
C. $14,000
D. $14,500
Accounting for Contributions
• Art works, historical treasures, and
the like are generally NOT recorded
if three conditions are met.
– The items are added to a collection for
public exhibition, education, or research.
– The items are protected and preserved.
– If sold, receipts must be used to acquire
other collection items.
Accounting for Contributions
•
Services contributed to a not-for-profit
organization should be recognized as a
revenue if the service
– created or enhanced a nonfinancial asset,
OR
– required a specialized skill possessed by the
donor and would have had to be purchased
if not donated.
The Turtle Society, a nongovernmental not-for-profit
organization, receives numerous contributed hours
from volunteers during its busy season. Chris, a clerk
at the local tax collector’s office, volunteered ten hours
per week for 24 weeks transferring turtle food from
the port to the turtle shelter. His rate of pay at the tax
office is $10 per hour, and the prevailing wage rate for
laborers is $6.50 per hour. What amount of
contribution revenue should Turtle Society record
for this service? (AICPA 2007)
A. $0
B. $840
C. $1,560
D. $2,400
A not-for-profit organization is exempt from
reporting which of the following contributed
services as revenue?
(AICPA 2018)
A. A CPA prepares the organization’s tax return.
B. A special education teacher tutors children
with learning disabilities.
C. A carpenter builds shelves for the office.
D. An attorney solicits contributions on
behalf of the organization.
A nongovernmental not-for-profit animal shelter receives
contributed services from the following individuals valued at
their normal billing rate:
Veterinarian provides volunteer animal care $8,000
Board members volunteer to prepare books for audit 4,500
Registered nurse volunteers as receptionist 3,000
Teacher provides volunteer dog walking 2,000
What amount should the shelter record as contribution
revenue? (AICPA 2010)
A. $8,000
B. $11,000
C. $12,500
D. $14,500
A storm damaged the roof of a nongovernmental, notfor-profit organization’s building. A professional
roofer repaired the roof at no charge. How should the
roof repairs be recognized in the statement of
activities? (AICPA 2015)
A. As an increase in expenses and an increase in
contributions from donated services.
B. As an increase in the building account and an
increase in unrestricted net assets.
C. As an increase in fixed assets and an increase in
contributions from donated services.
D. No recognition is required in the financial
statements, but a note disclosure is required.
In the current year a nongovernmental, not-for-profit
entity incurred $630,000 in expenditures exclusive of
in-kind and other nonmonetary activity during the
year. It also received donated legal services, which
otherwise would have cost $40,000, and consumed
donated supplies with a value of $15,000. What
should the entity report as total expenses in its
statement of activities for the current year?
(AICPA 2022)
A. $630,000
B. $645,000
C. $685,000
D. $670,000
Accounting for Contributions
Donations of
works of art
and historical
treasures are
generally not
recognized.
Contributed
services are
recognized as
revenue if one
of two
conditions is
met:
Exchanges,
such as
member
dues, are
treated as
accrual
revenue.
1. The service creates or enhances a nonfinancial asset, OR
2. The services are specialized and would have had to be
purchased otherwise.
Azim Services, a nongovernmental, not-for-profit
organization, received dues of $100 from its
members. Azim provided its members with a
newsletter that had a $25 value. All other
services were valued at $10 per member. What
is the amount of contribution made to A…