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AICPA National Governmental and

Not-for-Profit Training ProgramNPO ADVANCED AUDITING

October 23, 2007

Presented by:

Flo Ostrum, Grant Thornton LLP

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Objectives

Economic and Industry Developments

Affect of new auditing standards New regulatory developments

Future auditing standards

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Economic And Industry Developments

The State of the Economy

The State of the Not-for-profits

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The State of the Economy

In planning their audits, auditors need to

understand the economic conditions facing the

industry in which the client operates

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The State of the Economy

Economic activities relating to factors such as

interest rates,

consumer confidence,

overall economic expansion or contraction,

inflation, and

the labor market

Are likely to have an impact on the organizations

financial statements being audited.

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Critical strains to economy and business

environment

Rising interest rates continuing from the prior year.

Soaring gasoline prices, which may threaten

consumer spending, a vital tower of strength for

the U.S. economy also continued from the prior

year.

Dangerously high and rising consumer debt levels. Negative savings rate.

A softening housing boom in some markets.

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Risks

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

quite favorable, these strains could upset economic

growth, possibly affecting your clients operations

and therefore possibly impacting audit risk

Such strains may impact discretionary consumerspending and thereby decrease the willingness of

consumers to make contributions to not-for-profit

organizations

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Risks

Decreased giving may:

increase risk to improperly access restricted

funds

increase risk to properly recognize restrictions

increase risk in false reporting to obtain grants

increase risk in false reporting to meet matchingrequirements

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The State of Not-for-profits

Growth industry

As of 9/30/06 1.6 million

Auditor expectations:

regional and national conditions

health of local labor market

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The State of Not-for-profits

Corporate sponsorship

goals of sponsors = goals of organization

Funding Administrative Costs

Retiring workforce

Cyber donations

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Internet Fund-Raising

The Internet - great way for charities to:

raise awareness about a charitys mission

communicate with supporters

email appeals, supplying new donors

compelling government to give more, and

stimulating donations

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Internet Fund-Raising

Following Hurricane Katrina

45 percent of the funds that the Red Cross

received were through online fundraising

22 percent of funds raised online during the

2004 tsunami

internet increasingly effective measure ofcollecting funds in times of need

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E-Philanthropy

Internet proven to be a powerful tool for helping not-

for-profits raise significant dollars

auditor faces new challenges

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E-Philanthropy

Not-for-profits with online donation transactions

may automatically

initiate

authorize

record

summarize, and

settle transactions electronically without human

intervention or physical documentation

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E-Philanthropy

Pay Pal offering services

organization has an account

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E-Philanthropy

As a result, key audit evidence in electronic form

may exist only for a limited amount of time

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E-Philanthropy

Key audit evidence in electronic form may exist

only for a limited amount of time

Traditionally, audit procedures are performed after

fiscal year-end.

Waiting may be too late to obtain competent

sufficient evidence of controls or transactions. The not-for-profits conducting e-philanthropy may

not have hard-copy or paper evidence of

transactions

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Risks

Use of Internet may:

increase risk of maintaining adequate support

contributions increase risk of maintaining adequate support of

restrictions

increase risk of generating computer documents

as support for nonexistent transactions

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Risks

Use of Internet may:

increase risk of manipulating computer

information

increase risk of reliance upon use of specialists

to audit electronic transactions

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Objectives

Economic and Industry Developments

Affect of new auditing standards

New regulatory developments

Future auditing standards

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Audit And Attestation Issues And

Developments

Alternative Investments - Auditing

Implementation of New Standards

Risks

FO4

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Slide 21

FO4 old slideFlo Ostrum, 10/18/2007

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Alternative investmentsQuick overview

AICPA Alternative Investment Practice Aid

AICPA NFP Accounting and Audit Guide - Chapter 8

Investments not covered by SFAS Nos. 124 (Marketable Debt and

Equity Securities ) or 133 (Derivatives and Hedging Activities) areother investments

What are some examples?

Real estate, mortgage notes, venture capital funds, partnership

interests and equity securities that do not have a readily determinable

fair value

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Alternative investmentsQuick overview

Fair Value of equity security is "readily determinable" if:

Sales price or bid/ask quotation is currently available on a securitiesexchange registered with SEC or in over-the-counter market, provided

those prices or quotes for the OTC market are publicly reported by

NASDAQ systems or by the National Quotation Bureau, or

Traded only in foreign market---that foreign market is a of a breath and

scope comparable to one of U.S. markets referred to above, or Mutual fund FV per share is determined and published and is basis for

current transaction

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Alternative InvestmentsQuick overview summary

Generally investment vehicles other than stock, bonds, and mutual funds

Not a defined GAAP or GAAS term

Not traded on a national exchange such as NYSE or Nasdaq

Hedge funds

(LPs, LLPs, LLC, Ltds, Inc.)Fund of funds

Private equity funds Tr usts (other than charitable)

Venture capital funds Commodity f unds

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Applying lessons learned

1 2 3 4 5

6 7 8 9 10

Management : should, must, prepare, consider, assess, do, view,completemanagement, management, management!

Auditors can not audit what management has not done!

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Applying lessons learned

1 2 3 4 5

6 7 8 9 10

Management can never, ever prepare TOO much documentation for itsalternatives

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Applying lessons learned

1 2 3 4 5

6 7 8 9 10

Good internal controls include having STRONG documentation

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Applying lessons learned

1 2 3 4 5

6 7 8 9 10

If management uses 3rd party investment managers, they mustdevelop appropriate monitoring controls over them

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Applying lessons learned

1 2 3 4 5

6 7 8 9 10

Management must have a sufficient complement of personnel---investment, accounting, finance

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Applying lessons learned

1 2 3 4 5

6 7 8 9 10

Transparency means more than seeing the underlyings

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Applying lessons learned

1 2 3 4 5

6 7 8 9 10

Excerpt from investee's fund's offering document does NOT constituteadequate valuation policies and procedures

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Applying lessons learned

1 2 3 4 5

6 7 8 9 10

Cannot ignore controls when auditing alternatives

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Applying lessons learned

1 2 3 4 5

6 7 8 9 10

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

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Applying lessons learned

1 2 3 4 5

6 7 8 9 10

Auditing alternatives is like auditing AIRyou know it's there, you justcan't see or get your hands around it

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Guidance and focus

Current guidance (Practice Aid) focuses on due diligence,oversight and transparency

Transparency-an issue that should be consideredB

ROAD

LY to incorporate all forms of informationImportance ofDOCUMENTED management-developedrisk assessment

Management MUST establish controls and processes

Initial due diligence

Ongoing monitoring Financial reporting

Guidance:

http://www.aicpa.org/members/div/auditstd/alternative_investme

nts.htm.

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Management and auditor roles

AuditorManagement

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What management must do

Existence and valuation is management'sresponsibility

Must be prepared to take responsibilityin its own right for the valuation

Management must find other information orconduct other activities that will provideinformation on its alternative investments

Outsourced oversight

Management must develop appropriatemonitoring controls andDOCUMENTATION over it's 3rd partyservice provider

Management

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What management must do

Controls and process

Establish strong procedural controls

Design controls that are appropriatefor each type of alternative

Ensure effective process to havesufficient understanding

Regardless of how they do it, it is still

their responsibility for: Performing sufficient due diligence

Making informed investment choice

Documenting process

Management

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What auditors must do

Auditor's evaluation includes-

Adequacy of management's processand related documentationAND,

Quantity and quality of audit evidenceavailable FROM MANAGEMENT

Auditor's risk assessment should addressat least:

Materiality and significance

Nature and extent of management's

process and controls Degree of transparency tomanagement to support its valuationprocess and conclusions

Nature, complexity and liquidityAuditor

SN1

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What auditors must do

Understand and document controls

Facts and circumstances based

Must fully (robustly!) document oursolid understanding of management'sinitial due diligence, on-goingmonitoring, and financial reportingprocess and controls

Understanding will affect anddetermine nature, timing andextent of audit proceduresAuditor

SN1

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Slide 40

SN1 Frank, I moved some points to the notes section, please let me know if you want me to move them back. They should look and flow

better if they are just speaking points.Steven Ng, 6/9/2007

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What auditors must do

Level of comfort obtained fromunderstanding controls drives auditor tohelp determine nature and extent ofother procedures performed and auditevidence to be obtained

Audit evidence

Greater the risk, the more

audit evidence required Higher the quality of audit

evidence, the less the quantityof audit evidence

Considerable judgment is involved here!

Auditor

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What the auditors must do.continued

Auditor should not rely exclusively on fundmanager-provided information while ignoringinvestor controls

Investor entity's financial statements Obtain management's documented

reconciliation

Why send a confirmation?

Interpretation (and clarified by PA) requires it Information can corroborate or be helpful

Security-by-security confirmation generally, byitself, does not provide adequate information asto existence and valuation

Auditor

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Summary

Obtain management's risk assessment

Review and assess risk assessment and corroborate / test

the information Design efficient and effective procedures to address the

unique risks associated with each investment

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Alternative Investments - Risks

is the NFP acting as a prudent investor?

valuations of the alternative investments

potential effects on the organizations ability to

continue as a going concern

unrelated business income

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Statement 158 - Employers' Accounting for Defined

Benefit Pension and Other Postretirement Plans

Overview

Statement 158 represents Phase I of a comprehensive projecton employers accounting for postretirement benefit plans

Phase I Phase II

Requires:

recognition of the funded status

on the statement of financial

position

recycling of amounts recognizedin other comprehensive income

alignment of the measurement

date with the date of the

statement of financial position

May reconsider all aspect of

postretirement benefit

accounting including

measurement issues

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Applying Statement 158

Objective

Improve the employers statement of financial

position by recognizing the over-funded or under-

funded statuses of defined benefit postretirementplans as assets or liabilities

Does not change

Measurement of plan assets, benefit obligations,or net periodic benefit cost

Accounting and reporting with respect to

multiemployer plans

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Applying Statement 158

Primary changes

Statements 87, 88, 106 Statements 158

Deferred recognition of prior

service costs, gains andlosses and transition

amounts

Immediate recognition of the funded

status with offsetting entry to equitythrough other comprehensive

income

Recognition of a minimum

liability for pensions

No minimum liability required

No consideration of

deferred taxes for

"unrecognized" effects

Recognized net of deferred

tax impact (and any

allowance)

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Applying Statement 158

Primary changes, continu

ed

Statements 87, 88, 106 Statement 158

Amortization of certain

"unrecognized amounts" intoearnings

Recycling of certain amounts

recognized in comprehensiveincome into earnings

Measurement date up to 90 days

prior to the balance sheet date

allowed

Measurement date and the

balance sheet date will be the

same

Reconciliation of the funded status

to the amounts recognizedNew disclosure requirements

based on recycling

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Effective dates

Recognition of funded status and disclosure

as of the end of the fiscal year ending after June

15, 2007

Changing the measurement date

effective for fiscal years ending after

December 15, 2008

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Applying Statement 158

Debrief

Apply Statement 158 last

Apply Statements 87, 88, 106 and 132R first

Transition amount is an adjustment to Accumulated OtherComprehensive Income

Do NOT include the amount in other comprehensive income

Recycle prior service costs and gains and losses (Third times acharm)

Select either an additional measurement (stub period) or an extended

measurement period

Remember that Statement 157, Fair Value Measurements, will applyto the fair value of plan assets

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SAS 103 Audit Documentation

December 2005 SAS No. 103, Audit Documentation. SASNo. 103 supersedes SAS No. 96, Audit Documentation, andamends SAS No. 1, Codification ofAuditing Standards andProcedures, Dating of the Independent Auditors Report.

Statement establishes standards and provides guidance toauditors of nonissuers on audit documentation

The SAS is effective for audits of financial statements forperiods ending on or after December 15, 2006

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Practice Alert 07-1, Dating of the Auditor's

Report and Related Guidance

suggests a possible revision to firm's process

Guidance:

audit report date evidence supporting FS

FS prep and management's assertions

evidence that audit documentation has beenreviewed

www.aicpa.org/download/auditstd/pract_alert/pa_2007_1.pdf

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Implementation of New Standards

SAS 114

SAS 112 practice issues Risk assessment standards (applicable June 2008)

Practice Alert 07-1

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SAS 114, "The Auditor's Communication with

Those Charged with Governance"

Effective for periods beginning on or after

December 15, 2006 Supersedes SAS 61

Includes required communications, form and

timing, and to whom

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SAS 112, "Communicating Internal Control

Related Matters Identified in an Audit"

Effective for periods ending on or after December

15, 2006 How revisions will affect practice:

significant deficiencies and material weaknesses

communications

more time evaluating deficiencies

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SAS 112, "Communicating Internal Control

Related Matters Identified in an Audit"

Discussions with management and others

Issues for audits of smaller entities ??? increased costs

drafting of financial statements

possible opportunities AICPA Risk Alert

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Guidance on Evaluating Control Deficiencies

in a Single Audit

GAQC Alert #62

Evaluation guidance

factors that may affect the likelihood that acontrol, or combination of controls, could fail to

prevent or detect noncompliance

factors that affect the magnitude of

noncompliance

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Guidance on Evaluating Control Deficiencies

in a Single Audit (cont.)

For purposes of deficiencies in a single audit the followingareas ordinarily are at least significant deficiencies ininternal control:

Policies and procedures that are incomplete,inadequate, or outdated for the activities subject to atype of compliance requirement.

Inadequate segregation of duties over a type ofcompliance requirement.

Controls over complex types of compliancerequirements.

IT controls relating to the activity subject to the type ofcompliance requirement.

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Risk Assessment Standards

SAS No. 104 SAS No. 111

Effective for periods beginning on or afterDecember 15, 2006

Some highlights

requires auditor to understand and respond torisk

more emphasis on understanding internalcontrols (no more default to maximum controlrisk)

significant changes to audit methodology andtraining

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Risk Assessment Standards

Guidance:

AICPA Audit Risk alert

AICPA Audit Guide understand and implement

examples

in-depth case study

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What's not coming up.

Proposed FSP FAS 154-aConsidering the

Effects of Prior-Year Misstatements WhenQuantifying Misstatements in Current-Year

Financial Statements

FASB removed this item from the agenda

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Objectives

Economic and Industry Developments

Affect of new auditing standards

New regulatory developments

Future auditing standards

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Internal Revenue Service Activities

Pension Protection Act of 2006 (August 17, 2006)

Controlling organizations

990T now available for public inspection

private foundation and excess penalty excise

taxes doubled

Donor advised, supporting, and creditorganizations

2007- donors must have written documentation

for all contributions

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Internal Revenue Service Activities

changes to the Form 990

compensation of officers, directors, etc from

related organizations

Supporting organization must generally file a

Form 990 or 990-EZ

new lines to complete if donor advised funds if controlled entities, must still file a 990

travel and entertainment payments reported

separately

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2007 IRS Activities

implementing new legislation

gaming

employment taxes

telephone excise tax refund

community foundations

college UBIT

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Other

Frequently asked questions about exempts

www.irs.gov/charities/article/0,,id=96583,00.html

Report on Exempt Organizations Executive

Compensation Compliance Project released March

2007

Electronic filing requirement for small organizations 990-N

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Internet Based Workshop for Exempt Orgs

tax-exempt status

UBIT

employment issues

Form 990

required disclosures

www.stayexempt.org

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Independent Sector

issued in June 2005

April 2006 additional recommendations issued

www.nonprofitpanel.org

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Risks

Initiatives may increase risk:

of misstatement of use of expenditures to

support purpose

in misstatement of donations

in use of tax-exempt bonds

reporting of funded status of pension plan

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AICPAGovernmental Audit Quality Center

Launched in late September2004

Membership growing (740+)

Membership is voluntary for CPA firms

Center a resource for members including

monthly newsletters and periodic alerts for

important events, comprehensive Web site,member discussion forum, annual Webcast,

etc.

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AICPA GAQC Home Page

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Center Resources

E-mail Alerts on current audit and regulatory

developments

Dedicated Center Web sites with a completelisting ofCPA firm members in your state

Online MemberDiscussion Forums for sharing

best practices and discussing issues you are

facing

Web seminars, webcasts, and teleconferences

updating you on a variety of technical, legislative,

regulatory, and practice management subjects

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Center Resources

Governmental Audit Quality Article Collection

How to reissue a single audit report

GAQCmember update on the National

Statistical Sample of Single Audits

Audit Quality Issue: Basis of Accounting

Applying the 50% / 25% rule for selectingfederal programs to test

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Center Resources

Teleconferences

What You Should Know About the 2007

Revision ofGovernment Auditing Standards Impact of SAS 112 on Governmental

Financial Audits

What You Should Know about Recent

Proposed FASBNPO Exposure Drafts on

Accounting for Mergers and Acquisitions

Avoiding the Most Common Single Audit

Deficiencies

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GAQC Updates and Alerts

Accounting and auditing matters

Governance issues

OMB A-133 guidance: Compliance Supplement

Federal Agency waivers

HUD guidance

GASB New Statements

meeting minutes

implementation guides

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AICPA Governmental Audit Quality Center

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

Inquiries can also be sent to GAQC@aicpa.org

Firms join via the Center Web site

Demonstrate your commitment to audit quality by

joining the Center!

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AICPA Assistance

AICPA Audit Guide, GovernmentAuditing

Standards and OMB CircularA-133 Audits

GAS/A133 Audit Risk Alert

Practice Aid: Auditing Recipients of Federal

Awards: PracticalGuidance forApplying OMB

CircularA-133 2005 -2006 Edition

Federal single audit roundtable

Government Audit Quality Center

?

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Any questions?

H d t t d ti ti

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