Essentials of Accounting for Governmental and Not-for-Profit Organizations

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Essentials of Accounting for Governmental and
Not-for-Profit Organizations

• Chapter 13 Auditing
• Tax Issues for Exempt Entities
• Service Efforts and Accomplishments

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Overview of Chapter 13

• Auditing GNP organizations
• Tax issues for nonprofit organizations
• Reporting Service Efforts and Accomplishments
  (SEA Measures)

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Financial Statement Audits

• Financial statement audits help assure quality
  financial statements and provide oversight of
  government and nonprofit moneys -- these are the
  most common type of audit.
• Financial stmt audits involve
• examination of transactions on a test basis,
• forming judgments about internal controls and
  compliance with laws and regulations, and
• rendering an opinion about whether the financial
  statements are prepared fairly in accordance with
  GAAP.

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Financial Statement Audits

• Financial stmt audits may be conducted in
  accordance with
• AICPA basic generally accepted auditing standards
  (GAAS),
• GAO (General Accounting Office) generally
  accepted governmental auditing standards (GAGAS),
  
• OMB (Office of Management and Budget) single
  audit standards.
• GAGAS and Single Audit standards are written by
  the US federal government, but may apply to many
  SLGs and NFP organizations as well.

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Other types of audits

• Financial related audits --
• are a subset of a full financial stmt audit --
  may look at only specific financial items or at
  internal controls or compliance only
• Performance Audits
• Economy and efficiency audits --
• involve aspects of appropriate acquisition, use,
  and safeguarding of resources
• Program audits --
• assess the degree to which mission objectives
  have been achieved while adhering to applicable
  laws and regulations

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Purpose of Single Audits

• Before 1984, SLGs and NFPs receiving financial
  aid from several different federal agencies, had
  multiple audits.
• The initial Single Audit Act sought to impose one
  set of stringent audit guidelines so that only
  one audit would have to be conducted to satisfy
  multiple grantor agencies.

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Single Audits

• The initial Single Audit Acts in OMB circulars
  A-128 and A-133 required a single audit if
  federal financial assistance was over 100,000.
• In 1996 A-133 was revised and replaced A-128 .
  The current threshold for a single audit is
  federal financial assistance EXPENDITURES of over
  300,000.
• If federal assistance gt 300,000 but is all from
  one agency, a program audit may be used instead
  of a single audit.

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Supervision of Single Audits

• Oversight agency
• Agency with largest grants receive audit reports
• Cognizant agency
• Auditees with 25 M or more of federal awards are
  monitored by a cognizant agency -- agency with
  largest grants normally selected
• Compliance supplement -- includes any special
  guidelines for particular grants

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Audit process

• Must consider effect of pass-through entities and
  subrecipients
• Must identify MAJOR programs
• Group programs using risk-based approach
• Type A - larger programs
• Type B - smaller programs and low risk large
  programs
• Type A programs receive closer auditing than Type
  Bs

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Primary Single Audit Reports

• Opinion on basic financial statements
• Report on general internal control and compliance
  with laws and regulations
• Report on internal controls in federal programs
• Opinion on compliance for major programs
• Opinion on Schedule of Federal Awards

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Types of Audit Opinions on Overall Statements

• Unqualified --
• Statements appear to be in conformity with GAAP
  -- no ifs, ands, or but exception type of
  qualifying language.
• Qualified -
• Largely in conformity with GAAP except for some
  specified item(s).
• Adverse -
• Not in accordance with GAAP.
• Disclaimer -
• Not able to express an opinion, usually because
  auditor was precluded from doing some necessary
  procedure.

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Distribution of Reports

• Reports are given to oversight or cognizant
  agency
• In addition, condensed Data Collection Form
  information is submitted to a Federal Clearing
  House

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Tax Issues for Exempt Organizations

• Most nonprofits file IRS form 1023 to claim
  exemption from federal taxes on income earned
  from their main mission.
• Local law may also allow exemptions from sales
  tax and property tax.
• Most NFPs must still file an IRS Form 990
  information return if gross receipts are over
  25,000.
• NFPs with over 1000 of unrelated business income
  file Form 990-T.
• Other reports may be filed with the state.

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501(c)(3) organizations

• The tax code specifies several different classes
  of nonprofit organizations by purpose.
• The most common types are 501(c)(3) organizations
• Include religious, charitable, scientific,
  literary, educational, amateur sports
  organizations, orgs for prevent of cruelty to
  children or animals.
• Requires that no dividends be paid and no
  substantial political activity.
• 501(c)(3)s status allows donors to take a
  charitable deduction on their U.S. tax return for
  donations.

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Form 990 Information Return

• Requires financial statement information similar
  to that required by GAAP.
• Also reveals information about compensation of
  highest paid employees and contractors.
• Form 990 often subject to state freedom of
  information laws -- must be made available to
  those who request it -- commonly posted to a web
  site.
• Also asks questions to make sure the organization
  is still operating in accordance with its exempt
  mission.

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Unrelated Business Income Tax

• Even unrelated business income will be exempt
  from income tax if
• Not carried on regularly
• Run by volunteers
• Involves sales of donated items
• Operated for convenience of employees and
  patrons.
• Given specific exemption
• Royalties, dividends, interest and annuities
• Research revenues
• Income from public entertainment at a fair
• Revenues from labor, ag, business trade shows
• Income from rental or exchange of membership
  lists

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Service Efforts and Accomplishments

• Because the bottom line does not tell the whole
  story of NFP mission accomplishment, the GASB is
  experimenting with developing other measures,
  some nonfinancial in nature.
• Examples include crime statistics, lane-mile of
  highways maintained, cost per student, etc.
• Efficiency measures relate costs to outcomes
• For example, cost per student graduated within
  five years of college enrollment.
• Trade off of relevancy and reliability of these
  statistics -- may be a tendency to report only
  positive statistics.

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• Slides prepared by
• Dr. Louella Moore
• Arkansas State University