audits

The Government Accounting Standards Board, known as the GASB, establishes accounting and financial reporting standards for governmental entities in the United States, including municipalities, counties, school districts, special purpose districts such as water and sewer districts, as well as state governments. The GASB recently issued Statement 67 dealing with financial reporting for pension plans, and Statement 68 dealing with pension accounting and financial reporting for employers that sponsor or contribute to a public pension plan.

For most local governments, the annual financial statement audit is as much a part of the yearly round of public finance as the approval of the operating budget. Despite its routine character, however, the financial statement audit appears to remain something of mystery to most outside the auditing profession. This article will attempt to dispel the cloud of mystery by first briefly reviewing the nature and purpose of the financial statement audit and then examining ten specific points of misunderstanding commonly encountered in practice.

Nature and Purpose

Regardless of the type or size of your government, there are many advantages to having a high quality audit of your government’s financial statements. High quality audits can result in increased accountability over government programs and long-term improvements in public confidence in government. In addition, high quality audits can result in recommendations for immediate improvements in management operations and systems of internal controls.

The American Institute of Certified Public Accountants (AICPA) issued Statement on Auditing Standards number 112, commonly referred to as SAS 112, in May 2006. SAS 112 will affect all auditees, including local governments—cities, towns, counties and school districts—and is effective for audit periods ending on or after December 15, 2006. SAS 112 defines how auditors will communicate matters related to your entity’s internal controls over financial reporting.

A crucial but often overlooked component of an effective internal control framework is the audit committee. Although management is primarily responsible for making sure that the necessary controls are in place to achieve organizational objectives, the governing body ultimately must ensure that management is fulfilling this responsibility. The most effective means of oversight is the audit committee, which helps the governing body oversee the audit of financial statements, ensure that the auditor is independent of management, and address control and compliance weaknesses.