1. Financial Reporting & Auditing of non-profit organizations. Valter Cantino, Turin University Eugenio Puddu, Deloitte

2. Slide 1 Financial Reporting

3. Slide 2 Convergence to ….IPSAS  the role of ASB

4. Slide 3 Introduction: about the ASB ASB is an operating body of the Financial Reporting Council (FRC), the UK’s independent regulator for corporate reporting and governance. The ASB is the body recognised under the companies legislation to issue accounting standards. Accounting standards responsibilities impacted by move to International Financial Reporting Standards (IFRS). Focus moved to influencing the development of IFRS and their adoption in the EU, as well as developing strategy for convergence of UK standards with IFRS.

5. Slide 4 IPSASB Project: introduction Initial focus of IPSASB (and before it the PSC) has been to develop a credible core set of IPSAS, and build in its knowledge of concepts in conjunction with development of specific standards. July 2006 agreement made that IPSASB would lead a project to develop a public sector conceptual framework. November 2006 IPSASB agreed to a project brief. Updated version issued on website December 2006. IPSASB also agreed on proposals for the membership of a subcommittee to coordinate and contribute to the development of consultative papers for review by the IPSASB.

6. Slide 5 IPSASB project: objective Project brief states that: The objective of this project is to develop a Public Sector Conceptual Framework which is applicable to the preparation and presentation of general purpose financial reports of public sector entities, including but not necessarily limited to financial statements and notes thereto.” “The objective of this project is to develop a Public Sector Conceptual Framework which is applicable to the preparation and presentation of general purpose financial reports of public sector entities, including but not necessarily limited to financial statements and notes thereto.”

7. Slide 6 IPSASB Project: scope and focus Conceptual framework for: General purpose financial reporting (GPFR) – –current IPSAS relate to general purpose financial statements By public sector entities – –not GBEs –nor not-for-profit entities in the private sector.

8. Slide 7 IPSASB Project: relationship to IASB/FASB Most, if not all, components of IASB framework likely to be relevant for IPSASB framework, but… Project brief makes clear that objective is not simply to interpret IASB framework, but to develop IPSASB’s own framework using the work of IASB and others as appropriate. May result in divergence from IASB framework to reflect necessary public sector differences. May result in different timings of issues for consideration eg considering scope of financial reporting sooner. Also need to consider relationship to concepts in System of National Accounts (SNA).

9. Slide 8 IPSASB: project components Group 1 (Consultation Paper, CP, 2008) –Scope of financial reporting –Objectives of financial reporting –Qualitative characteristics –Reporting entity Group 2 (CP 2008/2009) –Definition and recognition of elements –Implications of scope for elements Group 3 (CP 2009/2010) –Measurement –Presentation and disclosure Group 4 (CP 2010) –Implications for cash basis framework.

10. Slide 9 Convergence to ….IPSAS  International Public Sector Accounting Standards

11. Slide 10 IPSAS - International Public Sector Accounting Standards The International Public Sector Accounting Standards Board (IPSASB) focuses on the accounting and financial reporting needs of national, regional and local governments, related governmental agencies, and the constituencies they serve. It addresses these needs by issuing and promoting benchmark guidance and facilitating the exchange of information among accountants and those who work in the public sector or rely on its work.

12. Slide 11 IPSAS - International Public Sector Accounting Standards A key part of the IPSASB's strategy is to converge the IPSASs with the International Financial Reporting Standards (IFRSs) issued by the IASB. To facilitate this strategy, the IPSASB has developed guidelines or "rules of the road" for modifying IFRSs for application by public sector entities.

13. Slide 12 IPSAS - International Public Sector Accounting Standards The IPSASB's objective, scope of activities and membership are set out in its Terms of Reference. They are also summarized in a fact sheet. The IPSASB's Strategic and Operational Plan, 2007-2009 sets out the direction for the board in fulfilling these objectives.

14. Slide 13 13 Strong Evidence of Progress UN System (28 bodies) OECD, NATO (21 bodies), EC, IFAC, INTERPOL Over 70 countries have agreed processes or have a project in place to adopt IPSASs or align with IPSASs

15. Slide 14 IFRS Convergence Target date December 31, 2009 of IFRS @ December 31, 2008 “Rules of the Road” – guidelines for modifying and documenting departures Relationship with IASB renewed focus

16. Slide 15 Development process… IPSASs (Public sector) IFRS (Private Sector) Terminologies Public sector guideline Public sector issues 1 2

17. Slide 16 Overview on IPSAS Mission –Establish and promote adherence to high quality professional standards –Further the international convergence of such standards –With the intention of the public organizations of the whole world –In the optics of the financial statements of general use –Speak out on public interest issues where the profession’s voice is most relevant

18. Slide 17 Overview on IPSAS (2) Rationale of Accounting Reforms –Accounting = Basis of decisions –Development decisions in particular –Infrastructure –Networks –Public services –Judgment by decision makers requires identical standards –Credibility increase –Education facilitated

19. Slide 18 Overview on IPSAS (3) Value added of Cash based IPSAS –1 Standard Cash Basis Advantages: –Full coverage of all cash transactions –Consolidation –Disadvantages: –Too basic for countries which are on modified accrual –Scope of consolidation is controversial

20. Slide 19 Overview on IPSAS (4) Value added of Accrual based IPSAS –26 Standards Accrual Basis Advantages: –Economic situation and flows –Resource allocation –Similar to GFS –Risks Disadvantage: –Leap for many countries

21. Slide 20 Overview on IPSAS (5) Structure of IPSAS –Recognition –Measurement –Disclosure

22. Slide 21 Overview on IPSAS (6) Organization of the IPSAS-Board –18 members –3 meetings of 4 days per year, English language –At least one phase of consultation („Exposure Draft“) –Qualified majorities required (2/3, 3/4)

23. Slide 22 Overview on IPSAS - Current Standards Accrual Accounting Standards IPSAS 1 –Presentation of Financial Statements IPSAS 2 – Cash Flow Statements IPSAS 3 – Accounting Policies, Changes in Accounting Estimates and Errors IPSAS 4 – The Effects of Changes in Foreign Exchange Rates IPSAS 5 – Borrowing Costs IPSAS 6 – Consolidated and Separate Financial Statements

24. Slide 23 Appendix Overview on IPSAS - Current Standards (2) IPSAS 7 – Investments in Associates IPSAS 8 – Interests in Joint Ventures IPSAS 9 – Revenue from Exchange Transactions IPSAS 10 –Financial Reporting in Hyperinflationary Economies IPSAS 11 – Construction Contracts IPSAS 12 – Inventories IPSAS 13 – Leases IPSAS 14 – Events After the Reporting Date IPSAS 15 –Financial Instruments: Disclosure and Presentation

25. Slide 24 Appendix Overview on IPSAS - Current Standards (3) IPSAS 16 –Investment Property IPSAS 17 – Property, Plant and Equipment IPSAS 18 – Segment Reporting IPSAS 19 – Provisions, Contingent Liabilities and Contingent Assets IPSAS 20 – Related Party Disclosures IPSAS 21 – Impairment of Non-Cash Generating Assets IPSAS 22 – Disclosure of Information About the General Government Sector IPSAS 23 – Revenue from Non-Exchange Transactions (Taxes and Transfers)

26. Slide 25 Appendix Overview on IPSAS - Current Standards (4) IPSAS 24 – Presentation of Budget Information in Financial Statements IPSAS 25 - Employee Benefits IPSAS 26 -Impairment of Cash-generating assets

27. Slide 26 Where to find out more On the IASB/FASB project: –www.iasb.orgwww.iasb.org –www.fasb.orgwww.fasb.org On the NSS Group of 4: –www.aasb.com.auwww.aasb.com.au –www.cica.ca and www.psab-ccsp.cawww.cica.cawww.psab-ccsp.ca –www.nzica.comwww.nzica.com –www.frc.org.uk/asbwww.frc.org.uk/asb On the IPSASB project: –www.ifac.org/publicSectorwww.ifac.org/publicSector

28. Slide 27 Auditing

29. Slide 28 There are no significant differences in auditing in private sector respect to public sector

30. Slide 29 What is an audit? Entity Professional accountant User of subject matter It begins with a three-party relationship.

31. Slide 30 What is an audit? (cont’d) Entity Professional accountant Against suitable criteria User of subject matter Systems & processes Behavior Data Evaluate/Measure subject matter

32. Slide 31 What is an audit? (cont’d) “presented fairly, in all material respects” or “true and fair view” Entity Professional accountant Against suitable criteria Systems & processes Behavior User of subject matter Express an opinion/conclusion on level of assurance about subject matter Data Evaluate/Measure subject matter

33. Slide 32 “Presented fairly, in all material respects” or “true and fair view” Accounting principles are appropriate. Financial statements (F/S) and related notes are informative. Information is classified and summarized in a reasonable manner. The F/S include financial information on: –Financial position. –Results of operation. –Changes in financial position.

34. Slide 33 Why is an audit performed? May be required by law or regulation Examples: EU Statutory Audit and SEC reporting requirement s Shareholders or governing bodies request the audit to obtain assurance on reliability of F/S Requested by specific parties interested in the F/S Examples: Creditors, potential creditors, and government agencies

35. Slide 34 Factors for successful audit Auditor independence. Understanding the entity and its environment. Risk-based approach. Professional skepticism.

36. Slide 35 Phases of the Audit Approach Perform Preliminary Engagement Activities Perform Audit Planning Perform the Audit Plan Conclude and Report Perform Post-Engagement Activities Manage the Audit Engagement Prepare and Control Working Papers Underlying Audit Quality Review Working Papers Documentation Assess and Manage Risk Pervasive Activities

37. Slide 36 Audit need to be documented Work NOT Documented is Work NOT Done!

38. Slide 37 ‘Audit documentation’ is… …the record of audit procedures performed (including audit planning), relevant audit evidence obtained, and conclusions the auditor reached. Terms such as ‘working papers’ or ‘workpapers’ are sometimes used and may vary within member firms.

39. Slide 38 –What was done. –The evidence obtained. –Significant matters arising during the audit. –The conclusion reached. –Who performed the work and when. Documentation – key messages Sufficient evidence to allow an experienced auditor with no previous connection to the audit engagement to understand:

40. Slide 39 Audit R isk factors

41. Slide 40 Risk factors Risk factors affecting an audit engagement: –Management characteristics and integrity. –Financial roles and responsibilities. –Control activities. –Significant events or unusual transactions. –Organization and management structure. –Nature of the business.

42. Slide 41 Risk Factors Risk factors affecting an audit engagement: –Business environment. –Nature of the audit engagement. –Financial results. –Business relationships and related parties. –Our prior knowledge and experience. –Likelihood of intentional misrepresentation (i.e., fraud).

43. Slide 42 Fraud risk triangle There are three conditions generally present when fraud occurs. Incentive/PressuresOpportunities Attitudes/Rationalizations Fraud Triangle

44. Slide 43 The auditors‘ report

45. Slide 44 The auditors’ report The auditor’s report should contain a clear expression of the auditor’s opinion on the financial statements. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

46. Slide 45 The auditors’ report An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. When expressing an unqualified opinion, the opinion paragraph of the auditor’s report should state the auditor’s opinion that the financial statements give a true and fair view or present fairly, in all material respects, in accordance with the applicable financial reporting framework (unless the auditor is required by law or regulation to use different wording for the opinion, in which case the prescribed wording should be used).

47. Slide 46 The auditors’ report When International Financial Reporting Standards or International Public Sector Accounting Standards are not used as the financial reporting framework, the reference to the financial reporting framework in the wording of the opinion should identify the jurisdiction or country of origin of the financial reporting framework. In the public sector, legislation governing the audit mandate may specify the layout of or words to be used in the auditor’s report.

48. Slide 47 The auditors’ report An auditor may not be able to express an unqualified opinion when either of the following circumstances exist and, in the auditor’s judgment, the effect of the matter is or may be material to the financial statements: (a) There is a limitation on the scope of the auditor’s work; or (b) There is a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures. The circumstances described in (a) could lead to a qualified opinion or a disclaimer of opinion. The circumstances described in (b) could lead to a qualified opinion or an adverse opinion.

49. Questions?