Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the new ASU will require both types of leases to be recognized on the balance sheet.
The amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for any of the following:
For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early application of the amendments in this Update is permitted for all entities.
For more information on this new standard, please refer to this press release. If you’re interested in better understanding how this new standard might impact your organization, please contact David Semendinger, Lead Partner, Quality Control Services Group, at 301.231.6200.
The standard opinion for audits of financial statements conducted in accordance with “auditing standards generally accepted in the United States” (GAAS) explains which financial statements were covered in the audit, the basis of accounting (typically accounting principles generally accepted in the United States of America [GAAP]) applied in preparing the financial statements, management’s responsibility for the statements, the responsibilities of the auditor, and the auditor’s opinion as to whether the financial statements are fairly presented.
What Are the Different Types of Audit Report Modifications?
The three broad types of audit report modifications are: 1) qualified opinions, 2) adverse opinions, and 3) disclaimers of opinion.
Qualified opinions state that except for the effects of the matter(s) to which the qualification relates, the financial statements are fairly presented. Adverse opinions state that the statements are not fairly presented in accordance with the accounting framework specified. Disclaimers of opinion disclaim an opinion on the financial statements.
What Could Lead to a Modification of the Standard Audit Opinion?
Significant GAAP departures are cause for either a qualified opinion, or if the departure is material and pervasive, an adverse opinion. GAAP departures may be in the form of measurement exceptions or disclosure exceptions. Measurement exceptions arise when GAAP provisions are not properly applied. Example scenarios include failing to record all lease obligations, failing to properly account for contingent losses related to a lawsuit, or computing depreciation expense in accordance with a methodology other than GAAP. Disclosure exceptions occur when disclosures or information required by GAAP to be presented are omitted or not presented in accordance with GAAP. For example, failure to disclose future commitments under long-term leases, present a statement of cash flows, or present comprehensive income and its components is likely to result in a report modification.
Limitations on the auditor’s ability to obtain sufficient appropriate audit evidence can lead to report modifications, or to the auditor withdrawing from the engagement. Examples of such scope limitations are situations in which the auditor is unable to confirm receivables or observe the physical inventory count. Scope limitations may be either client or circumstance-imposed; the materiality and source of limitation is evaluated in determining what report is appropriate.
Uncertainties may also trigger audit opinion modifications. The most typical uncertainty cited in audit opinions is uncertainty as to whether an entity will be able to continue as a going concern. Such an uncertainty may lead to a disclaimer of opinion.
Given the complexity of GAAP and required disclosures, there are many possible scenarios in which a report modification could be necessary. If you’d like to find out more about audit opinion modifications relating to your unique circumstances, please contact Aronson Quality Control expert Rachel Plumley at 301.231.6200.
The most popular method of accounting is cash basis, primarily because of its simplicity. Reporting on the cash basis allows the business to report income as cash received and expenses as they are paid. Under the accrual method, income is reported in the year it is earned and expenses are either deducted or capitalized in the year they are incurred.
Cash basis tax reporting is best for companies who are in their growth phase where their accounts receivable grows each year and is in excess of their accounts payable and other accrued liabilities. This allows for a deferral of taxable income related to those receivables until actually collected. However, there are limitations on what entity types are eligible to report on the cash basis. With a few exceptions, C-corporations are generally not eligible to report on the cash basis method for tax purposes. However, many partnerships, limited liability corporations, and S-corporations are eligible to use the cash basis method for tax reporting.
For more information, please contact your Aronson tax advisor or Melissa Tarkett at 301.231.6200.
The Department of Labor (DOL) is preparing to release the results of another audit quality study performed on audits of employee benefit plans.* Based on comments made publicly, the report will show that audit quality continues to decline and is particularly poor when the auditor does not have retirement plan audit experience. Hiring the plan auditor is a fiduciary function, and a common misconception among plan fiduciaries is that, if an audit is found to be deficient, the accounting firm that performed the work is somehow in trouble with the DOL. Surprisingly, this is not the case. A deficient audit can subject the plan sponsor, not the accounting firm, to significant fines and penalties as authorized by Title I of the Employee Retirement Income Security Act of 1974 (ERISA).
Furthermore, under ERISA, failure to properly select and monitor service providers, including qualified auditors, exposes the plan administrator to potential fiduciary violations and civil penalties. The only real recourse the DOL has against auditors is to report the accounting firm to their state licensing board.
The DOL has stated that one of the main reasons these audits are deficient is the auditors’ lack of training and knowledge in areas unique to employee benefit plans. Fiduciaries should understand the importance of prior experience when considering hiring a plan auditor for the first time or in deciding to continue with existing auditors. The American Institute of Certified Public Accountants issued a plan advisory, “The Importance of Hiring a Quality Auditor to Perform Your Employee Benefit Plan Audit.” This guide explains why your plan audit is important and provides excellent information on what factors to consider in evaluating different audit firms. It also provides an outline for developing a Request for Proposal (RFP).
The employee benefit plan audit season has begun. If you have not taken the time to evaluate the qualifications of your plan auditor, consider doing so now before it is too late!
For questions about benefit plan audits, please contact Aronson partner Kathryn Petrillo at 301.231.6233 or email@example.com.
*ERISA generally requires employee benefit plans with 100 or more participants to have an independent financial statement audit. The audit report must accompany the Form 5500 that is filed annually with the DOL.
A number of factors affect the duration and cost of an audit, such as the size of the company, the number of transactions, and the complexity of accounting concepts. For instance, a car wash business typically has straight forward accounting concepts, but have a high volume of transactions. On the other hand, an investment company typically faces complex accounting concepts that can take longer to audit than the actual transactions themselves.
Regardless of the entity, there are some key factors that can reduce audit fees and the duration of the audit: 1) the accuracy of accounting data provided to the auditors; 2) the strength of the entity’s internal controls; 3) the responsiveness of client personnel to the auditors. With these factors in place, it is much more likely that the audit will be performed efficiently, resulting in a lower cost and quicker delivery.