Fiduciary fund information is presented by type of fund rather than by major funds. Both criteria must be met in the same element assets, liabilities, etc. However, Statement 34 permits a government to designate a particular fund that is of interest to users as a major fund and to individually present its information in the basic financial statements, even if it does not meet the criteria.
However, a government does not have the option to NOT report a fund as major if it meets the criteria above. It should be noted that in applying the major fund criteria to enterprise funds, the reporting entity should consider both operating and nonoperating revenues and expenses, as well as gains, losses, capital contributions, additions to permanent endowments, and special items.
When the major fund criteria are applied to governmental funds, revenues do not include other financing sources and expenditures do not include other financing uses. However, special items would be included. An integral part of proper accounting procedures rests in issues of controls and begins with internal accountability structures.
In addition, the nature of internal control is such that even appropriate methods and systems will not guarantee that an entity's objectives will be achieved. Internal control is a process-affected by an entity's board of trustees, management, and other personnel-designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Reliability of financial reporting Effectiveness and efficiency of operations Compliance with applicable laws and regulations As a result, internal control consists of five interrelated components: Control Environment Risk Assessment Control Activities Information and Communication Monitoring Control Environment The control environment is established on the basis of the attitude of management toward internal control.
It is the basis for all other elements of the system of internal control. It is the foundation for all other components of internal control, providing discipline and structure. The collective effort of various factors affects the control environment, including the following: Integrity and ethical values Commitment to competence Governing board or audit committee participation Management's philosophy and operating style Organizational structure Assignment of authority and responsibility Human resource policies and practices The substance of internal controls is more important than the form because of the risk that controls may not be effectively implemented or maintained.
Risk Assessment Risk assessment is the entity's identification and analysis of risks relevant to the achievement of its objectives and forms a basis for determining how the risks should be managed. Risks can arise or change as a result of the following factors: Changes in operating environment New personnel New or revamped information systems Rapid growth New technology New grant programs, building projects, or other activities Organizational restructuring Accounting pronouncements Federal regulations Finance-related statutes Given the dynamic nature of governmental operating environments, the ability to anticipate and mitigate risks from these changes is a key factor in measuring the strength of internal controls.
To the extent that the design of controls for new operations is an important aspect of planning efforts, an entity's level of internal control may be enhanced. Control Activities Control activities are the policies and procedures that help ensure that management directives are carried out.
Control activities can be divided into four categories: Performance reviews Information processing Physical controls Segregation of duties The application of controls, such as the segregation of duties, is affected to some degree by the size of the organization.
In small entities, procedures will be less formal than in large entities. Additionally, certain types of control activities may not be relevant in small entities.
Information and Communication Information and communication represent the identification, capture, and exchange of information in a form and time frame that enable people to carry out their responsibilities. Information systems encompass procedures and documents that do the following: Identify and record all valid transactions Describe, on a timely basis, transactions in sufficient detail to permit proper classification for financial reporting Measure the value of transactions in a manner that permits their proper recording in the financial statements Permit the recording of transactions in the proper accounting period Present properly the transactions and related disclosures in the financial statements Senior management should deliver a clear message to employees about their responsibilities and role in the internal control system.
Employees should also have a means for communicating the effectiveness and efficiency of these systems to upper levels of management. Monitoring Monitoring is a process that assesses the quality of internal control performance over time. Ongoing monitoring activities include regular management and supervisory activities and other actions taken during the normal performance of management's responsibilities.
Further, periodic reviews of internal controls and related activities, performed with internal personnel or external resources, may be undertaken.
The nature and timing of these evaluations depend on the effectiveness of ongoing activities and the risk that internal controls are not performing as intended by management.
Deficiencies in the system of internal controls should be reported to the appropriate level of management. Management should clearly assign responsibility and delegate authority with sufficient care to ensure that persons who perform control procedures are held accountable for their performance by those who monitor these activities, and persons who monitor the performance of control procedures are held accountable by senior management, the governing board, or the audit committee.
If accounting information is routinely used in making operating decisions, management is likely to establish effective controls and hold lower-level managers and employees accountable for performance. In addition, if management routinely uses accounting information in measuring progress and operating results, significant variances between planned and actual results are likely to be investigated. This review may detect the causes of the variances and affect the steps necessary to correct procedures that failed to prevent misstatements.
Common Types of Control Procedures Numerous control procedures and monitoring activities are performed by individuals in governmental entities to accomplish particular objectives. All these controls, however, can be classified within one of the basic categories of controls described below. Detailed control procedures or monitoring activities may be included in each of these categories, depending on the size of the entity and the sophistication of the particular control environment.
Access Controls Certain controls prevent access to assets by unauthorized persons. Often these controls are physical in nature. For example, an organization might store inventories of supplies and commodities in locked storage areas, store currency in a vault or a locked drawer, and use alarm systems to restrict access by unauthorized individuals. If controls to prevent unauthorized access to assets are not effective, assets may be lost or stolen. If detective control procedures such as physical inventory counts are appropriately performed, shortages should be discovered in a timely manner.
In some cases, unauthorized access to assets may be gained through vulnerable accounting records-especially records maintained on computer systems. For example, if warehouse requisitions can be issued through a computer terminal, access to inventory may be gained through the system.
Controls over unauthorized access to assets through computer records may be physical e. Monitoring the control procedures that address unauthorized access includes observing physical control procedures, reviewing established access privileges with the manager of information systems, or reviewing reports of attempted computer access violations. Internal auditors often perform such activities. Access controls, however, do not prevent individuals who have authorized access to assets from misappropriating them.
Individuals who have authorized access to both assets and related accounting records may be in a position to conceal shortages of assets in the records. However, if duties are properly segregated, persons with access to assets will not have access to related accounting records, which may be altered to conceal shortages. Controls over authorized access to assets are important to an organization, not only to prevent thefts, but also to ensure that assets are committed only after proper consideration by individuals who are knowledgeable and experienced.
Authorization and approval are types of controls designed to prevent invalid or inappropriate transactions from occurring. An example is a procedure designed to ensure that disbursements are made only when authorized orders for goods and services have been received. In many systems, access to computerized records e. Reconciliation and Comparison of Assets with Records Reconciling and comparing assets with accounting records establish a system of independent verification, either through preparing an independent control document used to reconcile accounting records and assets or by directly comparing accounting records with related assets.
Examples of these procedures include the reconciliation of physical inventory to accounting records and the preparation of a bank reconciliation. Analytical Reviews The purpose of analytical reviews is to evaluate summarized information by comparing it with expected results. Management personnel often perform analytical reviews to determine whether the entity is performing as planned. For example, a common analytical review procedure is the comparison of budgeted to actual performance, with investigation of any significant or material variances as determined by the analyst.
Often, analytical reviews may be used to monitor other underlying control procedures. Authorization and Approval Authorization and approval procedures prevent invalid transactions from occurring. Thus, this type of control typically involves authorization or approval of transactions at specific dollar thresholds and manual e.
The effectiveness of these procedures often depends on general computer controls over information security. Reviews of Output Reviews of output should be performed by district personnel who have the knowledge and experience to identify errors. Such reviews could be performed in both computer and manual systems. These reviews check the validity and accuracy of output by comparing it in detail with expected results. For example, a purchasing manager may compare recorded amounts or quantities purchased with separate records of purchase orders.
Transactional Reviews Transactional reviews check the validity and accuracy of transaction processing by comparing it in detail with expected results. Reviews often use exception reports usually computer-generated , which list items that failed to be processed because they did not meet specified criteria.
For example, a computer-generated check may be rejected if it exceeds some dollar amount and requires a manual signature. Monitoring these types of control procedures involves reviews of results performed by management. General Computer Controls Computer systems frequently have common areas of control and related control procedures referred to as general computer controls. These controls directly or indirectly affect all systems that operate within a computer-processing environment. General computer controls include the usual elements of effective internal control, that is, an individual or group responsible for control procedures and monitoring activities.
Managers of the information systems function usually monitor the performance of general computer controls. Monitoring activities include observation, exception reporting, reviews of work performed, reviews of program changes, oversight by information system steering committees, and the monitoring of user complaints. For example, the effectiveness of programmed control procedures such as edit checks and approvals depends on general computer controls that ensure that program changes are not made improperly.
General computer controls include controls over computer operations; systems acquisition, development, and maintenance; information security; and information systems support, as detailed below: Computer operations. The computer operations staff is responsible for the day-to-day processing activities of the entity's system. It ensures that jobs are scheduled and processed as planned, data are properly stored on the system or tapes, and reports are distributed in a timely and accurate fashion. Systems acquisition, development, and maintenance.
The systems acquisition, development, and maintenance staff is responsible for planning, acquiring or developing, testing, and implementing new application systems and changes to existing application systems. Such controls are usually important in larger processing environments where there is more development and maintenance activity.
The systems are more complex and there is less reliance on purchased software. Information security. The information security function is responsible for administering and maintaining an entity's information security program, including both physical and logical security. The primary goal of such a program is to ensure that access to program data, online transactions, and other computing resources is restricted to authorized users.
Information systems support. Information systems support includes such functions as system software maintenance, database administration, communications and network management, end-user computing, and other groups with technical and administrative support responsibilities.
Certain governmental entities may use external service organizations for executing and recording certain transactions, such as payroll processing. In such situations, the entity needs to ensure that the service organization has adequate controls over processing the transactions.
In the final analysis, maintaining the internal control environment and related control procedures is an integral part of management's responsibilities.
In the context of governmental accounting and reporting, the control environment has a direct impact on an entity's ability to collect and present accurate financial information. Thus, the internal control environment and related procedures are key areas of concern to an entity's external auditor. School districts are the most common special governmental units. In some states, school districts operate as a fiscally dependent part of another local governmental entity such as a city or county; in other states, school districts are legislatively independent with authority to levy taxes and set budgets.
School districts may or may not have common boundaries with another political subdivision. Regardless of whether districts are component units of another financial reporting entity, are joint ventures of several reporting entities such as consolidated educational agencies , or meet the definition in GASB Codification, Section as separate reporting entities, many school districts prepare separate financial statements to accomplish one or more of the following: Support state or federal aid applications Report financial activities to parent, taxpayer, and citizen groups Prepare a financial report for use in an official statement for bond issuance purposes Although school districts are a common type of government, they face a number of unique issues that make them distinct from states, cities, counties, or other local governmental entities.
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