Chapter 13 – Auditing, Tax Exempt Organizations, and Evaluating Performance
CHAPTER 13 Auditing, Tax Exempt Organizations, and Evaluating Performance
13-1. THE SOLUTION TO THIS AND THE FIRST EXERCISE OF CHAPTERS 1 THROUGH 8 WILL VARY
FROM STUDENT TO STUDENT, ASSUMING EACH HAS A DIFFERENT CAFR.
13-2. THE SOLUTION TO THIS EXERCISE WILL VARY FROM STUDENT TO STUDENT, ASSUMING EACH
HAS A DIFFERENT NOT–FOR–PROFIT.
13-5 PART A.
CALCULATIONS
CITY OF SALEM
1) FINANCIAL POSITION (GOVERNMENT–
WIDE, GOVERNMENTAL ACTIVITIES)
10,786,672
40,690,111
26%
2) FINANCIAL POSITION (GENERAL FUND)
5,837,533
34,889,518 + 3,256,899
15%
3) QUICK RATIO (GOVERNMENT–WIDE,
GOVERNMENTAL ACTIVITIES)
8,242,998 + 3,312,992
2,425,477 + 4,340,108 +
2,164,521
1.29
4) LEVERAGE (GOVERNMENT–WIDE,
PRIMARY GOVERNMENT)
69,932,879
156,218,334
0.45
5) DEBT SERVICE COVERAGE
(ENTERPRISE FUNDS)
2,825,194
1,143,307 + 631,528
1.59 TIMES
6) DEBT SERVICE TO TOTAL
EXPENDITURES (GOVERNMENTAL
FUND–BASIS)
1,155,326 + 924,818
34,889,518 + 2,080,144
5.6%
7) DEBT PER CAPITA (GOVERNMENT–
WIDE, PRIMARY GOVERNMENT)
69,932,879
52,000
$ 1,345
8) DEBT TO ASSESSED VALUE OF
PROPERTY (GOVERNMENT–WIDE,
PRIMARY GOVERNMENT)
69,932,879
970,000,000
7.2%
Chapter 13 – Auditing, Tax Exempt Organizations, and Evaluating Performance
13-5 PART B
STRONGER
RATIO
EXPLANATION
1) FINANCIAL POSITION
(GOVERNMENT–WIDE,
GOVERNMENTAL ACTIVITIES)
CITY OF SALEM
THE CITY OF SALEM HAS
ACCUMULATED GREATER NET
RESOURCES (AS A PERCENTAGE OF
ANNUAL EXPENSES).
2) FINANCIAL POSITION (GENERAL
FUND)
CITY OF SALEM
THE CITY OF SALEM HAS
ACCUMULATED GREATER NET
SURPLUS OF CURRENT FINANCIAL
RESOURCES (AS A PERCENTAGE OF
GENERAL FUND EXPENDITURES).
3) QUICK RATIO (GOVERNMENT–
WIDE, GOVERNMENTAL ACTIVITIES)
VILLAGE OF
ELIZABETH
CASH AND CURRENT INVESTMENTS
ARE LARGER FOR THE VILLAGE AS A
PERCENTAGE OF CURRENT
LIABILITIES
4) LEVERAGE (GOVERNMENT–
WIDE, PRIMARY GOVERNMENT)
VILLAGE OF
ELIZABETH
THE VILLAGE HAS FINANCED ONLY
11% OF ITS ASSETS WITH DEBT, AS
OPPOSED TO >40% FOR THE CITY.
5) DEBT SERVICE COVERAGE
(ENTERPRISE FUNDS)
VILLAGE OF
ELIZABETH
THE VILLAGE’S ENTERPRISE FUNDS
GENERATE MORE CASH AVAILABLE
TO SERVICE DEBT.
6) DEBT SERVICE TO TOTAL
EXPENDITURES (GOVERNMENTAL
FUND–BASIS)
VILLAGE OF
ELIZABETH
THE DEBT SERVICE REQUIREMENTS
OF THE VILLAGE ARE A SMALLER
PROPORTION OF GOVERNMENTAL
EXPENDITURES THAN THE CITY.
7) DEBT PER CAPITA
(GOVERNMENT–WIDE, PRIMARY
GOVERNMENT)
VILLAGE OF
ELIZABETH
THE VILLAGE HAS A LOWER DEBT
BURDEN (PER CAPITA) THAN THE
CITY.
8) DEBT TO ASSESSED VALUE OF
PROPERTY (GOVERNMENT–WIDE,
PRIMARY GOVERNMENT)
VILLAGE OF
ELIZABETH
THE VILLAGE HAS A LOWER DEBT
BURDEN (PER ASSESSED VALUE OF
PROPERTY) THAN THE CITY.
Chapter 13 – Auditing, Tax Exempt Organizations, and Evaluating Performance
13-6
PART A
PART B
▪ PROGRAM EXPENSE: ABC HAS A STRONGER PROGRAM EXPENSE RATIO. BOTH
ORGANIZATIONS EXCEED THE 65% MINIMUM SUGGESTED BY THE BETTER BUSINESS
BUREAU.
RATIO
XYZ
PROGRAM EXPENSE
3,915,000 / 5,400,000
= 72.5 %
FUNDRAISING EFFICIENCY
256,000
3,200,000
= 0.08
WORKING CAPITAL
(593,000 – 129,000)
5,400,000
=0.086
OR .086 * 365 = 31 DAYS
Chapter 13 – Auditing, Tax Exempt Organizations, and Evaluating Performance
13-4
13-7.
A. FINANCIAL AUDITS PRIMARILY CONCERN PROVIDING REASONABLE ASSURANCE ABOUT
WHETHER FINANCIAL STATEMENTS ARE PRESENTED FAIRLY IN ALL MATERIAL RESPECTS IN
CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES OR WITH A
COMPREHENSIVE BASIS OF ACCOUNTING OTHER THAN GAAP.
ATTESTATION ENGAGEMENTS CONCERN EXAMINING, REVIEWING, OR PERFORMING
Chapter 13 – Auditing, Tax Exempt Organizations, and Evaluating Performance
13-5
13-8.
A. IN OUR OPINION, THE FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT FAIRLY, IN
ALL MATERIAL RESPECTS, THE RESPECTIVE FINANCIAL POSITION OF THE GOVERNMENTAL
ACTIVITIES, THE BUSINESS–TYPE ACTIVITIES, EACH MAJOR FUND, AND THE AGGREGATE
REMAINING FUND INFORMATION OF THE CITY OF X, AS OF DECEMBER 31, 2015, AND THE
RESPECTIVE CHANGES IN FINANCIAL POSITION, AND, WHERE APPLICABLE, CASH FLOWS
AN ADVERSE OPINION STATES THAT THE FINANCIAL STATEMENTS DO NOT PRESENT FAIRLY
THE FINANCIAL POSITION, RESULTS OF OPERATIONS, OR CASH FLOWS OF THE ENTITY IN
CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
A DISCLAIMER OF OPINION STATES THAT THE AUDITOR DOES NOT EXPRESS AN OPINION ON
THE FINANCIAL STATEMENTS.
(3) AN AUDITOR MIGHT DISCLAIM AN OPINION IF THE GOVERNMENT DOES NOT PROVIDE
13-9.
Chapter 13 – Auditing, Tax Exempt Organizations, and Evaluating Performance
13-6
A. A MAJOR PROGRAM IS ONE THAT IS SELECTED FOR AUDIT FOR COMPLIANCE UNDER THE
PROVISIONS OF OMB CIRCULAR A-133. SELECTION OF MAJOR PROGRAMS IS MADE FROM
TYPE A AND TYPE B PROGRAMS, AS FOLLOWS.
A TYPE A PROGRAM WOULD BE A LARGE PROGRAM, AS DETERMINED UNDER OMB
1. A REPORT CONTAINING AN OPINION ON THE FINANCIAL STATEMENTS.
2. A REPORT DISCUSSING THE EVALUATION AND TESTING OF INTERNAL CONTROL AND
COMPLIANCE WITH LAWS AND REGULATIONS.
13-10.
A. THE AUDITOR WILL NEED TO USE A RISK–BASED APPROACH. TYPE A PROGRAMS WOULD BE
Chapter 13 – Auditing, Tax Exempt Organizations, and Evaluating Performance
13-7
OF PROGRAMS THAT EXCEED $100,000 FOR MOST GOVERNMENTS. 50% OF FEDERAL
EXPENDITURES, OR $1,000,000 MUST BE INCLUDED.
IN THIS CASE, THE AUDITOR WOULD BE REQUIRED TO SELECT THE HUD GRANT IN THE
13-11.
A. A 501 (C) (3) ORGANIZATION IS “A CORPORATION AND ANY COMMUNITY CHEST, FUND, OR
FOUNDATION, ORGANIZED AND OPERATED EXCLUSIVELY FOR RELIGIOUS, CHARITABLE,
SCIENTIFIC, TESTING FOR PUBLIC SAFETY, LITERARY OR EDUCATIONAL PURPOSES, OR TO
FOSTER NATIONAL OR INTERNATIONAL AMATEUR SPORTS COMPETITION (SO LONG AS NONE
Chapter 13 – Auditing, Tax Exempt Organizations, and Evaluating Performance
13-8
13-12.
TYPES OF FORM 990:
1. FORM 990: ANY TAX EXEMPT ORGANIZATION MAY USE THIS AND ALL WITH ANNUAL GROSS
RECEIPTS OF OR EXCEEDING $ 500,000 OR ASSETS OF $ 2.5 MILLION MUST USE THIS FORM.
13-13.
A. THE FOUR CONDITIONS THAT WILL AUTOMATICALLY EXEMPT ORGANIZATIONS FROM UBIT
AND (4) IT IS OPERATED FOR THE CONVENIENCE OF EMPLOYEES, PATIENTS, STUDENTS, ETC.
B. LEGISLATION HAS PROVIDED THE FOLLOWING EXEMPTIONS FROM UBIT:
1. ROYALTIES, DIVIDENDS, INTEREST AND ANNUITIES (EXCEPT FROM CONTROLLED
CORPORATIONS).
C. UNRELATED BUSINESS INCOME TAX IS COMPUTED AT THE CORPORATE OR TRUST RATE.
Chapter 13 – Auditing, Tax Exempt Organizations, and Evaluating Performance
13-9
13-14. FIRST, I WOULD ENSURE THAT THE OBJECTIVES OF THE ORGANIZATION, AS LISTED IN THE
ARTICLES OF INCORPORATION, ARE LIMITED AND THAT THOSE OBJECTIVES RELATE SOLELY
TO THE TAX EXEMPT PURPOSES OF THE ORGANIZATION. I WOULD NEED TO SEE THAT THE
IRS FORM 1023, APPLICATION FOR RECOGNITION OF EXEMPTION UNDER SECTION 501 (C) (3)
OF THE INTERNAL REVENUE CODE, WAS FILED, ALONG WITH THE VARIOUS FORMS REQUIRED
Chapter 13 – Auditing, Tax Exempt Organizations, and Evaluating Performance
13–10
13-15.
A. SERVICE EFFORTS – MEASURES OF COSTS OR INPUTS; THE FINANCIAL AND NONFINANCIAL
RESOURCES APPLIED TO PROVIDE SERVICES.
B. SERVICE ACCOMPLISHMENTS – INCLUDE BOTH OUTPUTS AND OUTCOMES OF A SERVICE
ACTIVITY.
13-16.
BOND–RATING SERVICES, SUCH AS MOODY’S AND STANDARD & POOR’S, ASSIST INVESTORS BY
RATING BONDS AND OTHER FORMS OF DEBT. RATING AGENCIES EXAMINE A HOST OF FINANCIAL,
13-17.
FINANCIAL RATIOS ARE USED TO CONVERT INFORMATION TO A MORE UNDERSTANDABLE FORM.
SIMPLY CALCULATING RATIOS IS NOT SUFFICIENT TO PROVIDE INSIGHT. RATIOS MUST BE
COMPARED TO SOMETHING TO BE USEFUL IN MAKING EVALUATIONS AND JUDGMENTS. THIS YEAR’S
13-18.
Chapter 13 – Auditing, Tax Exempt Organizations, and Evaluating Performance
13–11
(1) CITIZENS/VOTERS: CITIZENS USE FINANCIAL INFORMATION TO MONITOR THE ACTIONS OF
ELECTED OFFICIALS AND TO DETERMINE WHERE TO BUY A HOME OR LOCATE A BUSINESS.
(2) INVESTORS AND CREDITORS : BEFORE LENDING MONEY OR PURCHASING BONDS,
(3) LEGISLATIVE AND OVERSIGHT OFFICIALS: STATE GOVERNMENTS USE FINANCIAL