State and local governments faced a major change in the way they did financial reporting when, on June 30, 1999, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments. GASB Statement No. 34 established new requirements for U.S. state and local governments that prepare their financial reports in conformity with generally accepted accounting principles (GAAP). The new rules substantially changed the appearance and content of government financial statements.

To help practitioners address the new accounting requirements and related auditing issues, the AICPA developed a new Audit and Accounting Guide, Audits of State and Local Governments (GASB 34 Edition). The Guide addresses the audits of basic financial statements and consideration of required supplementary information (RSI) and other supplementary information (SI) prepared in conformity with the new governmental financial reporting model required by GASB Statement No. 34 and related pronouncements.

The new Guide revises the AICPA's 1994 Audit and Accounting Guide Audits of State and Local Governmental Units (Non-GASB 34). The Non-GASB 34 Guide is updated annually for conforming changes and will remain effective for audits of state and local governments for which the auditor is not required to apply or has not elected to early-apply the new Guide's provisions in accordance with effective date provisions.

New Guide's effective date

The GASB 34 Guide is effective for audits of a state or local government's financial statements for the first fiscal period ending after June 15, 2003, in which the government applies or is required to apply GASB Statements No. 34 or No. 35. The new Guide discusses various issues relating to the transition to the provisions of GASB 34.

The Guide is the result of the efforts of an AICPA task force established in mid-1999. According to Venita Wood, CPA, CGFM, project manager for the task force, “The revision was warranted by the major change in financial statements the governments would be preparing.” Since the early 1900s, governments have used a different financial reporting model than the private sector. Accountable for their use of resources, governments used accounting and financial reporting to demonstrate compliance with finance-related legal and contractual restrictions. Accordingly, they used separate funds to segregate financial resources subject to special regulations or restrictions.

According to Robert Stout, finance director of the city of Modesto, California, “The segregation of assets into different funds, while useful for demonstrating compliance, makes it difficult to assess the financial position of the government as a whole.” The new reporting model facilitates this assessment.

Materiality determinations

The most significant issue addressed in the new GASB 34 Guide is materiality determinations for purposes of planning, performing, evaluating the results of, and reporting on the audit of financial statements. As Wood describes it, the pre-GASB 34 governmental financial reporting model requires financial statements that present information in columns for different types of activities known as fund types and account groups. The Non-GASB 34 Guide directs the auditor to plan to and perform the audit assessing materiality for each of those columns. However, it does not direct the auditor specifically to evaluate and report on the audit based upon the materiality in those columns.

Furthermore, the Non-GASB 34 Guide uses illustrative auditor's reports which make it appear that this evaluation and reporting is for the financial statements taken as a whole. “That troubled the task force,” Wood says, “because there seemed to be a disconnect between how one performed the work and how one reported on what was done. That also troubled the Audit Issues Task Force of the Auditing Standards Board (ASB), who directed the task force to make sure that all the way down the line—planning, performing, evaluating, reporting—materiality determinations were consistent.”

Opinion units

Even though the financial statements are now significantly different, GASB wanted to maintain a columnar focus for the audit approach. “In order to get consistency in planning, performing, evaluating, and reporting results,” Wood says, “the task force had to change the auditors' reports significantly so that they no longer report an opinion for the financial statement taken as a whole, but rather separate opinions for each of the important columnar presentations—the opinion units.” The term opinion units is a concept originating in the new GASB 34 Guide.

“The task force thought that the term opinion units would work a little better than materiality units because it focuses the auditor on the goal, which is to give an opinion on each of these columnar presentations, some of which are distinct in the financial statements and some of which are aggregations of different distinct presentations,” Wood said.

The GASB 34 Guide directs auditors to make separate materiality determinations for purposes of planning, performing, evaluating the results of, and reporting on the audit of a government's basic financial statements for each opinion unit.

The auditor should determine opinion units for special purpose government's basic financial statements in the same manner as for general purpose governments.

The auditor's report

The GASB 34 Guide discusses the auditor's report on governmental financial statements in various situations. The Guide contains a draft standard report on a typical government's basic financial statements, which shows unqualified opinions on a single year's basic financial statements that contain more than one opinion unit, along with reporting on RSI and SI. Said Wood, “Ultimately, the approach the task force chose isn't different from the way auditors plan and perform their audits now. What they added was clear direction on how to evaluate the effect of findings in the audit and then how auditors report on it.”

The Guide discusses departures from the standard report and special situations such as the part of the audit performed by another auditor and prior-period financial information.

Cleared by the AICPA's Accounting Standards Executive Committee (AcSEC) and the ASB as well as by the GASB, the new Guide provides guidance that will help meet GASB 34's goal of making governmental financial reports easier to understand. The Guide will help auditors provide more useful assurance to those who use financial information to make decisions.