J A N U A R Y / F E B R U A R Y 2 0 2 2 18 nebraska cpas AUDITING DISCLOSURES IN GOVERNMENTAL & NOT-FOR-PROFIT FINANCIAL STATEMENTS: ARE MATERIAL MISSTATEMENTS HIDING IN PLAIN SIGHT? BY PAUL H. KOEHLER, CPA, GOVERNMENT/NONPROFIT SERVICES SPECIALIST The purpose of an audit is to provide financial users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework. It only takes one material misstatement for a set of financial statements to be materially misstated and, thus, if not ultimately adjusted by management, result in a modified audit opinion. The “Accounting Principles Rule,” as cited in paragraph 1.14 of the AICPA Guide, State and Local Governments (AICPA SLG Guide), prohibits an auditor from expressing an unmodified opinion if the financial statements contain a material U.S. generally accepted accounting principles (U.S. GAAP) departure. Paragraph A7 of AU-C 705, Modifications to the Opinion in the Independent Auditor’s Report, indicates that material misstatements of the financial statements may arise when the disclosures in the f inancial statements are not presented in accordance with the applicable financial reporting framework. Also, paragraph A1 of AU-C 450, Evaluation of Misstatements Identified During the Audit, indicates that misstatements may result from: • Inadequate or incomplete disclosures and omission of those disclosures required to meet disclosure objectives of certain financial reporting frameworks as applicable. • The omission of a disclosure necessary for the financial statements to achieve fair presentation beyond disclosures specifically required by the framework. Our experience conf irms that, not uncommonly, material misstatements appear in SLG and not-for-profit (NFP) financial statement notes (disclosures), with no modification of the auditor’s opinion. As noted in our report, More Than Just the Audit Opinion: SAS 134 Significant Changes Unrelated to the Auditor’s Report, disclosure and presentation within financial statements are not held to the same level of rigor as recognition and measurement in the financial statements. In examining the Peer Review database of Matters for Further Consideration (MFCs), we noted numerous recent MFCs related to financial statement disclosures. Examples of Matters for Further Consideration Disclosures were omitted for the operating lease and capital stock including the number of shares issued, authorized, and outstanding. The required disclosures were omitted from the financial statements. Standard subsequent events disclosures are missing. The total of long-termdebt maturities presented in the financial statement disclosures does not tie to the face of the financial statements. The required disclosures were omitted from the financial statements—for example, missing disclosures on variable interest entities (VIEs); mi ssing di sclosures on a mult iemployer pension plan; missing disclosure of f iveyear minimum lease payments adjusted to present value; and capital lease and operating lease f ive-year minimum lease payments co-mingled together.
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