Office of the Washington State Auditor: February 2020

Checklist for Preparing Financial Statements for Local Governments reporting under Generally Accepted Accounting Principles (GAAP) Purpose Using a checklist to prepare your financial statements can help ensure important steps are not missed. This checklist can help local governments improve a pre-existing checklist that is already in use. Alternatively, it can be used as a launching point to help you develop your own checklist. Instructions Use this checklist, or portions thereof, while preparing your financial statements. Customize the checklist to meet your needs. Legend Additional information on checklist questions

Best practices for internal controls related to checklist questions

Office of the Washington State Auditor: February 2020

In preparation for year-end close Yes/No Notes

1 Has management conducted a risk assessment over financial reporting and related internal controls to identify potential problem areas that might require additional planning to address?

A best practice is to conduct this analysis well in advance of year-end to allow sufficient time to plan for changes that are ahead. Our office offers a resource: a financial reporting risk assessment worksheet that local governments can use to get started. portal.sao.wa.gov/PerformanceCenter/#/address?mid=6&rid=18514

2 Has management recently reviewed accounting policies and evaluated whether any policy updates are needed?

MRSC, in partnership with our Office, has developed online resources for developing financial policies and procedures: mrsc.org/Home/Explore-Topics/Finance/Finance-Policies/Financial-Budget-Policies.aspx

3 Have the appropriate staff involved in the preparation of financial statements reviewed the BARS Manual’s “Overview of Significant Changes” to ensure changes have been implemented?

It’s important to review these changes at the beginning of each year because some might require early action to implement. In addition, our Office sends updates as BARS Alerts to subscribers. To sign up for news and alerts, www.sao.wa.gov/about-sao/sign-up-for-news-alerts/

4 Are implementation plans in place for accounting or reporting changes? Our office provides a “Checklist for Accounting Standard Change,” to help local governments plan to implement changes in GASB standards at portal.sao.wa.gov/PerformanceCenter/#/address?mid=6&rid=18505. There is also a resource over implementing new GASB standards at portal.sao.wa.gov/PerformanceCenter/#/address?mid=6&rid=18510

5 Has a task timeline, milestones, and final reporting deadline been established for the financial reporting process?

GFOA discusses best practices for timely financial reporting at www.gfoa.org/timely-financial-reporting. This guidance indicates statutory or award deadlines should be viewed as the minimum standard rather than the ideal.

6 Has management evaluated the resources available for financial reporting and whether additional resources are needed to meet preferred timeframes or deadlines?

Office of the Washington State Auditor: February 2020

Some governments have contracted for outside financial statement preparation assistance when needed during certain times, such as during significant turnover or system conversions. In some cases, such as for the GFOA award submission due six months after year-end, extensions might be granted. There are no extensions for the nine months after year-end federal single audit deadline or for the 150 days after year-end statutory deadline to file with our Office.

7 Have financial staff taken sufficient training to maintain or build their knowledge base in technical financial accounting and reporting? Is additional training needed?

Training resources are available, some are free of charge:

• Office of the Washington State Auditor: www.sao.wa.gov • Government Finance Officers Association: www.gfoa.org • Washington Finance Officers Association: www.wfoa.org

(see conference and non-conference)

8 Is the local government using any accounting practices that do not conform to GAAP? If so, have they been recently evaluated to assess materiality and whether they should continue?

As a result of changing circumstances, it is a good practice to revisit past GASB statements and reconsider their current applicability.

9 Do you need to contract with an actuary to perform calculations for other post-employment benefits (OPEB) or stand-alone pension plan(s)?

It is important to consider any recent changes in pension plans or employee benefits that might necessitate an actuary report, even if you have not required one in the past.

10 Has the accounting staff begun preparations for capital asset reporting and recorded activity throughout the year? Has management recently reassessed the useful lives of capital assets?

A periodic review of useful life is necessary (GASB codification 1400.705-13) and governments should ensure the estimates are supported.

11 If reporting any infrastructure on the modified approach, is the local government on track with completing the required condition assessments every three years, as well as meeting the condition levels?

A 100% assessment is not required; sampling methods may be used, see guidance in the GASB codification 1400.703-26.

12 Has there been a recent evaluation of the reporting structure of funds? For example: • Are all funds properly classified by type? • Do all special revenue funds qualify to be reported as such or do any require

roll-up into the general fund? • Are there any activities reported in general or special revenue funds that

actually meet the requirements to be reported as an enterprise fund (GASB 34, par 67)?

Office of the Washington State Auditor: February 2020

• New standard effective for 2019 reporting (GASB 84) - have fiduciary funds been evaluated for proper classification such as trust and custodial funds?

13 Is there any activity potentially omitted from the general ledger or the financial statements? Perform due diligence to ensure all activity is being captured in the general ledger.

Some examples include court trust funds or other departmental funds maintained in a separate bank account.

14 Have new contracts and resolutions approved by the governing body been reviewed to identify activities or decisions that might affect financial accounting or reporting?

15 Have reminders been sent out to departments regarding the recording of activity at year-end, if applicable?

If departments participate in processing expenditure activity, then additional oversight might be needed to ensure all transactions are properly recorded.

16 Has management recently evaluated the reporting entity (related parties, potential component units, joint ventures, etc.) and assessed potential changes that might affect reporting?

Finalizing the General Ledger Yes/No Notes

17 Have all adjusting entries been recorded in the general ledger? Have all entries been reviewed to ensure they are accurate, supported, and purpose is clearly understood?

A best practice is to use a closing checklist to ensure all journal entries have been completed. Establishing due dates in advance for journal entries can facilitate timelier closing for larger governments with multiple staff.

18 Have prior year uncorrected items been addressed and the general ledger adjusted, if needed? This should include recommendations or issues noted by the external auditors as well as a GFOA review, if applicable.

The auditor will provide a final aggregation of uncorrected misstatements (might also be called passed adjustments) at the conclusion of each audit, if there are any uncorrected items. Some items might continue to affect future periods depending upon the nature of the error and local governments might wish to make corrections for these.

19 Have the implementation plans for new accounting pronouncements or BARS changes been executed and recorded in the general ledger, where appropriate?

20 Have the effects of unusual or non-routine transactions been fully evaluated and the general ledger updated, where appropriate?

Larger organizations should probably expect transactions annually that will require careful research and evaluation. While each case will be unique, the process to identify, research, and address some matter might need to occur each year.

Office of the Washington State Auditor: February 2020

21 Have all capital asset related items that might require general ledger adjustment been considered?

For example: Do any capital assets qualify for impairment? Are any capital assets now held for sale that will need to be reported at a different value? Have all disposals been communicated to management? Are there construction in progress projects that need to be reclassified? Consider using our Office’s internal control checklist for capital assets, portal.sao.wa.gov/PerformanceCenter/#/address?mid=6&rid=18513

22 For pension reporting for state operated plans, have the contributions to DRS been reconciled to the Participating Employer Financial Information (PEFI) report?

The contributions drive the proportionate share percentages for each participating government; consequently, this is an important step for ensuring the pension liability is reasonable for each participating government.

23 For pension reporting, have the calculations to determine the pension liability and related figures for each possible pension plan been performed, carefully checked, and updated in the general ledger?

For those reporting under state-operated plans, our Office provides pension templates and other helpful pension related resources. See the BARS manual 3.4.2 for a link to the pension worksheet.

24 Has legal counsel been consulted with regard to claims and assessments that might affect liabilities to be reported in the financial statements (or disclosed)? Also, is this information accurately reflected in the general ledger?

Litigation, claims, or assessments that are probable, estimable, and for which there is no reasonably certain insurance coverage should be accrued as liabilities. Other related liabilities might be self-insured portions, deductibles, or any probable member re-assessments from a risk pool.

25 Have the subsidiary ledgers been closed to the general ledger according to the schedule or timeline?

Additional accruals might need to be completed to record transactions in the proper period if not handled by the subsidiary ledger final posting such as for accounts payable or accounts receivable.

26 Has management evaluated for potential prior period adjustments or changes in accounting principles and ensured they are properly recorded in the general ledger?

27 Have the processes and calculations for significant accounting estimates been reviewed recently to ensure methods are consistent to prior year, the calculations are supported, and updates are made from the prior year?

These might include items such as updating an allowance for doubtful accounts (aka bad debt for accounts receivables), pollution remediation, landfill liability, compensated absences, self-insurance claim liabilities, asset retirement obligations, or other contingent liabilities.

Office of the Washington State Auditor: February 2020

28 Have all noncash transactions been accounted for, such as equipment donations, contributed land or infrastructure by developers, or financial effects of annexations given up or received (value of roads, utility infrastructure)?

These items might affect assets as well as capital contributions. The statement of cash flows will need to reflect noncash transactions as well.

29 Have the equity classifications been updated for the fund balances, as reported in the general ledger, and support for the classifications been maintained?

30 Have the suspense and clearing accounts been reconciled and transactions reclassified when appropriate?

31 Has the general ledger activity been reviewed for reasonableness given expectations of current period performance and prior year activity? Investigate any questionable fluctuations.

Trending by line item and fund, as well as budget to actual analysis are several best practices for ensuring general ledger information meets expectations.

32 Is there any netting that is occurring in the general ledger that would not be appropriate for financial reporting purposes?

An example of improper netting might be recording an expenditure/expense refund from a prior year transaction as a credit to current year expenditure/expense.

33 Have all subsidiary ledgers been reconciled to the general ledger? Activity in general ledger accounts should be reconciled monthly to the information reported in the subsidiary ledgers both as the year progresses and at year-end.

34 Has the local government reconciled all key general ledger accounts to ensure the information is accurate and complete?

A best practice is to reconcile every general ledger account. For some with limited resources, focusing on reconciling balance sheet accounts with other supplemental review procedures over financial activity might be an option.

Preparing the Fund Statements Yes/No Notes

35 Has the major fund calculation been prepared and reviewed? Remember that any last minute changes to the financial statements might affect the calculation of major funds and the financial statements should be updated if major funds change. Local governments should not rely on prior year calculations, or those done based on preliminary information. It might be helpful to be aware of and monitor any borderline funds approaching a threshold that would require major fund reporting.

Office of the Washington State Auditor: February 2020

36 If reporting non-major funds as major because the information is of particular importance to users, have you reviewed whether they should continue to be reported?

Non-major funds can be presented as major funds if they are of particular importance to users. Governments should be aware that each major fund creates an opinion unit for the audit and might affect audit costs. In addition, this can result in lower materiality thresholds for some transactions reported in affected funds.

37 Have the managerial funds been rolled up into the reporting funds, with intra-fund elimination entries prepared as needed?

Ensure documentation is retained that supports how the general ledger funds relate to the reporting fund structure for audit trail purposes.

38 For general-purpose governments, when preparing the budget statements (or schedules), have the general fund and major special revenue funds been included?

The budget information for debt service and capital project funds should not be included as part of the basic financial statements. In addition, there are two options in presenting this information: (1) to include this information as part of the basic financial statements or (2) as required supplementary information (in which case it is referred to as a schedule).

39 For general-purpose type governments, when preparing the budget statements (or schedules), if the budgetary basis is different from that of the government’s financial accounting basis for the fund type, was a reconciliation presented?

40 Are the line items on the financial statements meaningfully described and zero dollar line items are avoided?

41 If not clearly evident, is there documentation to support which general ledger accounts roll up to various reporting lines on the financial statements?

42 Have you ensured the format of the statements reflects the latest accounting changes? For example, in recent years there were changes to terms such as fixed assets, deferred, and net assets that should all be updated in the statements. The BARS Manual will have the latest format information reflected in its example financial statements.

43 If there are any unposted adjustments that are not reflected in the general ledger (but have been reflected in the financial statements), are these supported and have they been reviewed by a second person?

It is a best practice to record all adjustments to the general ledger as soon as possible. At a minimum, if there are manual adjustments, only current year transactions should be unposted and they should be completed in a timely manner either during the audit or shortly thereafter.

44 Does the beginning fund balance agree to prior year activity, the fund statements foot and cross-foot, and ending fund balance agree amongst the balance sheet and operating statements? In addition, do the operating statements agree to the actuals presented in the budgetary schedules or statements?

Office of the Washington State Auditor: February 2020

Preparing the Government-wide Statements (for general purpose governments)

45 Has there been a review of the conversion journal entries to ensure they are accurate, complete, and supported?

Conversion entries are those that convert fund information on the modified accrual basis of accounting to the full accrual basis of accounting required at the government wide level.

For most governments, conversion entries are prepared off-book, and this might not prompt the same level of review as other journal entries. A knowledgeable person should carefully review these entries.

46 Has there been a review of the conversion spreadsheet to ensure that beginning balances tie to the prior year information, conversion journal entries are accurately posted, formulas calculate the government-wide balances accurately, and final balances reconcile to the statements?

Note: This assumes a spreadsheet process is used for the conversion from the fund information to government wide because most governments do not have automated software with this functionality.

47 Do the restrictions in the equity (net position) section at the government-wide level reconcile to the restrictions presented at the governmental fund level, taking into account the change in the basis of accounting?

For example, REET and developmental impact fees would be restricted at the fund level, but also restricted at the government wide level – likely classified as a capital project restriction. Reconciling items that affect the amount of the restriction between the two different bases of accounting might include deferred inflows and different accounting treatment for compensated absences.

48 Are the reconciliations from the fund statements to the government-wide statements presented in a summarized, yet meaningful and clear manner, with details presented in the notes to the financial statements?

49 Do the reconciliations to the government-wide statements tie to the respective statements to which they relate?

50 Was guidance consulted in calculating net position classifications and is support retained for these calculations? Have these calculations been reviewed by a knowledgeable person?

Authoritative guidance is in the GASB codification 2300 Comprehensive Annual Financial Report (see implementation guide Q&A’s).

51 Have any significant unusual or infrequent items within management’s control been evaluated for possible recording as a special item?

Office of the Washington State Auditor: February 2020

Preparing the Note Disclosures

52 If using the BARS note templates as a starting place or to ensure BARS changes are implemented, have the most recent BARS note templates been accessed and reviewed?

BARS note templates are updated annually and reflect newly effective accounting standards. However, some situations are unique and sample note disclosures cannot be prepared to cover all possibilities. For example, in some cases the Manual might refer a preparer to a specific accounting standard with regard to a disclosure requirement.

53 Have all accounting changes been considered in the creation of the note disclosures, such as implementation of a new accounting standard that might have disclosure requirements?

54 Do all line items on the financial statements have related note disclosures where applicable or required?

Line items on the financial statements might change from year to year and some might require additional disclosures. An example might be a prior period adjustment or a special item.

55 Do amounts in the note disclosures agree with the financial statements or other accounting records? Do they foot and cross-foot, where applicable?

A best practice is for the preparer to maintain supporting information to facilitate internal reviews and audits. A preparer should double-check to ensure all amounts are supported and reconcile to the financial statements before internal reviews take place.

56 Have a spell check and grammar review been completed?

57 Are the note disclosures concisely and clearly expressed and understandable, and do they make sense in light of the government’s activities?

A best practice is for the preparer to perform a final reading of the note disclosures to ensure the information reads well, all information is updated and included, and that the government is using current terminology to describe financial elements.

58 Do the note disclosures contain irrelevant, obsolete, trivial, or superfluous information that should be removed? Do the note disclosures contain negative disclosures that should be removed?

For example, the note disclosures detail outstanding debt issuances and might include debt that has been retired. While it might be tempting to retain this history in the note disclosures, information that is no longer applicable to understanding the current statements should be removed. An example of a negative disclosure is, “We have no pension liabilities to report.”

59 Has the financial statement preparer evaluated significant events and transactions incurred by or affecting the government and their potential effect on the note disclosures?

Office of the Washington State Auditor: February 2020

60 Has updated legal information been obtained and evaluated for claims, litigations or assessments and the note disclosures updated, where applicable?

61 Has the financial statement preparer evaluated for possible subsequent events? If any subsequent events have occurred after year-end, are they disclosed in the notes?

For example, subsequent events might include issuance or refunding of debt, settlement of significant litigation, an unresolved strike, or a major change in the municipalities programs or services.

Preparing the Schedule of Federal Expenditures (SEFA) – if applicable

62 Have appropriate personnel reviewed the BARS Manual guidance on SEFA preparation before completing this financial statement (BARS 4.8.5)?

This guidance is comprehensive and can answer most questions about this schedule. In addition, it includes a sample SEFA and sample note disclosures.

63 Have all new grant agreements with state agencies or other local governments been evaluated to determine if any of the funding is federal? All federal expenditures, including expenditures of pass-through awards, should be reported on the SEFA.

A review of the agreement or approved application will indicate whether the funds are from a federal program. Specifically, the agreement will reference a CFDA number and compliance with the Uniform Guidance 2 CFR 200, and should refer to audit requirements. If in doubt, contact the awarding agency directly.

64 Has the government collected all information on federally funded non-cash assistance throughout the year, such as equipment transferred from the federal government (BARS 4.8.5.80-90), for purposes of SEFA reporting?

65 Does the local government have any federal loans, either new or outstanding? If so, have the loan terms been reviewed and evaluated in preparation for SEFA reporting?

Loans have unique reporting requirements, which often include reporting the beginning of the period balance from prior year’s activity. Refer to detailed guidance in the BARS Manual 4.8.5.130 and not the exceptions to the rule.

66 Has the preparer of the SEFA double checked amounts reported on the SEFA to ensure they are consistent with the local government’s basis of accounting, and reconcile to underlying supporting records?

A best practice is to retain underlying support for the SEFA amounts. If relying on information submitted by departments, additional documentation should be obtained to ensure the amounts for grant expenditures are correctly calculated and supported.

67 Were the notes to the SEFA prepared, updated, and include all required note disclosures?

Office of the Washington State Auditor: February 2020

68 Are total expenditures on the SEFA expected to equal or exceed $750,000? If yes, a single audit is required. Contact your local audit team to schedule a single audit if you do not regularly receive one each year. Single audits must be completed within nine months of the fiscal year’s end.

Review Processes Yes/No Notes

69 Has there been an evaluation to ensure all required financial statements, required supplementary information, and combining information (if applicable) have been prepared?

The BARS Manual has information on reporting requirements. For those submitting to the GFOA Financial Reporting Recognition Program, see their website for more details about additional reporting requirements.

70 Has the major fund calculation been updated with final financial statement amounts and reviewed to ensure it is calculated correctly and results agree with the major funds presented?

During the preparation process, amounts might be adjusted or late entries might be recorded that change the major fund determinations. It is a best practice to monitor for changes to ensure all major funds are reported.

71 Has the statements, note disclosures, schedules and RSI been footed, cross-footed, and related to one another to ensure amounts are consistent throughout the reporting package (by the preparer and a second reviewer, if possible)?

At any time when changes are made to any part of the reporting package, it is a best practice for both the preparer as well as a second reviewer to ensure the changes were made properly and consistently throughout the report.

72 Has the reporting package been reviewed from a technical perspective? This might be accomplished using a review checklist such as those maintained by GFOA.

Prior year GFOA comments should be considered as part of this review to ensure they are resolved. If a government is not submitting for a GFOA award, the review checklist might still be a beneficial exercise. One option is to focus the review on the starred checklist questions as these are deemed the most critical by GFOA.

73 Has the reporting package been reviewed from an operational perspective, as well as a technical perspective?

For example, a contracted reviewer might be able to perform a technical review on behalf of the entity but might lack knowledge of entity activities. For example, a technical reviewer can ensure an environmental liability is reported correctly, but might not detect an issue when it is mistakenly omitted.

Office of the Washington State Auditor: February 2020

74 Has the review process been well documented?

Documenting the process, results, and follow up of the financial statement review is a best practice for ensuring the internal control process is conducted in the manner expected, and it allows for easier oversight.

75 Has the reviewer specifically reviewed the financial statements in high-risk areas to ensure accurate reporting?

For example, an implementation of a new accounting standard, estimates, or unusual items should warrant specific review procedures.

76 Has a finance committee or other qualified personnel reviewed the reporting package to ensure the required components are included and submitted to our Office by the reporting deadline of 150 days after fiscal year-end?

A best practice is to plan to file as early as feasible in case unanticipated issues arise during the filing process that might take time to resolve.

77 Have the financial staff reviewed the annual financial statement report with the governing body and sought its approval?

Presentation to the governing body (or other means of allowing the governing body the opportunity to review or accept the financial statements and notes) allows the governing body to carry out its role of overseeing financial reporting.

Finalizing the Reporting Package Yes/No Notes

78 Has legal information been reviewed for changing circumstances with claims, assessments, or litigation that might affect the financial statements or note disclosures?

This relates to the next checklist item that discusses responsibility for subsequent events, which include changes involving legal matters.

79 Have subsequent events been reconsidered with any new information that should be disclosed or might alter the financial statement amounts directly?

GASB Statement No. 56 provides guidance on subsequent events and how they affect the financial statements. Management has a responsibility to update this information up to the point the financial statements are issued (This will coincide with the date of the auditor’s report.).

80 Has all feedback from the review process been incorporated and addressed in the final financial statements?

81 Were any changes made since the final review that would necessitate additional review procedures, such as ensuring the elements of the reporting package reconcile where applicable?

Office of the Washington State Auditor: February 2020

Post reporting reflection

82 Consider a discussion with key players in the financial reporting process to develop ideas for future improvement and to celebrate successes.

Building in a practice of continuous improvement into the financial reporting process can reduce staff time and stress, improve the quality of reporting, and help meet future reporting deadlines.

83 Evaluate and update the year-end closing and financial reporting checklist. Did it cover all items that needed to be addressed or are some updates needed?

It is a best practice to complete this in a timely manner after the reporting process is finished so that the information is easily remembered and documented.

84 Review audit recommendations and uncorrected misstatements provided by the auditor; develop a plan for addressing in the next year.

It can be easy for these recommendations to be tabled and even forgotten until the next audit cycle. It is a best practice to consider the effort and time each might take to resolve and set some targets for addressing them.

85 Evaluate the effectiveness of the review process for the financial reporting package. Based on audit results, did any issues surface that highlight where internal controls could be strengthened?

Larger adjustments, numerous misstatements, and multiple revisions of the financial statements are indicators that internal controls might need to be strengthened over financial reporting including strengthening the review process.

86 Evaluate the timeliness of preparing and issuing the financial statements. Consider improvements that would eliminate or minimize obstacles that might allow for timelier reporting or a more efficient process.

Office of the Washington State Auditor: February 2020

For assistance

This resource has been developed by The Center for Government Innovation of the Office of the Washington State Auditor. Please send any questions, comments, or suggestions to Center@sao.wa.gov. For technical guidance on specific transactions and how to report them, please submit questions to the help desk available through the client portal at www.sao.wa.gov.

Disclaimer This resource is provided for informational purposes only. It does not represent prescriptive guidance, legal advice, an audit recommendation, or audit assurance. It does not relieve governments of their responsibilities to assess risks, design appropriate controls, and make management decisions.

Establishing goals for next year’s reporting timeline that improve upon current year performance can facilitate this process. Planning for incremental improvement each year can allow progress to be made over time.