Official releases.

GASB no. 44 ... SSARS 10 ... SSARS 11 ... SSARS interpretation ... auditing interpretations

Space considerations prevent publishing here the appendices to GASB Statement no. 44. Since the appendices often are important to understanding GASB statements, readers are advised to obtain complete copies. For additional copies of GASB statements and/or information on applicable prices and discount rates, contact the GASB order department, 401 Merritt 7, P. O. Box 5116, Norwalk, Connecticut 06856-5116. Telephone: [phone].

Statement No. 44 of the Governmental Accounting Standards Board-Economic Condition Reporting: The Statistical Section

(An amendment of NCGA Statement 1)

SUMMARY

This Statement amends the portions of NCGA Statement 1, Governmental Accounting and Financial Reporting Principles, that guide the preparation of the statistical section. The statistical section presents detailed information, typically in ten-year trends, that assists users in utilizing the basic financial statements, notes to basic financial statements, and required supplementary information to assess the economic condition of a government.

Three shortcomings have been identified in the statistical section since NCGA Statement 1 was issued in 1979. First, NCGA Statement 1 presented a list of fifteen required schedules with no additional explanation of the nature of the information they were to contain. As a result, some governments prepared their statistical sections differently from others, thereby diminishing the usefulness and comparability of the information. Second, the statistical section requirements were oriented to general purpose local governments. Consequently, other types of governments had little guidance on how to adapt the requirements to their circumstances, resulting in incomplete and inconsistent application of the standards and, therefore, additional loss of comparability and usefulness.

Third, the requirements for the statistical section did not encompass the new information that governments are presenting as a result of GASB Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Governments.

The statistical section is a required part of a comprehensive annual financial report (CAFR), although governments are not required to prepare a statistical section if they do not present their basic financial statements within a CAFR. These circumstances are not altered by this Statement. However, this Statement does apply to any statistical section that accompanies a government's basic financial statements. The provisions of this Statement are effective for statistical sections prepared for periods beginning after June 15, 2005.

How the Changes in This Statement Improve Financial Reporting

This Statement improves the understandability and usefulness of statistical section information by addressing the comparability problems that have developed in practice and by adding information from the new financial reporting model for state and local governments required by Statement 34. In order to clarify that the requirements are applicable to all types of state and local governmental entities that prepare a statistical section, this Statement establishes the objectives of the statistical section and the five categories of information it contains--financial trends information, revenue capacity information, debt capacity information, demographic and economic information, and operating information. The more specific requirements of this Statement should be adapted by each type of government in order to meet the overarching objectives.

The more specific requirements of this Statement explain more clearly than prior standards the types of information that should be presented in each category of statistical section information. The prior requirements are clarified and updated to better meet user needs. For example, whereas NCGA Statement 1 required a schedule of "miscellaneous statistics," this Statement specifies that a statistical section should include ten-year trends in three types of operating information--government employment levels, operating statistics, and capital asset information. This Statement also clarifies certain features of previously required information, such as which governmental funds to include in information about trends in changes in fund balances.

This Statement adds new information that users have identified as important and eliminates certain previous requirements. For instance, a government's statistical section should now include trend information on governmental fund balances and principal employers. On the other hand, governments are no longer required to present in their statistical sections information that users have identified as less useful, such as special assessment levies and collections, construction activity, and bank deposits. Additionally, statistical sections do not have to include a separate schedule of debt service ratios; the most useful information from that schedule will he presented with the changes in fund balances information.

The most significant new information added to the statistical section is the government-wide, accrual-based information required by Statement 34. The statistical section will include ten-year trend reformation about net assets and changes in net assets. The debt information presented in the statistical section will also he more comprehensive due to the inclusion of information from the government-wide financial statements and notes. Finally, this Statement further improves the understandability and usefulness of statistical section information by requiring governments to augment their schedules with notes regarding sources, methodologies, and assumptions, and to provide narrative explanations of (a) the objectives of statistical section information, (b) unfamiliar concepts, (c) relationships between information in the statistical section and elsewhere in the financial report, and (d) atypical trends and anomalous data that users would not otherwise understand.

Unless otherwise specified, pronouncements of the GASB apply to financial reports of all state and local governmental entities, including general purpose governments; public benefit corporations and authorities; public employee retirement systems; and public utilities, hospitals and other healthcare providers, and colleges and universities. Paragraph 2 discusses the applicability of this Statement.

Copyright[C]2004 by Governmental Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Governmental Accounting Standards Board.

CONTENTS

Introduction/1

Standards of Governmental Accounting and Financial Reporting/2-42

Scope and Applicability/2-3

Focus on the Primary Government/4

The Objectives of Statistical Section Information/5-7

Financial Trends Information/8-12

Information about Net Assets/9

Information about Changes in Net Assets/10-11

Information about Governmental Funds/12

Revenue Capacity Information/13-21

Information about the Revenue Base/14-15

Information about Revenue Rates/16-18

Information about Principal Revenue Payers/19-20

Information about Property Tax Levies and Collections/21

Debt Capacity Information/22-30

Information about Ratios of Outstanding Debt/23-24

Information about Ratios of General Bonded Debt/25-26

Information about Direct and Overlapping Debt/27-28

Information about Debt Limitations/29

Information about Pledged-Revenue Coverage/30

Demographic and Economic Information/31-34

Information about Demographic and Economic Indicators/32-33

Information about Principal Employers/34

Operating Information/35-39

Information about Government Employees/36

Information about Operating Indicators/37

Information about Capital Assets/38

Operating Information Reported by Pension and Other Postemployment Benefit Plans in Separately Issued Reports/39

Additional Information/40

Sources, Assumptions, and Methodologies/41

Narrative Explanations/42

Effective Date and Transition/43-44

Glossary/45

Appendix A: Background/46-59

Appendix B: Basis for Conclusions/60--105

Appendix C: Illustrations/106

Appendix D: Codification Instructions/107

INTRODUCTION

1. The objective of this Statement is to improve the understandability and usefulness of the information that state and local governments present as supplementary information in the statistical section. The standards that previously addressed the contents of the statistical section--specifically, NCGA Statement 1, Governmental Accounting and Financial Reporting Principles--had been in effect since 1980 without significant modification. A lack of specificity in those standards led to many problematic divergences of practice among governments. In addition, the focus of the prior requirements on general purpose local governments resulted in inconsistent application among other types of governmental entities. Finally, prior standards did not require that the statistical section include the government-wide, accrual-based information established by Statement No. 34, Basic Financial Statement--and Management's Discussion and Analysis--for State and Local Governments. This Statement is intended to improve consistency and comparability in reporting and to provide clearer guidance regarding the applicability of the standards for the statistical section to all types of governmental entities.

STANDARDS OF GOVERNMENTAL ACCOUNTING AND FINANCIAL REPORTING

Scope and Applicability

2. This Statement establishes and modifies requirements related to the supplementary information presented in a statistical section. This Statement applies to state and local governmental entities that prepare a statistical section that accompanies the basic financial statements.

3. This Statement supersedes NCGA Statement 1, paragraphs 160 and 161, and GASB Statement No. 6, Accounting and Financial Reporting for Special Assessments, paragraph 25. It amends footnote a of GASB Statement No. 30, Risk Financing Omnibus, paragraph 7.

Focus on the Primary Government

4. Generally, the information provided in a statistical section should focus on the primary government, rather than on the financial re porting entity.(1) However, in the context of assessing the economic condition of the primary government, it may be advantageous to understand certain information about individual discretely presented component units. Statement No. 14, The Financial Reporting Entity, paragraph 63, as amended, addresses the decision-making process for determining which note disclosures might be necessary for individual major component units. It states that:

   ... Determining which discretely presented
   component unit disclosures are essential to
   fair presentation is a matter of professional
   judgment and should be done on a component
   unit-by-component unit basis. A specific
   type of disclosure might be essential for
   one component unit but not for another depending
   on the component unit's significance
   relative to the total component units
   included in the component units column(s)
   and the individual component unit's relationship
   with the primary government.

The approach described in paragraph 63 of Statement 14 also applies to the requirements for management's discussion and analysis (MD&A) set forth in paragraph 10 of Statement 34. This Statement extends the approach described above to the requirements for the statistical section to provide a consistent scope for disclosures throughout the financial report. Just as a primary government should consider whether its relationship with a particular component unit is such that certain note disclosures and MD&A coverage are considered appropriate, it follows that the primary government should consider whether including information about the component unit in the primary government's statistical section schedules would also be beneficial in assessing the economic condition of the primary government. A decision to present information about a component unit in a note disclosure or MD&A, however, does not necessarily imply that information about that component unit should be included in the statistical section.

The Objectives of Statistical Section Information

5. The objectives of statistical section information are to provide financial statement users with additional historical perspective, context, and detail to assist in using the information in the financial statements, notes to financial statements, and required supplementary information to understand and assess a government's economic condition.(2)

6. Statistical section information should be presented in five categories--financial trends information, revenue capacity information, debt capacity information, demographic and economic information, and operating information.

a. Financial trends information is intended to assist users in understanding and assessing how a government's financial position has changed over time.

b. Revenue capacity information is intended to assist users in understanding and assessing the factors affecting a government's ability to generate its own-source revenues.(3)

c. Debt capacity information is intended to assist users in understanding and assessing a government's debt burden and its ability to issue additional debt.

d. Demographic and economic information is in tended (1) to assist users in understanding the socioeconomic environment within which a government operates and (2) to provide information that facilitates comparisons of financial statement information over time and among governments.

e. Operating information is intended to provide contextual information about a government's operations and resources to assist readers in using financial statement information to understand and assess a government's economic condition.

7. The objective of providing users with historical perspective is met by presenting information for multiple years. For the information described in this Statement, governments should present data for the most recent ten years, unless otherwise specified.

Financial Trends Information

8. To meet the objectives of providing financial trends information, governments should present, at a minimum, two types of information in statistical section schedules--net assets and changes in net assets.(4)

Information about Net Assets

9. The three components of net assets--invested in capital assets net of related debt, restricted, and unrestricted should be shown separately for governmental activities, business-type activities, and the total primary government.

Information about Changes in Net Assets

10. Governments should present the following information separately for governmental activities and business-type activities: expenses by function, program, or identifiable activity; program revenues by category (charges for services, operating grants and contributions, and capital grants and contributions); total net (expense) revenue; general revenues and other changes in net assets by type; and total change in net assets. Governments should also present individually their most significant charges for services revenue, categorized by function, program, or identifiable activity.

a. Governments engaged only in business-type activities should present revenues by major source and should distinguish between operating and nonoperating revenues and expenses in the statistical section of their separately issued financial reports.

b. Governments engaged only in fiduciary activities should present, at a minimum, the following information about changes in net assets in the statistical section of their separately issued financial reports: additions by source, deductions by type, and total change in net assets. If applicable, these governments should present that information, as well as benefit and refund deductions by type of benefit (for example, age and service benefits, disability) or refund (for example, death, separation), for each individual pension and other postemployment benefit plan. Benefit and refund deductions by type may be presented in a separate schedule.

11. At a minimum, governments should present changes in net assets information at the level required by paragraph 10 of this Statement and by Statement 34, as amended. Governments may provide greater detail on the face of the schedule or in an accompanying schedule. For example, a government with revenues from several different taxes might prefer to present aggregated tax revenue information in a schedule with other changes in net assets data and to provide more detailed information about individual tax sources in an accompanying schedule.

Information about Governmental Funds

12. In addition to information about net assets and changes in net assets, governments that report governmental funds should present information on fund balances and changes in fund balances.

a. Governments should present reserved and unreserved fund balances for both (1) the general fund and (2) all other governmental funds in the aggregate. Unreserved fund balances should be shown by fund type.

b. Governments should present for total governmental funds: revenues by source, expenditures by function, other financing sources (uses) and other changes to fund balances by type, and total change in fund balances. For purposes of this schedule, the interest and principal components of debt service expenditures should be shown separately. A ratio of total debt service expenditures (interest and principal combined) to noncapital expenditures(5) should also be presented.

At a minimum, governments should present the information at the level required for governmental fund financial statements. Governments may provide greater detail on the face of the schedule or in an accompanying schedule.

Revenue Capacity Information

13. To meet the objectives of providing revenue capacity information, governments should present, at a minimum, information about three aspects of their most significant own-source revenue in statistical section schedules revenue base, revenue rates, and principal revenue payers. (6)

Information about the Revenue Base

14. Revenue base information should be shown by major component--for example, different classes of real and personal property, or different types of rate payers. In addition, governments should show the total direct rate applied to this revenue base.

15. If a government presents revenue base information for a property tax, it should present both the assessed value of taxable property by major component (for example, residential, commercial, and so on) and the total estimated actual value of taxable property. If a government assesses the value of property in a manner that does not provide a reasonable basis for estimating the actual value of property, the government should disclose these circumstances on the face of the schedule and explain why the information is not presented.

Information about Revenue Rates

16. Each individual direct rate applied by the reporting government to the revenue base should be shown separately, as well as the total direct rate. Rates applied by each overlapping government to the revenue base should also be shown separately. Reporting governments with a large number of overlapping governments may aggregate smaller overlapping governments by type and show their rates as ranges. Governments should identify any legal restrictions on their ability to raise their direct rates--for example, a state law requiring that localities obtain the approval of the state legislature or a majority of the voters in a public election.

17. For governments that present direct and overlapping rate information for property taxes, some overlapping taxing bodies may levy their taxes for different fiscal periods. For purposes of this statistical schedule, the rates--used should be based on taxes payable by the taxpayers in the same year.

18. Overlapping governments are those whose geographic area coincides at least in part with the geographic area of the reporting government. State governments are not required to present information about the revenue rates of the overlapping governments within their borders, and governmental entities other than state governments are not required to present overlapping state government revenue rates. Regional governments are encouraged, but not required, to present information about the revenue rates of their overlapping governments.

Information about Principal Revenue Payers

19. For the current year and the period nine years prior, governments should identify the payers (or remitters, where appropriate) of their most significant own-source revenue, the amount of revenue base (as described in paragraphs 14 and 15) attributable to each or actual taxes levied on each, and the percentage of each amount relative to the total revenue base or total taxes levied, respectively. Governments should present the ten largest payers in terms of revenue base or taxes levied, unless fewer are needed to reach 50 percent of the total revenue base or total taxes levied, respectively.

20. Governments that are legally prohibited from disclosing individual revenue payers should present other information that assists users in understanding the degree to which the sources of own-source revenue may be concentrated. For example, governments presenting revenue capacity information about a personal income tax might prepare a schedule of personal income tax revenue by income level, for the current year and the period nine years prior.

Information about Property Tax Levies and Collections

21. If a government presents revenue capacity information about a property tax, it should also present information about property tax levies and collections. For each of the last ten periods for which a property tax is levied,(7) a government should present:

a. The amount levied for that period

b. The amount collected prior to the end of that period and the percentage of the total levy that amount represents

c. The amount of the levy collected in subsequent years, the total amount collected to date, and the percentage of the total levy that has been collected to date.

Debt Capacity Information

22. To meet the objectives of providing debt capacity information, governments should present, at a minimum, four types of information in statistical section schedules--ratios of outstanding debt, direct and overlapping debt, debt limitations, and pledged-revenue coverage.

Information about Ratios of Outstanding Debt

23. Governments should present each type of outstanding debt individually--for example, general obligation bonds, revenue-backed bonds, loans, certificates of participation, capital leases--and divided between debt related to governmental activities and debt related to business-type activities. A total for the primary government should be shown.

24. Governments should present an outstanding debt ratio calculated by dividing total outstanding debt by total personal income. Total personal income amounts should be presented with this information or with the demographic and economic information. If total personal income amounts are not available for a governments jurisdiction, estimated actual value of taxable property or another relevant economic base should be used as the denominator in this ratio. A per capita ratio of total outstanding debt should also be presented; if population is not an appropriate basis, a more relevant alternative may be used to calculate the ratio. For example, a public utility might prefer to divide outstanding debt by the number of customers or rate payers.

Information about Ratios of General Bonded Debt

25. Governments that issue general obligation debt or other bonded debt financed with any general governmental resources should provide additional information about ratios of general bonded debt. Each type of general bonded debt--for example, general obligation bonds, tax-backed bonds--should be shown individually and totaled. If a government has accumulated resources that are restricted?? to repaying the principal of outstanding general bonded debt, these resources should be subtracted and the resulting amount referred to as net general bonded debt.

26. Governments should present a general bonded debt ratio calculated by dividing total general bonded debt (or net general bonded debt, if applicable) by the total estimated actual value of taxable property. If a government's general bonded debt is not repaid with property taxes, an alternative revenue base may be used to calculate the ratio. A per capita ratio of total general bonded debt should also be presented; if population is not a meaningful basis for the ratio, a more relevant alternative may be used to calculate the ratio.

Information about Direct and Overlapping Debt

27. Governments that are engaged in governmental activities should provide information about direct and overlapping debt. For each type of outstanding debt attributable to governmental activities of an overlapping governmental entity, as defined in paragraph 18, the reporting government should present the following information for the current year: the total amount outstanding, the percentage of overlap between the reporting and overlapping governments, and the product of the debt outstanding multiplied by the percentage of overlap. The products for overlapping debt should be totaled, and total direct debt and total direct and overlapping debt should also be shown. State governments are not required to present this information in the statistical section, and governmental entities other than state governments are not required to present overlapping state government debt. County and regional governments are encouraged, but not required, to present information about direct and overlapping debt.

28. The percentage of overlap between the reporting government and the overlapping government should be determined by dividing (a) the amount of the revenue base from which the debt is repaid that is contained within the overlapping area by (b) the total revenue base of the overlapping government. For example, if an f overlapping government's debt is repaid with property taxes, the percentage of overlap would be the value of the property in the overlapping area divided by the total value of property of the overlapping government. If information for the relevant revenue base is not available, or if debt is not repaid with resources derived from a specific base, an alternative base may be used, such as population or personal income. Governments should explain the methodology and denominator employed to determine the percentage of overlap for each type of debt.

Information about Debt Limitations

29. Governments with legal debt limitations should provide the information upon which their legal debt margin is required to be calculated for the current year. A typical legal debt margin presentation would include the following information:

a. Relevant revenue base (for example, property value)

b. Debt limit amount; governments should also explain the nature of the limitation

c. Debt applicable to the limit, reserves to be deducted, if any, and total net debt applicable to the limit

d. Legal debt margin amount.

For the last ten years, governments should present the debt limit amount, total net debt applicable to the limit, the legal debt margin amount, and a ratio calculated by dividing either the legal debt margin amount or total net debt applicable to the debt limit by the debt limit.

Information about Pledged-Revenue Coverage

30. Governments should present information about pledged-revenue coverage for non-general obligation debt that is secured by a pledge of a specific revenue stream. For each type of debt backed by pledged revenues, governments should present gross revenues (and, if applicable, specific operating expenses, to produce net available revenues), principal and interest requirements, and a coverage ratio. The nature of the revenues pledged for each type of debt should also be explained (for example, charges for services, room and board fees, special assessments, incremental property and sales taxes, and lease rental payments).

Demographic and Economic Information

31. To meet the objectives of providing demographic and economic information, governments should present relevant demographic and economic indicators and information about principal employers in statistical section schedules.

Information about Demographic and Economic Indicators

32. At a minimum, governments should present the following demographic and economic indicators: population, total personal income (if it is not presented with the ratios of outstanding debt; see paragraph 24), per capita personal in come, and unemployment rate.

33. A government should attempt to obtain the most current data and the data that are the most specific to that particular government. If the required indicators are not applicable to a special purpose government, it should provide alternative indicators that are considered relevant.

Information about Principal Employers

34. For the current year and the period nine years prior, governments should identify the principal employers in its jurisdiction, the number of persons each employs, and the percentage of total employment that each represents. Governments should present the ten largest employers in terms of number of persons employed, unless fewer are needed to reach 50 percent of total employment.

Operating Information

35. To meet the objectives of providing operating information, governments should present, at a minimum, three types of information in statistical section schedules--number of government employees, operating indicators, and capital asset information.

Information about Government Employees

36. Governments should present the number of persons they employ by function, program, or identifiable activity, at least at the level of detail required for expenses by Statement 34, as amended. Governments may categorize the information differently if they cannot report it on a functional, programmatic, or identifiable activity basis or if it would be more meaningful to do so.

Information about Operating Indicators

37. Governments should present available indicators of demand or level of service at the level of detail described in paragraph 36. For example, a municipal government might report crime rates, number of arrests, and number of responses to 911 calls as indicators for its police activity

Information about Capital Assets

38. Governments should present available indicators of the volume, usage, or nature of their capital assets at the level of detail described in paragraph 36. For example, a city government might report lane-miles of streets and highways, estimated vehicle-miles traveled on highways, miles of water mains and sewers, and average daily water consumption for its public works function.

Operating Information Reported by Pension and Other Postemployment Benefit Plans in Separately Issued Reports

39. At a minimum, three types of operating information should he presented in the statistical section schedules of separately issued reports--retired members by type of benefit, average benefit payments, and principal participating employers--for each individual pension and other postemployment plan.

a. Information about retired members by type of benefit should be presented for the current year. Typically, the number of retired members, organized by ranges of benefit levels and by the major features of the plans, should be presented. Major features commonly include (1) types of retirement benefits (for example, normal retirement, disability retirement, beneficiary payment), (2) types of other postemployment benefits (such as health insurance, dental coverage, life insurance), and (3) plan options (such as various provisions for payments to beneficiaries).

b. Information about the average monthly benefit, average final average salary, and number of retired members should be presented--organized by years of credited service in five-year increments.

c. For multiple-employer plans, information about the principal participating employers, the number of covered employees each has, and the percentage of total covered employees that each represents should be presented for the current year and the period nine years prior. The ten largest employers in terms of number of covered employees should be presented, unless fewer are needed to reach 50 percent of total covered employees.

Additional Information

40. Governments may provide information in the statistical section in addition to the information required by this Statement if it meets the objectives established in paragraph 6.

Sources, Assumptions, and Methodologies

41. Governments should identify the sources of all information that does not appear in the basic financial statements, notes to basic financial statements, or required supplementary information. Governments should also explain methodologies used to produce information, as well as any significant assumptions made. For example, governments that report revenue capacity information about a property tax should describe the frequency with which property is assessed and explain how estimated actual value is determined and how it relates to assessed value.

Narrative Explanations

42. Governments should use narrative explanations to enhance the understandability of the statistical section's quantitative information. Narrative explanations in the statistical section should be primarily analytical in nature, although for some data explanations may be educational as well. Professional judgment should be used in deciding if it is appropriate to present narrative explanations and, if appropriate, what type of explanation and its extent. Generally, there are four types of narrative explanations in the statistical section:

a. Explanations of the objectives of statistical section information in general and the five categories of statistical section information, as well as individual schedules of information, if appropriate.

b. Explanations of basic concepts that may be unfamiliar to the users of the financial report.

c. Explanations that identify relationships among the information in various statistical section schedules, as well as between the statistical section and information in other sections of the financial report.

d. Explanations of atypical trends and anomalous data that the users of the financial report would not otherwise understand. Such trends and data may result from infrequent incidents, changes in underlying assumptions or accounting methods, organizational restructuring, major policy changes, or other events.

EFFECTIVE DATE AND TRANSITION

43. The provisions of this Statement are effective for statistical sections prepared for periods beginning after June 15, 2005. Governments that prepare a statistical section for the first time in response to this Statement (or that previously prepared a statistical section but did not present certain information) are encouraged, but not required, to report all required years of information retroactively. Governments are encouraged, but not required, to implement the government-wide information required by this Statement retroactively to the year they implemented Statement 34.

44. If information required by this Statement differs from information previously reported by governments, governments are encouraged, but not required, to restate or revise the information for previous years. If the information for previous years is not restated or revised, governments should clearly indicate the year of implementation of the information required by this Statement and explain the nature of the differences from prior information.

The provisions of this Statement need not be applied to immaterial items.

This Statement was issued by unanimous vote of the seven members of the Governmental Accounting Standards Board:

Tom L. Allen, Chairman

Cynthia B. Green

William W Holder

Edward J. Mazur

Paul R. Reilly

Richard C. Tracy

James M. Williams

GLOSSARY

45. This paragraph contains definitions of certain terms as they are used in this Statement; the terms may have different meanings in other contexts.

Coverage ratio. A measure of the magnitude of resources available to pay the interest on and repay the principal of debt backed by pledged revenues. For each type of debt backed by pledged revenues, a coverage ratio is generally calculated by dividing gross pledged revenues or pledged revenues net of specific operating expenses by the stun of interest expenses and principal repayments.

Direct debt. The outstanding long--term debt instruments--including bonds, notes, certificates of participation, loans, and capital leases--of the government preparing the statistical section information.

Direct rate. An amount or percentage applied to a unit of a specific revenue base by the government preparing the statistical section information--for example, a property tax rate of $1 per $1,000 of assessed property value, a sales tax rate of 5 percent of a retail sale, or a water charge of a certain amount per 100 gallons of water used.

Estimated actual value of taxable property. The fair value of taxable real or personal property or a surrogate measure of fair value if actual fair value information is not available. In practice, fair value is often referred to as market value. The estimated actual value of taxable property may be determined in a variety of manners, such as through a system that tracks changes in market values by monitoring property sales or by dividing the assessed value of property by an assumed assessment percentage.

Overlapping debt. The outstanding long-term debt instruments--including bonds, notes, certificates of participation, loans, and capital leases--of governments that overlap geographically, at least in part, with the government preparing the statistical section information.

Overlapping rate. An amount or percentage applied to a unit of a specific revenue base by governments that overlap geographically, at least in part, with the government preparing the statistical section information.

Own-source revenues. Revenues that are generated by a government itself, such as tax revenues and water and sewer charges. Investment income is also an own-source revenue. Intergovernmental aid and shared revenues are riot own-source revenues.

Total direct rate. The weighted average of all individual direct rates applied by the government preparing the statistical section information.

SSARS No. 10--Performance of Review Engagements

(Amends Statement on Standards for Accounting and Review Services No. 1, Compilation and Review of Financial Statements, AICPA, Professional Standards, vol. 2, AR sec. 100.)

1. Statement on Standards for Accounting and Review Services (SSARS) No. 1, Compilation and Review of Financial Statements (AICPA, Professional Standards, vol. 2, AR sec. 100.24-.33), currently provides guidance on analytical procedures, inquiries, and other procedures applicable to a review of financial statements whether prepared under generally accepted accounting principles or a comprehensive basis of accounting other than generally accepted accounting principles. This Statement amends SSARS No. 1 (AR see. 100.24-.33) to expand on previous guidance on analytical procedures, inquiries, and other review procedures; to provide inquiries regarding fraud in a review engagement and to require representations regarding fraud in the management representation letter; and to clarify and provide guidance regarding workpaper documentation in a review engagement. New language is shown in boldface italics; deleted language is shown by strikethrough. Subsequent paragraphs will be renumbered accordingly:

Review of Financial Statements

.24 Paragraphs .25 through [begin strikethrough].40[end strikethrough].44 provide additional guidance applicable to a review of financial statements. Procedures for conducting a review of financial statements generally are limited to analytical procedures and inquiries. The accountant performs these procedures to obtain a basis for communicating whether he or she is aware of any material modifications that should be made to the financial statements for them to be in conformity with generally accepted accounting principles. The specific inquiries made and the analytical and other procedures performed should be tailored to the engagement based on the accountant's knowledge of the entity's business. For example, if the accountant becomes aware of a significant change in the entity's operations, the accountant may consider making additional inquiries, employing additional analytical procedures, or both.

.25[begin strikethrough] 32 [end strikethrough] A review does not contemplate obtaining an understanding of internal control or assessing control risk, tests of accounting records and of responses to inquiries by obtaining corroborating evidential matter, and certain other procedures ordinarily performed during an audit. Thus, a review does not provide assurance that the accountant wall become aware of all significant matters that would be disclosed in an audit. However, if the accountant becomes aware that information coming to his or her attention is incorrect, incomplete, or otherwise unsatisfactory, [begin strikethrough] he [end strikethrough] the accountant should perform the additional procedures [begin strikethrough]he[end strikethrough] deem[begin strikethrough]s[end strikethrough]ed necessary to achieve limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with generally accepted accounting principles. (See paragraph [begin strikethrough].38.[end strikethrough] 42 for guidance when an accountant is unable to complete a review and paragraphs [begin strikethrough].41 [end strikethrough].45 through [begin strikethrough] .43[end strikethrough].47 for the accountant's responsibilities when he or she is aware of departures from generally accepted accounting principles.)

Knowledge of Accounting Principles and Practices of the Industry .26[begin strikethrough] 25[end strikethrough] The accountant should possess a level of knowledge of the accounting principles and practices of the industry in which the entity operates and an understanding of the entity's business(17) that will provide [begin strikethrough] him,[end strikethrough] through the performance of inquiry and analytical procedures, [begin strikethrough]with [end strikethrough] a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with generally accepted accounting principles. (As previously noted, reference to generally accepted accounting principles in this [begin strikethrough]s[end strikethrough] Statement includes, where applicable, [begin strikethrough]another [end strikethrough]an other comprehensive basis of accounting.)

.27[begin strikethrough]26[end strikethrough] The requirement that the accountant possess a level of knowledge of the accounting principles and practices of the industry in which the entity operates does not prevent an accountant from accepting a review engagement for an entity in an industry with which the accountant has no previous experience. It does, however, place upon the accountant a responsibility to obtain the required level of knowledge. The accountant may do so, for example, by consulting AICPA guides, industry publications, financial statements of other entities in the industry, textbooks and periodicals, or individuals knowledgeable about the industry.

.28[begin strikethrough]27 [end strikethrough] The accountant's understanding of the entity's business should include a general understanding of the entity's organization, its operating characteristics, and the nature of its assets, liabilities, revenues, and expenses. This would ordinarily involve a general knowledge of the entity's production, distribution, and compensation methods, types of products and services, operating locations, and material transactions with related parties. An accountant's understanding of an entity's business is ordinarily obtained through experience with the entity or its industry and inquiry of the entity's personnel.

Analytical Procedures .29[begin strikethrough]28 The accountant's inquiry and procedure should ordinarily consist of the following:[end strike through] The accountant should apply analytical procedures to the financial statements to identify and provide a basis for inquiry about the relationships and individual items that appear to be unusual and that may indicate a material misstatement. Analytical procedures should include:

* Developing expectations by identifying and using plausible relationships that are reasonably expected to exist based on the accountant's understanding of the entity and the industry in which the entity operates.

* Comparing recorded amounts, or ratios developed from recorded amounts, to expectations developed by the accountant. See Appendix H for examples of analytical procedures an accountant may consider performing when conducting a review of financial statements.

.30 Expectations developed by the accountant in performing analytical procedures in connection with a review of financial statements ordinarily are less encompassing than those developed in an audit. Also, in a review the accountant ordinarily is not required to corroborate management's responses with other evidence. However, the accountant should consider the reasonableness and consistency of management's responses in light of the results of other review procedures and the accountant's knowledge of the entity's business and the industry in which it operates.

Inquiries and Other Review Procedures

.31 The following are inquiries the accountant should consider making and other review procedures the accountant should consider performing when conducting a review of financial statements:

a.[begin strikethrough] Inquiries concerning the entity's accounting principles and practices and the methods followed in applying tem (see Appendix B [paragraph .58])[end strikethrough] Inquiries to members of management who have responsibility for financial and accounting matters concerning (see Appendix B):

(1) Whether the financial statements have been prepared in conformity with generally accepted accounting principles consistently applied.

(2) The entity's accounting principles and practices and the methods followed in applying them and procedures for recording, classifying, and summarizing transactions, and accumulating information for disclosure in the financial statements.

(3) Unusual or complex situations that may have an effect on the financial statements.

(4) Significant transactions occurring or recognized near the end of the reporting period.

(5) The status of uncorrected misstatements identified during the previous engagement.

(6) Questions that have arisen in the course of applying the review procedures.

(7) Events subsequent to the date of the financial statements that could have a material effect on the financial statements.

(8) Their knowledge of any fraud or suspected fraud affecting the entity involving management or others where the fraud could have a material effect on the financial statements, for example, communications received from employees, former employees, or others.

(9) Significant journal entries and other adjustments.

(10) Communications from regulatory agencies. [begin strikethrough]b. Inquiries concerning actions the entity's procedure for recording, classifying and summarizing transactions, and accumulating information for disclosure in the financial statements (see Appendix B [paragraph .58]).[end strikethrough]

[begin strikethrough]c. Analytical procedures designed to identify the relationships and individual items that appear to be unusual. For the purposes of this statements analytical procedures consists of (1) comparison of the financial statements with statements for comparable prior period(s), (2) comparison of the financial statements with anticipated results, if available for example, budgets and forecasts), and (3) study of the relationships of the elements of the financial statements that would be expected to conform to a predictable pattern based on the entity's experience. In applying these procedures, the accountant should consider the types of matters that required adjustments in preceding periods. Examples of relationships of elements in financial statements that would be expected to conforms to a predictable pattern may be the relationships between changes in sales and changes in accounts receivable and expense accounts that ordinarily fluctuate with sales, and between changes in depreciation property, plant, and equipment and changes in depreciation expense and other accounts that may be affected, such as maintenance and repairs.[end strikethrough]

b[begin strikethrough]d.[end strikethrough] Inquiries concerning actions taken at the meetings of shareholders, board of directors, committees of the board of directors, or comparable meetings that may affect the financial statements.

c[begin strikethrough]e[end strikethrough] Reading the financial statements to consider, on the basis of information coming to the accountant's attention whether the financial statements appear to conform with generally accepted accounting principles.

d[begin strikethrough]f[end strikethrough] Obtaining reports from other accountant's, if nay, who have been engaged to audit or review the financial statements of significant components of the reporting entity, its subsidiaries, and other investments. (18)

[begin strikethrough]g. Inquiries of persons having responsibility for financial and accounting matters concerning (1) whether the financial statements have been prepared in conformity with generally accepted accounting principles consistently applied, (2) changes in the entity's business activities or accounting principles and practices, (3) matters as to which questions have arisen in the course of applying the foregoing procedures, and (4) events subsequent to the date of the financial statements that would have a material effect on the financial statements. [end strikethrough]

Management Representations

.32[begin strikethrough]29[end strikethrough] Written representations are required from management for all financial statements and periods covered by the accountant's review report. For example, if comparative financial statements are reported on, the representations obtained at the completion of the most recent review should address all periods being reported on. The specific written representations obtained by the accountant will depend on the circumstances of the engagement and the nature and basis of presentation of the financial statements. In connection with a review of financial statements presented in accordance with generally accepted accounting principles, specific representations should relate to the following matters: (19)

a. Management's acknowledgment of its responsibility for the fair presentation in the financial statements of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles

b. Management's belief that the financial statements are fairly presented in conformity with generally accepted accounting principles

c. Management's acknowledgement of its responsibility to prevent and detect fraud

d. Knowledge of any fraud or suspected fraud affecting the entity involving management or others where the fraud could have a material effect on the financial statements, including any communications received from employees, former employees, or others

e[begin strikethrough]c.[end strikethrough] Management's full and truthful response to all inquiries

f[begin strikethrough]d.[end strikethrough] Completeness of information

g[begin strikethrough]c.[end strikethrough] Information concerning subsequent events

The representation letter ordinarily should be tailored to include additional appropriate representations from management relating to matters specific to the entity's business or industry. An illustrative representation letter is presented in Appendix F.

.33[begin strikethrough]30[end strikethrough] The written representations should he addressed to the accountant. Because the accountant is concerned with events occurring through the date of the report that may require adjustment to or disclosure in the financial statements, the representations should he made as of a date no earlier than the date of the accountant's report. The letter should be signed by those members of management whom the accountant believes are responsible for and knowledgeable, directly or through others in the organization, about the matters covered in the representation letter. Normally, the chief executive officer and chief financial officer or others with equivalent positions in the entity should sign the representation letter. If the current management was not present during all periods covered by the accountant's report, the accountant should nevertheless obtain written representations from current management on all such periods.

.34[begin strikethrough]31 [end strikethrough]Knowledge acquired in the performance of audits of the entity's financial statements, compilation of the financial statements, or other accounting services may result in modification of the review procedures described in paragraphs

[begin strikethrough].28[end strikethrough].29 through .31. However, such modification would not reduce the degree of responsibility the accountant assumes with respect to the reviewed financial statements [begin strikethrough]he has reviewed.[end strikethrough]

Documentation in a Review Engagement

.35 The accountant should prepare documentation in connection with a review of financial statements, the form and content of which should be designed to meet the circumstances of the particular engagement. Documentation is the principal record of the review procedures performed and the conclusions reached by the accountant in performing the review. However, an accountant would not be precluded from supporting his or her review report by other means in addition to the review documentation. Such other means might include written documentation contained in other engagement (for example compilation) files or quality control files (for example consultation files) and in limited situations, oral explanations. Oral explanations should be limited to those situations where the accountant finds it necessary to supplement or clarify information contained in the documentation. Oral explanations should not be the principal support for the work performed or the conclusions reached.

.36[begin strikethrough]33[end strikethrough] Because of the different circumstances in individual engagements, [begin strikethrough]Although[end strikethrough] it is not possible to specify the form or content of the [begin strikethrough]working papers that an[end strikethrough] documentation the accountant should prepare[begin strikethrough] in connection with a review of financial statements because of the different circumstances of individual engagements, the accountant's working papers should describe. [end strikethrough] However, the documentation should include any findings or issues that in the accountant's judgment are significant, for example, the results of review procedures that indicate the financial statements could be materially misstated, including actions taken to address such findings, and the basis for the final conclusions reached.

.37 The documentation of the inquiry and analytical procedures should include the following:

a. The matters covered in the accountant's inquiry [begin strikethrough]and analytical[end strikethrough] procedures.

b. The analytical procedures performed.

c. The expectations as discussed in paragraph .29, where significant expectations are not otherwise readily determinable from the documentation of the work performed, and factors considered in the development of those expectations.

d. Results of the comparison of the expectations to the recorded amounts or ratios developed from recorded amounts.

e. Any additional procedures performed in re. spouse to significant unexpected differences arising from the analytical procedure and the results of such additional procedures.

f[begin strikethrough]b.[end strikethrough] Unusual matters that the accountant considered during the performance of the review procedures, including their disposition.

g. The representation letter.

2. This Standard is effective for reviews of financial statements for periods ending on or after December 15, 2004.

3. This Statement amends Appendix B to SSARS No. 1 and adds an additional appendix to SSARS No. 1 (Appendix H). New language is shown in boldface italics; deleted language is shown by strikethrough.

(1) Unless otherwise noted, for the purposes of this Statement the term primary government includes the primary government and its blended component units, as defined in Statement 14.

(2) Unless otherwise noted, for the purposes of this Statement the term government includes the primary government, its blended component units, and in some cases certain discretely presented component units as discussed in paragraph 4 of this Statement.

(3) Terms that are defined in the Glossary are shown in boldface type the first time they appear in this Statement.

(4) Sometimes other terminology is used, such as fund net assets, plan net assets, fund equity, changes in fund net assets, changes in plan net assets, and changes in fund equity.

(5) Noncapital expenditures are calculated by subtracting the following from total expenditures: (a) capital outlay (to the extent capitalized for the government-wide statement of net assets) and (b) expenditures for capitalized assets contained within the functional expenditure categories.

(6) At a minimum, a government should present the information described in paragraphs 14 through 20 for its most significant source of own-source revenues. If a government has other own-source revenues that are nearly as significant as its largest source, it should consider presenting revenue capacity information for those own-source revenues as well.

(7) The phrase periods for which a property tax is levied, as used in this Statement, is consistent with the meaning of the phrase in the period for which they are levied established in Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions. The period referred to in subparagraph b is the period for collecting and distributing taxes that ends when the collector makes final scheduled distribution of the current year's taxes and begins the levy and collection process for the next year's taxes.

(8) The meaning of restricted is defined in paragraph 34 of Statement 34. All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please call the AICPA Copyright Permissions Hotline at (20l) 938-3245. A Permissions Request Form for e-mailing requests is available at www.aicpa.org by clicking on the copyright notice on any page. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, Harborside Financial Center, 20l Plaza Three, Jersey City,, NJ 07311-3881.

(17) For purposes of this Statement, the term business includes not-for-profit entities.

(18) The financial statements of the reporting entity ordinarily include an accounting for all significant components, such as unconsolidated subsidiaries and investees. If other accountants are engaged to audit or review the financial statements of such components, the accountant will require reports from the other accountants as a basis, in part, for his the accountant's review report on his with respect to the review of the financial statements of the reporting entity. The accountant may decide to make reference to the work of other accountants in his the accountant's review report on the financial statements It such reference is made, the report should indicate the magnitude of the portion of the financial statements audited or reviewed by the other accountants.

(19) Specific representations also are applicable to financial statements presented in conformity with a comprehensive basis of accounting other than generally accepted accounting principles The specific representations to be obtained should be based on the nature and basis of presentation of the financial statements being reviewed.

APPENDIX B

Review of Financial Statements--illustrative Inquiries

The inquiries to be made in a review of financial statements are a matter of the accountant's professional judgment. In determining [begin strikethrough]his[end strikethrough] the appropriate inquiries, an accountant may consider (a) the nature and materiality of the items reflected in the financial statements, (b) the likelihood of a misstatement in the financial statements, (c) knowledge obtained during current and previous engagements, (d) the stated qualifications of the entity's accounting personnel, (e) the extent to which a particular item is affected by management's judgment, and (f) inadequacies in the entity's underlying financial data. The inquiries should generally be made of members of management with financial reporting and accounting responsibilities.

The following list of inquiries is for illustrative purposes only. These inquiries [begin strikethrough]do-[end strikethrough]will not necessarily[begin strikethrough] apply to[end strikethrough] be applicable in every review engagement, nor are they these inquiries meant to be all-inclusive.[begin strikethrough] This list is [end strikethrough]These illustrative inquiries are not intended to serve as a program or checklist [begin strikethrough]in the conduct of[end strike through] to be utilized in performing a review engagement; rather [begin strikethrough]it describes the,[end strike through] they address general areas [begin strikethrough]in which[end strike through] where inquiries might be made in a review engagement. [begin strikethrough]For example [end strike through] Also, the accountant may feel it necessary to make several inquiries in an effort to answer[begin strikethrough] one of the[end strikethrough] questions[begin strikethrough] listed below, such as item 3(a)[end strikethrough]related to the issues addressed in these illustrative inquiries.

(1.) General

a. Have there been any changes in the entity's. business activities?

b. Are there any unusual or complex situations that may have an effect on the financial statements (for example, business combinations, restructuring plans, or litigation)?

c[begin strikethrough]a.[end strikethrough] What[begin strikethrough] are the[end strikethrough] procedures are in place related to[begin strikethrough] for[end strikethrough] recording, classifying, and summarizing transactions[begin strikethrough] (relates to care information discussed below)[end strikethrough] and accumulating information related to financial statement disclosures?

[begin strikethrough]b. Do the general ledger control accounts agree with subsidiary records (for example, receivables, inventories, investments, property and equipment, accounts payable, accrued expenses, non current liabilities)?[end strikethrough]

d[begin strikethrough]e.[end strikethrough] Have the financial statements been prepared in conformity with generally accepted accounting principles[begin strikethrough] been applied on a consistent basis[end strikethrough] or, if appropriate, a comprehensive basis of accounting other than generally accepted accounting principles? Have there been any changes in accounting principles and methods of applying those principles?

e. Have there been any instances of fraud or illegal acts within the entity?

f. Have there been any allegations or suspicions that fraud or illegal acts might have occurred or might be occurring within the entity? If so, where and how?

g. Are any entities, other than the reporting entity, commonly controlled by the owners? If so, has an evaluation been performed to determine whether those other entities should be consolidated into the financial statements of the reporting entity?

h. Are there any entities other than the reporting entity in which the owners have significant investments (for example, variable interest entities)? If so, has an evaluation been performed to determine whether the reporting entity is the primary beneficiary related to the activities of these other entities?

i. Have any significant transactions occurred or been recognized near the end of the reporting period?

2. Cash and cash equivalents

a. Is the entity's policy regarding the composition of cash and cash equivalents in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 95, Statement of Cash Flows (paragraphs 7-10)? Has the policy been applied on a consistent basis?

b[begin strikethrough]a.[end strikethrough] [begin strikethrough] Have[end strikethrough]Are all[begin strikethrough] bank[end strikethrough]cash and cash equivalents (1) [begin strikethrough] balances been[end strikethrough] accounts reconciled[begin strikethrough]with[end strikethrough] books balances on a timely basis?

c[begin strikethrough]b.[end strikethrough] Have old or unusual reconciling items between bank balances and book balances been re viewed and adjustments made where necessary?

d[begin strikethrough]e.[end strikethrough] Has there been a proper cut off of cash [begin strikethrough]transaction been made[end strikethrough] receipts and disbursements?

e. Has a reconciliation of intercompany transfers been prepared?

f. Have checks written but not mailed as of the financial statement date been properly reclassified into the liability section of the balance sheet?

g. Have material bank overdrafts been properly reclassified into the liability section of the balance sheet?

h. [begin strikethrough]d. [end strikethrough] Are there[begin strikethrough]any [end strikethrough] compensating balances or other restrictions on the availability of cash and cash equivalents balances? If so, has consideration been given to reclassifying these amounts as noncurrent assets?

i[begin strikethrough]e.[end strikethrough] Have cash thuds been counted and reconciled with control accounts?

3. Receivables

a. Has an adequate allowance[begin strikethrough]been made[end strikethrough] doubtful accounts been properly reflected in the financial statements?

b. Have uncollectible receivables[begin strikethrough]considered uncollectible[end strikethrough]been written off through a charge against the allowance account or earnings?

c. [begin strikethrough]If appropriately, h[end strikethrough] Has interest earned on receivables been properly reflected in the financial statements?

d. Has there been a proper cutoff of sales transactions[begin strikethrough] been made[end strikethrough]?

e. Are there[begin strikethrough]any[end strikethrough]receivables from employees or other related parties? Have receivables from owners been evaluated to determine if they should be reflected in the equity section (rather than the asset section) of the balance sheet?

f. Are any receivables pledged, discounted, or factored? Are recourse provisions properly reflected in the financial statements?

g. Have receivables been properly classified between current and noncurrent?

h. Have there been significant numbers of sales returns or credit memoranda issued subsequent to the balance sheet date?

i. Is the accounts receivable subsidiary ledger reconciled to the general ledger account balance on a regular basis?

4. [begin strikethrough]Inventories[end strikethrough]Inventory

a. have inventories been physically counted Are physical inventory counts performed on a regular basis, including at the end of the reporting period? Are the count procedures adequate to ensure an appropriate count? If not, how have amounts related to inventories been determined for purposes of financial statement presentation? If so, what procedures were used to take the latest physical inventory and what date was that inventory taken?

b. Have general ledger control accounts been adjusted to agree with the physical[begin strikethrough]inventories[end strikethrough] inventory count? If so, were the adjustments significant?

c. If the physical[begin strikethrough][end strikethrough] inventory counts [begin strikethrough]are[end strikethrough]were taken at a date other than the balance sheet date, what procedures were used to[begin strikethrough]record [end strikethrough] determine changes in inventory between the date of the physical inventory counts and the balance sheet date?

d. Were consignments in or out considered in taking physical inventories?

e. What is the basis of[begin strikethrough]valuation[end strikethrough] valuing inventory for purposes of financial statement presentation?

f. Does inventory cost include material, labor, and overhead where applicable?

g. [begin strikethrough]Have write downs[end strikethrough] Has inventory been reviewed for obsolescence or cost in excess of net realizable value[begin strikethrough]been made[end strikethrough]? If so, how are these costs reflected in the financial statements?

h. Have proper cutoffs of purchases, goods in transit, and returned goods been made?

i. Are there any inventory encumbrances?

j. Is scrap inventoried and controlled?

5. Prepaid Expenses

a. What is the nature of the amounts included in prepaid expenses?

b. How are these amounts being amortized?

6. Investments, [begin strikethrough]Including Loans, Mortgages, and Intercorporate Investments[end strikethrough]

a. What is the basis of accounting for investments reported in the financial statements (for example, securities, joint ventures, or closely-held businesses)?

b. Are derivative instruments properly measured and disclosed in the financial statements? If those derivatives are utilized in hedge transactions, have the documentation or assessment requirements related to hedge accounting been met?

c. Are investments in marketable debt and equity securities properly classified as trading, available-for-sale, and held-to-maturity?

d. How were fair values of the reported investments determined? Have unrealized gains and losses been properly reported in the financial statements?

e. If the fair values of marketable debt and equity securities are less than cost, have the declines in value been evaluated to determine whether the declines are other-than-temporary?

f. For any debt securities classified as held-to-maturity, does management have the positive ability and intent to hold the securities until they mature? If so, have those debt securities been properly measured?

g. [begin strikethrough]a.[end strikethrough] Have gains and losses[begin strikethrough]on[end strikethrough] related to disposal of investments been properly reflected in the financial statements?

h. [begin strikethrough]b.[end strikethrough] How was investment income[begin strikethrough]been[end strike through] determined? Is investment income properly reflected in the financial statements?

i. [begin strikethrough]c.[end strikethrough] Has appropriate consideration been given to the classification of investments between current and noncurrent, [begin strikethrough]and the difference between the cost and market value of investments[end strikethrough]?

d. [begin strikethrough]Have consolidation or equity accounting requirements been considered[end strikethrough]?

j. [begin strikethrough]e.[end strikethrough] [begin strikethrough]What is the basis of evaluation of marketable equity securities[end strikethrough] For investments made by the reporting entity have consolidation, equity, or cost method accounting requirements been considered?

k[begin strikethrough]f.[end strikethrough] Are [begin strikethrough]any[end strikethrough] investments[begin strikethrough]unencumbered[end strikethrough]?

7. Property and Equipment

a. Are property and equipment items properly stated at depreciated cost or other proper value?

b. When was the last time a physical inventory of property and equipment was taken?

c. Are all items reflected in property and equipment held for use? If not, have items that are held for sale been properly reclassified from property and equipment?

d[begin strikethrough]a.[end strikethrough] Have gains or losses on disposal of property and equipment been properly reflected in the financial statements?

e. [begin strikethrough]b. [end strikethrough] What are the criteria for capitalization of property and equipment? Have [begin strikethrough]such[end strikethrough]the criteria been consistently and appropriately applied[begin strikethrough]during the fiscal period[end strikethrough]?

f. [begin strikethrough]c.[end strikethrough] Are repairs and maintenance [begin strikethrough]account only include items of[end strikethrough]cost properly reflected as an expense in the income statement? [begin strikethrough]d. Are property and equipment stated at cost[end strikethrough]?

g. [begin strikethrough]e.[end strikethrough] What[begin strikethrough]are the [end strikethrough]depreciation methods and rates are utilized in the financial statements? Are these methods and rates appropriate and [begin strikethrough]they[end strikethrough]these applied on a consistent basis?

h. [begin strikethrough]f.[end strikethrough] Are there any unrecorded additions, retirements, abandonments, sales, or trade-ins?

i. [begin strikethrough]g.[end strikethrough] Does the entity have any material lease agreements? If so, [begin strikethrough]H[end strikethrough]have they those agreements been properly[begin strikethrough]reflected[end strikethrough] evaluated for financial statement presentation purposes?

j. Are there any asset retirement obligations associated with tangible long-lived assets? If so, has the recorded amount of the related asset been increased because of the obligation and is the liability properly reflected in the liability section of the balance sheet?

k. Has the entity constructed any of its property and equipment items? If so, have all components of cost been reflected in measuring these items for purposes of financial statement presentation, including, but not limited to, capitalized interest?

l. Has there been any significant impairment in value of property and equipment items? If so, has any impairment loss been properly reflected in the financial statements?

m. [begin strikethrough]h. [end strikethrough] Are any property and equipment items mortgaged or otherwise encumbered? If so, are these mortgages and encumbrances properly reflected in the financial statements?

8. Intangibles and Other Assets

a. What is the nature of the amounts included in other assets?

b. Do these assets represent costs that will benefit future periods? What is the amortization policy related to these assets? Is[begin strikethrough]i[end strikethrough]t this polity appropriate?

c. Have other assets been properly classified between current and noncurrent?

d. Are intangible assets with finite lives being appropriately amortized?

e. Are the costs associated with computer software properly reflected as intangible assets (rather than property and equipment) in the financial statements?

f. Are the costs associated with goodwill (and other intangible assets with indefinite lives) properly reflected as intangible assets in the financial statements? Has amortization ceased related to these assets?

g. Has there been any significant impairment in value of these assets? If so, has any impairment loss been properly reflected in the financial statements?

h. [begin strikethrough]d. [end strikethrough] Are any of these assets mortgaged or otherwise encumbered?

9. Accounts and Short-Term Notes Payable and Accrued Liabilities

a. Have[begin strikethrough]all[end strikethrough] significant payables been reflected in the financial statements?

b. Are[begin strikethrough]all banks[end strikethrough] loans from financial institutions and other short-term liabilities properly classified in the financial statements?

c. Have[begin strikethrough]all[end strikethrough] significant accruals, [begin strikethrough]such as[end strikethrough] (for example, payroll, interest, [begin strikethrough]and[end strikethrough] provisions for pension and profit-sharing plans, or other postretirement benefit obligations) been properly reflected in the financial statements?

d. Has a liability for employees' compensation for future absences been properly accrued and disclosed in the financial statements?

e. [begin strikethrough]d. [end strikethrough] Are[begin strikethrough]there[end strikethrough] any[begin strikethrough]collateralized[end strikethrough] liabilities collateralized or subordinated? If so, are those liabilities disclosed in the financial statements?

f. [begin strikethrough]e. [end strikethrough] Are there any payables to employees and related parties?

10. Long-Term Liabilities

a. [begin strikethrough]What a[end strikethrough]Are the terms and other provisions of long-term liability agreements properly disclosed in the financial statements?

b. Have liabilities been properly classified between current and non-current?

c. Has interest expense been properly accrued and reflected in the financial statements?

d. [begin strikethrough]has there been[end strikethrough] Is the company in compliance with[begin strikethrough]restrictive[end strikethrough] loan covenants and [begin strikethrough]of loans[end strikethrough]agreements? If not, is the noncompliance properly disclosed in the financial statements?

e. Are any long-term liabilities collateralized or subordinated? If so, are these facts disclosed in the financial statements?

f. Are there any obligations that, by their terms, are due on demand within one year from the balance sheet date? If so, have these obligations been properly reclassified into the current liability section of the balance sheet?

11. Income and Other Taxes

a. [begin strikethrough]Has[end strikethrough] Do the financial statements reflect an appropriate provision[begin strikethrough]been made[end strikethrough] for current and prior-year[begin strikethrough]federal[end strikethrough] income taxes payable?

b. Have any assessments or reassessments been received? Are there tax authority examinations in process?

c. Are there[begin strikethrough]timing[end strikethrough] any temporary differences between book and tax amounts? If so, have deferred taxes on these differences been properly reflected in the financial statements?

d. [begin strikethrough]Has[end strikethrough] Do the financial statements reflect an appropriate provision[begin strikethrough]been made[end strikethrough] for [begin strikethrough]state and local income, franchise, sales and other[end strikethrough] taxes[begin strikethrough]payable[end strikethrough] other than income taxes (for example, franchise, sales)?

e. Have all required tax payments been made on a timely basis?

12. Other Liabilities, Contingencies, and Commitments

a. What is the nature of the amounts included in other liabilities?

b. Have other liabilities been properly classified between current and noncurrent?

c. Are there any guarantees, whether written or verbal, whereby the entity must stand ready to perform or is contingently liable related to the guarantee? If so, are these guarantees properly reflected in the financial statements?

d. [begin strikethrough]e. [end strikethrough] Are there any contingent liabilities, [begin strikethrough] such as[end strikethrough](for example, discounted notes, drafts, endorsements, warranties, litigation, and unsettled assorted claims)? Are there any[begin strikethrough]unasserted[end strikethrough] potential unasserted claims? Are these contingent liabilities, claims, and assessments properly measured and disclosed in the financial statements?

e. [begin strikethrough]d. [end strikethrough] Are there any material contractual obligations for construction or purchase of [begin strikethrough]real[end strikethrough]property and equipment [begin strikethrough]and[end strikethrough]or any commitments or options to purchase or sell company securities? If so, are these facts clearly disclosed in the financial statements?

f. Is the entity responsible for any environmental remediation liability? If so, is this liability properly measured and disclosed in the financial statements?

g. Does the entity have any agreement to repurchase items that previously were sold? If so, have the repurchase agreements been taken into account in determining the appropriate measurements and disclosures in the financial statements?

h. Does the entity have any sales commitments at prices expected to result in a loss at the consummation of the sale? If so, are these commitments properly reflected in the financial statements?

i. Are there any violations, or possible violations, of laws or regulations the effects of which should be considered for financial statement accrual or disclosure?

13. Equity

a. What is the nature of any changes in equity accounts during each reporting period?

b. What classes of[begin strikethrough]capital[end strikethrough] stock (other ownership interests) have been authorized?

c. What is the par or stated value of the various classes of stock (other ownership interests)?

d. Do amounts of outstanding shares of[begin strikethrough]capital[end strikethrough] stock (other ownership interests) agree with subsidiary records?

e. Have pertinent rights and privileges of ownership interests been properly disclosed in the financial statements?

f. Does the entity have any mandatorily redeemable ownership interests? If so, have these ownership interests been evaluated so that a proper determination has been made related to whether these ownership interests should be measured and reclassified to the liability section of the balance sheet? Are redemption features associated with ownership interests clearly disclosed in the financial statements?

g. [begin strikethrough]e. [end strikethrough] Have[begin strikethrough]capital stock[end strikethrough] dividend (distribution) and liquidation preferences related to ownership interest, [begin strikethrough]if any[end strikethrough] been properly disclosed in the financial statements?

h. Do disclosures related to ownership interests include any applicable call provisions (prices and dates), conversion provisions (prices and rates), unusual voting rights, significant terms of contracts to issue additional ownership interests, or any other unusual features associated with the ownership interests?

i. Are syndication fees properly reflected in the financial statements as a reduction of equity (rather than an asset)? j. [begin strikethrough]f. [end strikethrough] Have any stock options or other stock compensation awards been granted to employees or others? If so, are these options or awards properly measured and disclosed in the financial statements?

k. [begin strikethrough]g. [end strikethrough] Has the entity made any acquisitions of its own[begin strikethrough]capital[end strikethrough] stock? If so, are the amounts associated with these reacquired shares properly reflected in the financial statements as a reduction in equity? Is the presentation in accordance with applicable state laws?

l. [begin strikethrough]h. [end strikethrough] Are there any restrictions or appropriations on retained earnings or other capital accounts? If so, are these restrictions or appropriations properly reflected in the financial statements?

14. Revenue and Expenses

a. What is the entity's revenue recognition policy? Is the policy appropriate? Has the policy been consistently applied and appropriately disclosed?

b. [begin strikethrough]a. [end strikethrough] Are revenues from[begin strikethrough]the[sales strikethrough] sales of[begin strikethrough]major[end strikethrough] products and rendering of services recognized in the appropriate reporting period (that is, when the products have been delivered and when the services have been performed)?

c. Were any sales recorded under a "bill and hold" arrangement? If yes, have the criteria been met to record the transaction as a sale?

d. [begin strikethrough] b. [end strikethrough]Are purchases and expenses recognized in the appropriate reporting period (that is, matched against revenue) and properly classified in the financial statements?

e[begin strikethrough]e[end strikethrough]. Do the financial statements include discontinued operations, items that might be considered extraordinary, or both? If so, are amounts associated with discontinued operations, extraordinary items, or both properly displayed in the income statement?

f. Does the entity have any gains or losses that would necessitate the display of comprehensive income (for example, gains/losses on available-for-sale securities or cash flow hedge derivatives)? If so, have these items been properly displayed within comprehensive income (rather than included in the determination of net income)?

15. Other

a. [begin strikethrough]Are there[end strikethrough] Have [begin strikethrough]any[end strikethrough] events occurred [begin strikethrough]after[end strikethrough]subsequent to the[begin strikethrough]end of the fiscal period[end strikethrough] balance sheet date that [begin strikethrough]have a significant effect on[end strikethrough] would require adjustment to, or disclosure in, the financial statements?

b. Have actions taken at stockholders, [begin strikethrough]board of[end strikethrough] directors, committees of directors, or comparable meetings that affect the financial statements been reflected in the financial statements?

c. Are significant estimates and material concentrations (for example, customers or suppliers) properly disclosed in the financial statements?

d. Are there plans or intentions that may materially affect the carrying amounts or classification of assets and liabilities reflected in the financial statements?

e[begin strikethrough]e[end strikethrough]. Have there been [begin strikethrough]any[end strikethrough] material transactions between or among related parties (for example, sales, purchases, loans, or leasing arrangements)? If so, are these transactions properly disclosed in the financial statements?

f[begin strikethrough]d[end strikethrough]. Are there [begin strikethrough]any material[end strikethrough] uncertainties that could have a material impact on the financial statements? Is there any change in the status of previously disclosed material uncertainties [begin strikethrough]previously disclosed[end strikethrough]?Are all uncertainties, including going concern matters, that could have a material impact on the financial statements properly disclosed in the financial statements?

g. Are barter or other nonmonetary transactions properly recorded and disclosed?

(1) Cash and cash equivalents include all cash and highly

liquid investments that are both (a) readily convertible to cash and (b) so near to maturity that they present insignificant risk of changes in value because of changes in interest rates, in accordance with paragraph 8 of Financial Accounting Standards Board Statement No. 95, Statement of Cash Flows.

APPENDIX H

Analytical Procedures the Accountant May Consider Performing When Conducting a Review of Financial Statements

Analytical procedures are designed to identify relationships and individual items that appear to be unusual and that may reflect a material misstatement of the financial statements. The analytical procedures performed in a review of financial statements are a matter of the accountant's professional judgment. In determining the appropriate analytical procedures, an accountant may consider (a) the nature and materiality of the items reflected in the financial statements, (b) the likelihood of a misstatement in the financial statements, (c) knowledge obtained during current and previous engagements, (d) the stated qualifications of the entity 's accounting personnel, (e) the extent to which a particular item is affected by management's judgment, and (f) inadequacies in the entity's underlying financial data.

The following list of analytical procedures is for illustrative purposes only. These analytical procedures will not necessarily be applicable in every review engagement, nor are these analytical procedures meant to be all-inclusive. These illustrative analytical procedures are not intended to serve as a program or checklist to be utilized in performing a review engagement. Examples of analytical procedures an accountant may consider performing in a review of financial statements include:

* Comparing financial statements with statements for comparable prior period(s).

* Comparing current financial information with anticipated results, such as budgets or forecasts (for example, comparing tax balances and the relationship between the provision for income taxes and pretax income in the current financial information with corresponding information in (a) budgets, using expected rates, and (b) financial information for prior periods). (1)

* Comparing current financial information with relevant nonfinancial information.

* Comparing ratios and indicators for the current period with expectations based on prior periods, for example, performing gross profit analysis by product line and operating segment using elements of the current financial information and comparing the results with corresponding information for prior periods. Examples of key ratios and indicators are the current ratio, receivables turnover or days' sales outstanding, inventory turnover, depreciation to average fixed assets, debt to equity, gross profit percentage, net income percentage, and plant operating rates.

* Comparing ratios and indicators for the current period with those of entities in the same industry.

* Comparing relationships among elements in the current financial information with corresponding relationships in the financial information of prior periods, for example, expense by type as a percentage of sales, assets by type as a percentage of total assets, and percentage of change in sales to percentage of change in receivables. Analytical procedures may include such statistical techniques as trend analysis or regression analysis and may be performed manually or with the use of computer-assisted techniques.

In addition, the accountant may find the guidance in SAS No. 56, Analytical Procedures (AICPA, Professional Standards, vol. 1, AU sec. 329), as amended, useful in conducting a review of financial statements.

This Statement titled Performance of Review Engagements was adopted unanimously by the assenting votes of the seven members of the Accounting and Review Services Committee.

Accounting and Review Services Committee (2003-2004)

Andrew M. Cohen, Chair Suzanne M. Heidenreich Henry Krostich John J. Malahoski Kurt Oestriecher Thomas A. Ratcliffe Mark E. Ziessman

AICPA Staff

Charles E. Landes Director, Audit and Attest Standards Michael P. Glynn Technical Manager, Audit and Attest Standards

Note: Statements on Standards for Accounting and Review Services (SSARS) are issued by the AICPA Accounting and Review Services Committee (ARSC), the senior technical body of the Institute designated to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonpublic entity. Rule 202, Compliance With Standards, of the Institute's Code of Professional Conduct requires an AICPA member who performs either a compilation or a review (the accountant) to comply with standards promulgated by the ARSC. The accountant should have sufficient knowledge of the SSARS to identify those that are applicable to his or her compilation or review and should be prepared to justly departures from the SSARS.

(1) The accountant should exercise caution when comparing and evaluating current financial information with budgets, forecasts, or other anticipated results because of the inherent lack of precision in estimating the future and the susceptibility of such information to manipulation and misstatement by management to reflect desired results.

SSARS No. 11--Standards for Accounting and Review Services

1. An accountant must perform a compilation or review of a nonpublic entity in accordance with Statements on Standards for Accounting and Review Services (SSARS) issued by the American Institute of Certified Public Accountants. SSARS provide a measure of quality and the objectives to be achieved in both a compilation and review

2. The SSARS are issued by the AICPA Accounting and Review Services Committee (ARSC) and provide performance and reporting standards for compilations and reviews.

3. Rule 202, Compliance With Standards, of the AICPA Code of Professional Conduct (AICPA, Professional Standards, vol. 2, ET sec. 202.01), requires an AICPA member who performs compilations or reviews to comply with standards promulgated by the ARSC. The ARSC develops and issues standards in the form of Statements on Standards for Accounting and Review Services through a due process that includes deliberations in meetings open to the public, public exposure of proposed SSARS, and a formal vote. The SSARS are codified.

4. The accountant should have sufficient knowledge of the SSARS to identify those that are applicable to his or her engagement. The nature of the SSARS requires an accountant to exercise professional judgment in applying them. The accountant should be prepared to justify departures from the SSARS.

INTERPRETATIVE PUBLICATIONS

5. Interpretative publications consist of compilation and review Interpretations of the SSARS, appendixes to the SSARS, compilation and review guidance included in AICPA Audit and Accounting Guides, and AICPA Statements of Position to the extent that those Statements are applicable to compilation and review engagements. Interpretative publications are not standards for accounting and review services. Interpretative publications are recommendations on the application of the SSARS in specific circumstances, including engagements for entities in specialized industries. An interpretative publication is issued after all ARSC members have been provided an opportunity to consider and comment on whether the proposed interpretative publication is consistent with the SSARS.

6. The accountant should be aware of and consider interpretative publications applicable to his or her compilation or review. If the accountant does not apply the guidance included in an applicable interpretative publication, the accountant should be prepared to explain how he or she complied with the SSARS provisions addressed by such guidance.

OTHER COMPILATION AND REVIEW PUBLICATIONS

7. Other compilation and review publications include AICPA accounting and review publications not referred to above; AICPA's annual Compilation and Review Alert; compilation and review articles in the Journal of Accountancy and other professional journals; compilation and review articles in the AICPA CPA Letter, continuing professional education programs and other instruction materials, textbooks, guide books, compilation and review programs, and checklists; and other compilation and review publications from state CPA societies, other organizations, and individuals. (1) Other compilation and review publications have no authoritative status; however, they may help the accountant understand and apply the SSARS.

8. If an accountant applies the guidance included in an other compilation and review publication, he or she should be satisfied that, in his or her judgment, it is both relevant to the circumstances of the engagement, and appropriate. In determining whether an other compilation and review publication is appropriate, the accountant may wish to consider the degree to which the publication is recognized as being helpful in understanding and applying the SSARS and the degree to which the issuer or author is recognized as an authority in compilation and review matters. Other compilation and review publications published by the AICPA that have been reviewed by the AICPA Audit and Attest Standards staff are presumed to be appropriate.

PREDECESSOR'S COMPILATION ON REVIEW REPORT

9. SSARS currently provide guidance to be followed when the financial statements of a prior period have been compiled or reviewed by a predecessor accountant whose report is not presented and the successor accountant has not compiled or reviewed those financial statements. This Statement amends AR section 200.17, footnote 9, to state that a successor accountant may name the predecessor accountant if the predecessor accountant's practice was acquired by, or merged with, that of the successor accountant. New language is shown in boldface italics.

(9) The successor accountant should not name the predecessor accountant in his or her report; however, the successor accountant may name the predecessor accountant if the predecessor accountant's practice was acquired by, or merged with, that of the successor accountant.

EFFECTIVE DATE

10. This Statement is effective upon issuance.

This Statement titled Standards for Accounting and Review Services was adopted unanimously by the assenting votes of the seven members of the Accounting and Review Services Committee.

Accounting and Review Services Committee (2003-2004)

Andrew M. Cohen, Chair Suzanne M. Heidenreich Henry Krostich John J. Malahoski Kurt Oestriecher Thomas A. Ratcliffe Mark E. Ziessman

AICPA Staff Charles E. Landes Director, Audit and Attest Standards Michael P. Glynn Technical Manager, Audit and Attest Standards

Note: Statements on Standards for Accounting and Review Services (SSARS) are issued by the AICPA Accounting and Review Services Committee (ARSC), the senior technical body of the institute designated to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonpublic entity. Rule 202, Compliance With Standards, of the Institute's Code of Professional Conduct requires an AICPA member who performs either a compilation or a review (the accountant) to comply with standards promulgated by the ARSC. The accountant should have sufficient knowledge of the SSARS to identify those that are applicable, to his or her compilation or review and should be prepared to justly departures from the SSARS.

(1) The accountant is not expected to be aware of the full body of other compilation and review publications.

SSARS Interpretation

Interpretations are issued by the ARSC to provide guidance on the application of Statements on Standards for Accounting and Review Services (SSARS). Interpretations are issued after all ARSC members have been provided an opportunity to consider and continent on whether the Interpretation is consistent with SSARS. An Interpretation is not as authoritative as a SSARS, but members should be aware that they may have to justify a departure from an Interpretation f the quality of their work is questioned.

AIR SECTION 9100

Interpretation of AR Section 100, "Compilation and Review of Financial Statements"

26. Communicating Possible Fraud and Illegal Acts to Management and Others

.100 Question--SSARS No. 1 [section 100.05] states that the accountant should establish an understanding with the entity, preferably in writing, regarding the services to be performed. The understanding should provide that the accountant will inform the appropriate level of management of any material errors that come to his or her attention and any fraud or illegal acts that come to his or her attention, unless they are clearly inconsequential. When, during the performance of a compilation or a review engagement, the accountant suspects that a fraud or an illegal act may have occurred, what steps should be taken in performing the required communication?

.101 Interpretation--When an accountant suspects that a fraud or an illegal act may have occurred, (1) the accountant communicates the matter, unless clearly inconsequential, to an appropriate level of management. If the suspected fraud or illegal act involves senior management, the matter should be communicated to an individual or group at the highest level within the entity, such as the manager (owner) or the board of directors. When the suspected fraud or illegal act involves an owner of the business, the accountant should consider resigning from the engagement. (2) Additionally, the accountant should consider consulting with his or her legal counsel and insurance provider whenever fraud or an illegal act is suspected.

.102 The accountant need not perform additional procedures to ascertain whether fraud or an illegal act, in fact, occurred or the probability that fraud or an illegal act occurred. However, the accountant should consider the impact of the suspected matter on the accountant's ability to perform inquiries and other review procedures such as obtaining a management representation letter and keep in mind that the purpose of the review is to express limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with generally accepted accounting principles.

.103 The disclosure of possible fraud or illegal act to parties other than the client's senior management ordinarily is not part of the accountant's responsibility and ordinarily would be precluded by the accountant's ethical or legal obligations of confidentiality. The accountant should recognize, however, that in the following circumstances a duty to disclose to parties outside of the entity may exist:

a. To comply with certain legal and regulatory requirements

b. To a successor accountant when the successor decides to communicate with the predecessor accountant in accordance with AR section 400, Communications Between Predecessor and Successor Accountants, regarding acceptance of all engagement to compile or review the financial statements of a nonpublic entity

c. In response to a subpoena

Because potential conflicts between the accountant's ethical and legal obligations for confidentiality of client matters may be complex, the accountant may wish to consult with legal counsel before discussing such matters with parties outside the client.

(1) If the suspected fraud or illegal act extends to prior period financial statements, see Interpretation No. 4 of AR section 100 (section 9100. 13-15)

(2) See Interpretation No. 6 of AR section 100 (section 9100.18-22) for guidance as to the circumstances under which the accountant would ordinarily conclude that it is necessary to withdraw from a compilation or review engagement.

Auditing Interpretations

Auditing Interpretations of Statements on Auditing Standards (SASs) are Interpretive Publications pursuant to AU section 150, Generally Accepted Auditing Standards [of AICPA Professional Standards]. Interpretive Publications are recommendations on the application of SASs in specific circumstances, including engagements for entities in specialized industries. Interpretive Publications are issued under the authority of the Auditing Standards Board. The auditor should identify Interpretive Publications applicable to his or her audit. If the auditor does not apply the auditing guidance included in an applicable Interpretive Publication, the auditor should he prepared to explain holy lie or she complied with the SAS provisions addressed by such auditing guidance.

AU SECTION 9508

Reports on Audited Financial Statements: Auditing Interpretations of Section 508

17. Clarification in the Audit Report of the Extent of Testing of Internal Control Over Financial Reporting in Accordance With Generally Accepted Auditing Standards

.85 Question--Auditing standards established by the Auditing Standards Board (ASB) of the AICPA are in effect and are enforceable (8) for audits of entities that are not "issuers," as that term is defined by the Sarbanes-Oxley Act of 20002 (the Act) or whose audit is not prescribed by the rules of the SEC. For purposes of this interpretation, these entities are referred to as "nonissuers." (9)

.86 Section 319, Consideration of Internal Control in a Financial Statement Audit, provides guidance on the auditor's consideration of internal control in an audit of a nonissuer's financial statements in accordance with generally accepted auditing standards. That consideration is intended to provide the auditor a sufficient understanding of internal control to plan the audit and to determine the nature, timing, and extent of tests to be performed. The scope of the auditor's procedures required under section 319 is considerably less than that required for an attestation of internal control pursuant to Section 404(b) of the Act.

.87 To clarify that an audit performed in accordance with generally accepted auditing standards does not require the same level of testing and reporting on internal control over financial reporting as an audit of an issuer when Section 404(b) of the Act is applicable, may the auditor expand his or her audit report to indicate that the purpose and extent of the auditor's testing of internal control over financial reporting was to determine the auditor's procedures and was not sufficient to express an opinion on the effectiveness of internal control over financial reporting?

.88 Interpretation--Yes. An auditor may add such language to the auditor's standard report. An example of additional language (10) that may be included in the auditor's report to indicate this matter follows:

Independent Auditor's Report [Same first paragraph as the standard report]

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis jot designing audit procedures that art' appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting, Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

[Same opinion paragraph as the standard report]

18. Reference to PCAOB Standards in an Audit Report on a Nonissuer (11)

.89 Question--The Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 1, References in Auditor's Reports to the Standards of the Public Company, Accounting Oversight, Board, directs auditors to state in the auditor's report that the engagement was conducted in accordance with "the standards of the Public Company Accounting Oversight Board (United States)" whenever the auditor has performed the engagement in accordance with PCAOB standards. Additionally, the release accompanying the standard states that "nothing in the Board's rules would preclude an accounting firm from conducting an audit era company that is not an issuer in accordance with the Board's standards and so stating in its audit report. This is true regardless of whether or not the accounting firm performing the audit is registered with the Board."

.90 If an auditor is engaged to perform an audit era nonissuer in accordance with PCAOB standards, which standards are applicable and how should the auditor report?

.91 Interpretation--Section 508 requires the auditor to indicate in the auditor's report that the audit was conducted in accordance with generally accepted auditing standards and an identification of the United States of America as the country of origin of those standards. However, an auditor may indicate that the audit was also conducted in accordance with an other set of auditing standards. If the auditor conducted the audit in accordance with generally accepted auditing standards and the auditing standards of the PCAOB, the auditor may indicate in the auditor's report that the audit was conducted in accordance with both sets of standards.

.92 Following is an example of additional language that may be included (12) in the auditor's report to indicate that an audit was conducted in accordance with both generally accepted auditing standards and the PCAOB's auditing standards, and to clarify that the purpose and extent of the auditor's testing of internal control over financial reporting was to determine the auditor's procedures and was not sufficient to express an opinion on the effectiveness of internal control. To clarify the source of generally accepted auditing standards in a dual reference reporting situation, the auditor may indicate that the audit was conducted in accordance with generally accepted auditing standards as established by the ASB:

Independent Auditor's Report [Same first paragraph as the standard report]

We conducted our audit in accordance with generally accepted auditing, standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing, audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

[Same opinion paragraph as the standard report]

(8) The AICPA governing Council designated the Public Company Accounting Oversight Board (PCAOB) as the body, pursuant to Rules 201 and 202 [ET section 201.01 and 202.01] of the AICPA's Code of Professional Conduct, with the authority to promulgate auditing and related attestation standards, quality control, ethics, independence and other standards relating to the preparation and issuance of audit reports for issuers, as defined by the Sarbanes-Oxley Act of 21102. The Council also designated the Auditing Standards Board (ASB), pursuant to Rules 201 and 202 [ET section 201.0l and 202.01], as the body with the authority to promulgate auditing, attestation, and quality control standards and procedures for all other entities

(9) In a report issued on the audit of the financial statements of a subsidiary, investee, or other type of affiliate of an issuer, that is not itself an issuer, the auditor should rotor to the audit as having been performed in accordance with generally accepted auditing standards if the report will not be filed with the SEC. For example, a subsidiary of an issuer may be subject to certain regulations that require an audit be performed in accordance with government Auditing Standards (the Yellow Book) In this example the auditor's report of the nonissuer should refer to generally accepted auditing standards and generally accepted government auditing standards.

(10) The additional language related to internal control should not be used when reporting on the audit of financial statements of a nonissuer that engages its auditor to examine (or audit) and report on the effectiveness of internal control over financial reporting either voluntarily or to comply with regulatory requirements

(11) In a report issued on the audit of the financial statements of a subsidiary, investee, or other type of affiliate of an issuer, that is not itself an issuer, the auditor should refer to the audit as having been performed in accordance with generally accepted auditing standards if the report will not be filed with the SEC. For example, a subsidiary of an issuer may be subject to certain regulations that require an audit be performed in accordance with government Auditing Standards (the Yellow Brink) In this example, the auditors report of the nonissuer should refer to generally accepted auditing standards and generally accepted government auditing standards

(12) This example includes the Illustrative language from paragraph .88 Because the PCAOB's Auditing Standard No, 2, An Audit of Internal Control Over financial Reporting Performed in Conjunction With an Audit of Financial Statements, requires all audit of internal control for those entities that are subject to Section 404(a) of the Act, all audit era nonissuer performed under PCAOB auditing standards does not require an audit of internal control unless otherwise required by a regulator with jurisdiction over the nonissuer. The additional language related to internal control should not be used when reporting on the audit of financial statements of a nonissuer that engages its auditor to examine (or audit) and report on the effectiveness of internal control over financial reporting either voluntarily or to comply with regulatory requirements