Firm Profile Datasheet for IPAs

MEMORANDUM

February 5, 2007

TO: Independent Public Accountants
FROM: Hector H. Balderas, State Auditor
SUBJECT: 2007 Firm Profile Due March 5, 2007

In order to be eligible to respond to New Mexico government agency requests for price quotes or requests for proposals for audit services, an Independent Public Accountant (IPA) must first complete and submit the attached Firm Profile packet consisting of nine pages and related attachments required by the accompanying checklist. If additional space is required on any of the forms, attach a separate sheet in a similar format with the additional information. Firm profiles that meet the eligibility requirements set forth in 2.2.2 New Mexico Administrative Code (NMAC), Requirements for Contracting and Conducting Audits of Agencies, commonly know as The State Auditor's Rule, will be added to the list of State Auditor approved IPAs for 2006-2007 fiscal year audit engagements. The completed firm profile packet must be received by the Office of the State Auditor (Office) by Monday, March 5, 2007.

The update of the 2.2.2 NMAC (The State Auditor's Rule) is in process. The finalized version will be available on our web site and can be downloaded. You will be notified when the 2007 Audit Rule has been finalized. For those who prefer a hardcopy of the document they will be available from the Office upon request.

The State Auditor requires in Section 2.2.2.14.B(4) of 2.2.2 NMAC, that the IPA submit the following documentation with the firm profile:

• External quality control review report for the auditor's firm;
• The corresponding letter of comments;
• Auditor's response to the letter of comments;
• The letter of acceptance from the peer review program in which the firm is enrolled;
• A list of the governmental audit(s) reviewed during the peer review; and
• The peer reviewer's own peer review reflecting an unqualified opinion.

New Mexico regulation requires in Section 2.2.2.14.B(3) of NMAC that the location of the external quality control review must be the office of the firm under review, regardless of whether the firm reviewed is a sole practitioner and regardless of the number of firm employees. Per Section 2.2.2.14.B (5) of 2.2.2 NMAC, any firm that receives an Opinion less than modified on the auditor's peer review, will disqualify the IPA from doing governmental audits.

Per the American Institute of Certified Public Accountants (AICPA) Standards for Performing and Reporting on Peer Reviews, effective for peer reviews commencing on or after January 1, 2005, the peer review deadline is: (1) eighteen months from the date the firm enrolled in the Program or should have enrolled, whichever date is earlier. If a firm is enrolled in the program, but does not perform engagements requiring it to undergo a peer review, it is not required to undergo a peer review. However, when a firm performs its first engagement requiring a peer review, the firm's due date will be eighteen months from the year-end of that engagement.

If you audit a state agency, remember that Section 12-6-3 A, NMSA 1978 states, "[t]he comprehensive annual financial report (CAFR) for the state shall be thoroughly examined and audited each year by the state auditor, personnel of his office designated by him or by independent auditors approved by him." The audited financial statements of the individual state agencies may be compiled to create the statewide CAFR, in which case, the auditors' reports thereon would be relied upon by the primary auditor of the CAFR. (SAS AU 543.10(c))

Remember that Section 2.2.2.8.I.(3) of NMAC requires the IPAs on the approved list, and New Mexico governmental agencies to receive prior written approval from the State Auditor before entering into any financial, special audit or any other nonaudit service contract.

Relevant Changes in Statutes and Standards

Mutual Domestic Water Associations affected by Attorney General Opinion

Attorney General Opinion 06-02 determined the following regarding Mutual Domestic Water Associations (MDWA) created pursuant to the Sanitary Projects Act, NMSA 1978, MDWA's are: public bodies/political subdivisions; their revenues are "public money"; and they must abide by the open Meetings Act, the Inspection of Public Records Act, the Procurement Code, and the Per Diem and Mileage Act. Due to the fact the MDWA's have officially been determined to be governmental nonprofit organizations, their financial statements must follow the government format required by GASB 34 for the fiscal year ended June 30, 2007 and thereafter.

Legislation Authorizes State-Chartered Charter Schools

Senate Bill 600 was passed during the Regular Session 2006 of the New Mexico Legislature. It authorized a "Public Education Commission" to receive applications for initial chartering and renewals of charters for charter schools that want to be chartered by the state. The chartering authority for a charter school existing on July 1, 2007 (FY08) may be transferred to the commission; provided, however, that if a school chartered under a previous chartering authority chooses to transfer its chartering authority, it shall continue to operate under the provisions of that charter until its renewal date unless it is suspended or revoked by the commission. A copy of Senate Bill 600 is available under "Bill Finder" on the web at ttp://legis.state.nm.us.

Continuing Professional Education

The Continuing Professional Education (CPE) requirements remained basically unchanged in the Government Auditing Standards 2006 Revision Exposure Draft. The related updated version of GAGAS is expected to be available the end of January 2007.

Per generally accepted government auditing standards (GAGAS) Section 3.45, "Each auditor performing work under GAGAS should complete, every 2 years, at least 80 hours of CPE that enhance the auditor's professional proficiency to perform audits and/or attestation engagements. At least 24 of the 80 hours of CPE should be in subjects directly related to government auditing, the government environment, or the specific or unique environment in which the audited entity operates. At least 20 hours of the 80 should be completed in any 1 year of the 2-year period." Audit staff who charge less than 20 percent annually of their time to GAGAS audits and attestation engagements and do not plan, direct or report on those audits or attestation engagements are required to obtain only the 24 hours described above.

The new revision of Government Auditing Standards (Yellow Book) will be issued electronically in late January 2007. The above GAGAS references may change when that revision is issued.

Statements on Auditing Standards (SAS)

SAS 104, Amendment to Statement on Auditing Standards No. 1, Codification of Auditing Standards and Procedures ("Due Professional Care in the Performance of Work") - This SAS expands the definition of the term reasonable assurance. "The auditor must plan and perform the audit to obtain sufficient appropriate audit evidence so that audit risk will be limited to a low level that is, in his or her professional judgment, appropriate for expressing an opinion on the financial statements. The high, but not absolute, level of assurance that is intended to be obtained by the auditor is expressed in the auditor's report as obtaining reasonable assurance about whether the financial statements are free of material misstatement (whether caused by error or fraud.)" It is effective for periods beginning on or after December 15, 2006, (FY08), with earlier application permitted.

SAS 105, Amendment to Statement on Auditing Standards No. 95, Generally Accepted Auditing Standards - This SAS expands the scope of the second standard of field work from "internal control" to "the entity and its environment, including its internal control." It amends the third standard of field work to replace references to specific audit procedures with "audit procedures" and replaces "evidential matter" with "audit evidence." All three standards of field work are updated to begin with "The auditor must." It is effective for periods beginning on or after December 15, 2006, (FY08), with earlier application permitted.

SAS 106, Audit Evidence - This SAS: (1) defines audit evidence; (2) defines relevant assertions and discusses their use in assessing risks and designing appropriate further audit procedures; (3) discusses qualitative aspects that the auditor considers in determining the sufficiency and appropriateness of audit evidence; and (4) and describes various audit procedures and discusses the purposes for which they may be performed. It is effective for periods beginning on or after December 15, 2006, (FY08), with earlier application permitted.

SAS 107, Audit Risk and Materiality in Conducting an Audit - This SAS indicates the auditor should document: (1) the levels materiality and tolerable misstatement including any changes, and the level on which those levels were determined; (2) a summary of uncorrected misstatements, related to known and likely misstatements; (3) the auditor's conclusion as to whether uncorrected misstatements, individually or in aggregate, do or do not cause the financial statements to be materially misstated, and the basis for the conclusion; and (4) all known and likely misstatements identified during the audit, that have been corrected by management. Uncorrected misstatements should be documented so that the auditor can: (1) separately consider the effects of known and likely misstatements, including uncorrected misstatements identified in prior periods; (2) consider the aggregate effect of misstatements on the financial statements; (3) consider the qualitative factors relevant to the consideration whether misstatements are material. It is effective for periods beginning on or after December 15, 2006, (FY08), with earlier application permitted.

SAS 108, Planning and Supervision - Planning and supervision continue throughout the audit. The auditor must plan the audit so that it is responsive to the assessment of the risk of material misstatement based on the auditor's understanding of the entity and its environment, including its internal control. Planning is an interactive process throughout the audit. Firm personnel other than the auditor with final responsibility for the audit are referred to as assistants. "Auditor" refers to either the auditor with final responsibility for the audit or to assistants. This SAS is effective for periods beginning on or after December 15, 2006, (FY08), with earlier application permitted.

SAS 109, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement - This SAS explains the audit procedures that the auditor should perform to obtain the understanding of the entity and its environment, including its internal control (risk assessment procedures). It provides guidance regarding understanding specified aspects of the entity and its environment and internal control in order to identify and assess risks of material misstatement, and related "further" audit procedures. It provides guidance regarding assessing the risks of material misstatement. The auditor should: consider the classes of transactions, account balances, and disclosures; relate the identified risks to what could go wrong at the relevant assertion level; and consider the significance and likelihood of material misstatement for each identified risk. The SAS provides guidance in determining significant risks and requires auditor evaluation of the design of the entity's controls to determine whether they are adequate and have been implemented. Related documentation guidance is also provided. It is effective for periods beginning on or after December 15, 2006, (FY08), with earlier application permitted.

SAS 110, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained - This SAS provides the auditor with guidance: (1) in determining overall responses to address risks of material misstatement at the financial statement level; (2) in designing and performing further audit procedures that are responsive to the assessed risks of material misstatement at the relevant assertion level; and (3) in evaluating whether the risk assessments remain appropriate and to conclude whether sufficient appropriate audit evidence has been obtained; and (4) related documentation. The SAS is effective for periods beginning on or after December 15, 2006, (FY08), with earlier application permitted.

SAS 111, Amendment to Statement of Auditing Standards No. 39, Audit Sampling - This SAS amends SAS No. 39 to: (1) move guidance from the appendix in SAS No. 107 into the text of this statement; (2) to incorporate into this statement guidance from SAS No. 99 regarding fraud and from SAS No. 110 regarding audit procedures in response to assessed risks and evaluating audit evidence; and (3) to enhance this statement's audit sampling guidance relating to the auditor's judgment about establishing tolerable misstatement for a specific audit procedure and on the application of sampling to tests of controls. The SAS is effective for periods beginning on or after December 15, 2006, (FY08), with earlier application permitted.

SAS 112, Communicating Internal Control Related Matters Identified in an Audit - This SAS defines the terms "significant deficiency" and "material weakness." It provides guidance on evaluating the severity of control deficiencies identified in an audit. SAS 112 requires the auditor to communicate, in writing, to management and those charged with governance, significant deficiencies and material weaknesses identified in an audit. This SAS is effective for periods ending on or after December 15, 2006, (FY07), with earlier application permitted.

SAS 113, Omnibus Statement on Auditing Standards - 2006 (paragraphs 1 through 5) - This SAS clarifies terminology used to describe the professional requirements imposed on auditors in the 10 standards. This SAS adds to SAS No. 99: footnote 15 that links the auditor's consideration of fraud to the auditor's assessment of risk; and footnote 21 that links the auditor's consideration of fraud and the auditor's response to assessed risks. This portion of the SAS is effective for periods beginning on or after December 15, 2006, (FY08), with earlier application permitted.

SAS 113, Omnibus Statement on Auditing Standards - 2006 (paragraphs 7 through 14) - This SAS amends SAS Numbers 101, 59, 57, and 1 to change old references to "completion of fieldwork" to "the date of the auditor's report" because SAS 103 changed the date of the audit report from the date of completion of fieldwork to "the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion on the financial statements." SAS 113 also amends SAS 85 so that the date of management representations is "the date of the auditor's report." This portion of the SAS is effective for periods ending on or after December 15, 2006, (FY07), with earlier application permitted.

SAS 114, Auditor's Communication With Those Charged With Governance - This SAS supersedes SAS No. 61, Communication With Audit Committees, as amended. It establishes standards and provides guidance on the auditor's communication with those charged with governance in relation to an audit of financial statements. The SAS is effective for periods beginning on or after December 15, 2006 (FY08).

GASB Statements

GASBS 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans - The requirements of this Statement for OPEB plan reporting are effective in FY07, FY08, and FY09, one year prior to the effective date of the related Statement for the employer (single-employer plan) or for the largest participating employer in the plan (multiple-employer plan). The requirements of the related Statement are effective in three phases based on a government's total annual revenues, as defined in that Statement, in the first fiscal year ending after June 15, 1999—the same criterion used to determine a government's phase for implementation of GASB 34. The statement establishes uniform financial reporting standards for OPEB plans and supersedes the interim guidance included in Statement No. 26, Financial Reporting for Postemployment Healthcare Plans Administered by Defined Benefit Pension Plans. The approach followed in this Statement generally is consistent with the approach adopted in Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, with modifications to reflect differences between pension plans and OPEB plans.

GASBS 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions Implementation - This GASB statement is effective in three phases in FY08, FY09, and FY10, based on a government's total annual revenues in the first fiscal year ending after June 15, 1999. The revenue cutoff points for implementation are the same as those in GASB 34. This Statement establishes standards for the measurement, recognition, and display of OPEB, expense/expenditures and related liabilities (assets), note disclosures, and if applicable, required supplementary information (RSI) in the financial reports of state and local governmental employers. This Statement generally provides for prospective implementation—that is, that employers set the beginning net OPEB obligation at zero as of the beginning of the initial year.

GASBS 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues - The requirements of this statement are effective for financial statements for periods beginning after December 15, 2006 (FY08). This statement establishes criteria that governments will use to determine whether the proceeds received from the sale or pledge of receivables and future revenue should be reported as revenue or as a liability. The transaction will be treated as a collateralized borrowing unless the criteria are met, indicating a sale has taken place. The statement stipulates that governments should not revalue assets that are transferred between financial reporting entity components. The statement also includes guidance regarding the recognition of other assets and liabilities resulting from a sale of specific receivables or future revenues, including residual interests and recourse.

GASBS 49, Accounting and Financial Reporting for Pollution Remediation Obligations - The requirements of this statement are effective for financial statements for periods beginning after December 15, 2007 (FY09). Once any of five events occurs, this statement requires governments to estimate parts of expected pollutions remediation outlays and determine whether related outlays should be accrued as liabilities or be capitalized when the goods and services are acquired.

Facts Regarding the IPA Recommendation Approval Process

Agencies subject to oversight by the state public education department or the higher education department are required to receive approval of their independent public accountant recommendation from their oversight agency, prior to submitting the recommendation to the Office of the State Auditor.

The State Auditor will use his discretion and may not approve audit contract recommendations for any IPA firm that:

Failed to deliver an audit report on time (Section 2.2.2.8.D(2)(b));

Performed nonaudit services for an agency without prior approval of the State Auditor (Section 2.2.2.8 D (2) (b));

Failed to respond in an acceptable manner to an audit report or working paper review (Section 2.2.2.8.D(2)(f); or

Did not comply with any section of 2.2.2 NMAC (Section 2.2.2.8.D(2)(c).

For clarification of these or other related issues please contact Valerie Gallegos, Manager of Administrative Services, at (505) 476-3808.

IPA firms that are not interested in performing governmental audits but wish to remain on the Office of the State Auditor mailing list should notify the Office regarding that desire, in writing by March 5, 2007.

You may download, print, complete and return this form: Firm Profile Datasheet - pdf file format (56 k); and Individual Profile Worksheet. You will need a copy of Adobe Acrobat Reader installed on your computer in order to view the pdf file format. Download Acrobat Reader by clicking on the Acrobat Icon at the top of this page. If you have any questions related to the download process contact Art Baca at (505) 476-3815.

Firm Memorandum - PDF file format (57 kb)

Firm Profile Datasheet - PDF file format (428 kb)
Individual Profile Worksheet - PDF file format (180 kb)