If you are a grantee organization, how smart are you financially? Like it or not, you may have to bone up on your accounting savvy, or hire someone who is, in light of changes in the 2011 revision of the Government Auditing Standards (GAGAS) to encourage auditor independence.

The November issue of the Single Audit Information Service features an article from our contributing auditing expert Leita Hart-Fanta that asks some questions regarding a grantee’s financial statement expertise. Here are three examples from her article, so see if you can answer them correctly:

A. Which of the following financial statements is based on this equation: revenues – expenses = profit?

1. the balance sheet
2. the income statement
3. the schedule of expenditures of federal awards

B. Which of the following is true of the balance sheet?

1. it is based on the equation assets = liabilities + equity
2. it contains sums for earnings and cash
3. it is unnecessary if using the cash method of accounting
4. all of the above
5. 1 and 2 only
6. 2 and 3 only

C. If you work for a government, how is an agency fund classified?

1. as a fiduciary fund, appearing in the governmental activities column in the entitywide financial statements
2. as a proprietary fund, appearing in the business activities column in the entitywide financial statements
3. as a fiduciary fund, does not appear in the entitywide financial statements
4. as a governmental fund and does not appear in the entitywide financial statements

Want to know the answers? Subscribers to the Service can read the complete article to find out the answer to these and other similar questions. This one article may be worth the price of the subscription alone.

The 2011 GAGAS revision is focusing on a common service that auditors have done as part of an engagement — drafting financial statements. Because this process impairs auditor independence, the revised standards are, in essence, forcing grantees to become more knowledgeable about preparing their own financial statements. If your auditor is now preparing them, start looking for other options.

How would you answer these three questions? Do you rely on your auditor to draft these statements and what changes could this mean for you?