Chapter 20D - Auditing Governments and Auditing...

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Unformatted text preview: Auditing Governments and Auditing Not-for-Profit Organizations Chapter 20 Learning Objectives Learning • Understand the different types of government and Understand NFP audits NFP • Understand the sources of standards for Understand governments and NFP auditing – and the relationships between and among GAAS, GAGAS, and single audit standards GAGAS, • Understand the basic aspects of an audit of Understand government or NFP organization financial statements under GAAS and GAGAS statements Learning Objectives (continued) (continued) • Understand single audit: purposes, when required, Understand and key components and • Determine which federal programs should be Determine treated as major programs in a single audit treated • Explain the responsibilities of both the auditor and Explain auditee under single audit requirements auditee Learning Objectives (continued) (continued) • Identify and understand audit reports required by a Identify single audit and who is to receive the audit reports single • Be better acquainted with the SLG “reporting Be units” and “major program” approaches to judging materiality quantitatively as well as major G&NP quantitatively audit related Internet sites audit Auditing defined Auditing The process of collecting and evaluating The evidence to formulate an independent, professional opinion or other judgment about assertions made by management. assertions Players in the audit process Players • • • Auditee Auditor User Auditee Auditee Considered accountable for certain events, activities, Considered & transactions – and makes assertions, either directly or indirectly, about such accountability – such as whether its financial statements are presented fairly and it has complied with applicable regulations and grant provisions grant Auditor Auditor Compares the auditee’s assertions against established Compares criteria – following an appropriate audit process and standards – and reports an opinion or other judgment based on the result of the audit. based User User Receives information from both the auditee Receives (assertions) and the auditor (opinion or other judgment) to use in making evaluations and decisions about the auditee’s accountability. decisions Audit Classifications Audit • Internal audits • Done by employees of company • Review operations of entity, including employee Review compliance with managerial policies and report results to management to • External audits • • • Financial Audits Attestation engagements Performance audits Financial Audits Financial Concerned with whether financial statements are Concerned presented fairly in conformity with presented • Generally accepted accounting principles Generally (GAAP), or or • Other comprehensive basis of accounting Other (OCBOA) (OCBOA) Other objectives of financial audits Other • Special reports for specified elements of Special statements statements • Review interim financial information • Issue letters for underwriters and certain other Issue requesting parties requesting • Report on the processing of transactions by Report service organizations service • Audit compliance with regulations relating to Audit federal award expenditures federal Attestation Engagements Attestation • Examine, review, or perform agreed-upon Examine, procedures on subject matter or assertion and reporting on results reporting • Can address broad range of financial and Can nonfinancial subjects nonfinancial Attestation engagements report on Attestation • Internal control over Internal financial reporting financial • Compliance with laws, Compliance regulations, rules, contracts, or grants contracts, • Effectiveness of internal Effectiveness control over compliance with specified requirements requirements • MD&A presentation • Prospective financial Prospective statements statements • Reliability of performance Reliability measures measures • Final contract cost • Allowability and Allowability reasonableness of proposed contact amounts proposed • Agreed-upon procedures Performance Audits Performance • Objective and systematic examination of evidence Objective to provide an independent assessment of program performance and management compared with objective criteria objective • Assessments that provide a prospective focus or Assessments that synthesize information on best practices or crosscutting issues crosscutting Objectives of Performance Audits Objectives • Program effectiveness and results of audit Program objectives objectives • Economy and efficiency audit objectives • Internal control audit objectives • Compliance audit objectives Management’s Representations Management’s • Management is responsible for recording, Management processing, and reporting financial and other economic transactions, events, and balances economic • Financial statements represent management’s Financial assertions about these events assertions • Auditors gather sufficient objective data to allow Auditors them to express an opinion on the accuracy and reliability of representations and assertions reliability External Auditor Classifications External • Officials of the governmental unit being examined • Officials of a government other than the one being Officials examined examined • Independent public accountants and auditors Elements of audit contract Elements • Type and purpose of the audit, including scope, Type any limitation of scope, parties of interest, how materiality will be evaluated, and whether a single audit will be performed audit • Departments, funds, and agencies to be audited Departments, and audit personnel assigned and • Period audit will cover • Approximate start and end dates of audit and Approximate delivery date of report delivery Elements (continued) (continued) • Information & assistance the auditee will provide Information the auditor the • Means of handling unexpected problems which Means require a more extensive audit and how & to whom the auditor is to report any fraud, malfeasance, or other problems discovered during the audit the Elements (continued) (continued) • Terms of compensation and reimbursement of the Terms auditor’s expenses auditor’s • Auditee personnel & facilities to be made Auditee available to the auditors available Auditing Standards Auditing • AICPA sets GAAS • GAO establishes GAGAS AICPA Auditing Standards AICPA • • • General Standards Standards of Field Work Standards of Reporting General Standards General • Audit is to be conducted by person or persons Audit having adequate technical training and proficiency as an auditor proficiency • Independence of mental attitude is to be maintained by auditors maintained • Due professional care is to be exercises in planning and performance of the audit and the preparation of the report preparation Standards of Field Work Standards • Work is to be adequately planned and assistants, Work adequately if any, are to be properly supervised properly supervised • Sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed nature, • Sufficient competent evidential matter is to be obtained to afford a reasonable basis for forming an opinion regarding the financial statements under audit under Standards of Reporting Standards • Report states whether the financial statements are Report financial presented in accordance with GAAP GAAP • Report identifies those circumstances in which Report identifies circumstances principles have not been consistently observed principles not • Informative disclosures in the financial statements Informative disclosures are reasonably adequate unless otherwise stated are • Report contains an opinion regarding the financial Report opinion statements or an assertion that opinion cannot be assertion expressed expressed GAO Auditing Standards GAO • First issued in 1972 as Standards for Audit of First Governmental Organizations, Programs, Activities, & Functions Activities, Now commonly referred to as generally accepted Now government auditing standards (GAGAS) or “Yellow Book”, which is color of cover “Yellow • May be performed by auditors at any level • Are to be applied to all types of internal & Are external audits external Federal requirements Federal • Federal inspectors general (IGs) must comply with Federal GAO auditing standards in audits of federal agencies agencies • GAO auditing standards must be followed by GAO those conducting audits of SLGs under the Single Audit Act Audit Significant Aspects of GAGAS Significant • GAGAS incorporates AICPA auditing standards (GAAS) • Supplemental standards, including independence Supplemental standards, that limit nonaudit work for auditee standards, • Additions to field work and reporting standards • Audit planning must be considered at all levels • Opinion includes statement that audit was performed in Opinion conformance with GAGAS conformance • Auditor reports on overall compliance and internal control • Specific CPE requirements Financial Audit Financial • Addresses whether fund and government-wide Addresses financial statements are presented fairly in presented accordance with GAAP accordance • Must also determine compliance with laws and Must compliance regulations applicable transactions and events for which noncompliance might have a material effect on the financial statements on Audit Procedures Audit • Specific guidance for audits available from Specific AICPA audit guides for various types of organizations organizations • Most detailed guidance is in Audits of State and Most Local Government Units (ASLGU) updated Local annually by the AICPA annually • Specific procedures selected for an audit depend Specific on the circumstances on Audit Report Audit • Key differences from private sector report • Need to follow GAGAS in addition to GAAS • Different levels of financial statements identified in Different Chapter 13 Chapter • Report must clearly define level of financial Report statements included in the scope and include the auditor’s opinion or disclaimer auditor’s • Must also include written reports (not opinions) on not internal control and compliance with laws & regulations regulations The Single Audit The • $1 trillion + in federal grants calls for close $1 scrutiny that the money is being spent properly scrutiny • Basic idea of Single Audit: one audit can provide Basic both both • Basis for an opinion on the recipient entity’s financial Basis statements statements • Basis for determining whether federal financial Basis assistance program resources are being managed, controlled, and used appropriately controlled, Disadvantage of Single Audit Disadvantage • Some grantor agencies do not receive all Some information they need information • These agencies have additional requirements that These go beyond the Single Audit requirements go Purposes of Single Audit Purposes • Improve financial management and accountability Improve of SLGs and NPOs with respect to federal financial assistance (FFA) programs assistance • Establish uniform requirements for audits of FFA Establish provided to SLGs and NPOs provided • Promote efficient & effective use of audit resources • Ensure that federal departments rely on Single Ensure Audit work done as much as possible Audit Applicability of Single Audit & OMB Circular A-133 [Page 803] [Page Did the nonfederal entity expend $500,000 or more of federal awards? No No Single Audit or ProgramSpecific Audit required -- only GAAS & GAGAS required Yes Did the nonfederal entity (1) expend federal awards under only one federal program -- which does not require a financial statement audit, (2) meet other requirements, and (3) properly elect a program-specific audit? No A Single Audit is required Yes A Program-Specific Audit is required Objectives of Single Audit Objectives Related to entity as a whole • Determine whether basic financial statements fairly Determine present financial position and results of operations in accordance with GAAP accordance • Determine whether SLGs or NPOs have complied with Determine laws and regulations with which noncompliance may have a material effect on entity financial statements material • Study & evaluate internal controls of entity to determine Study internal nature, extent, and timing of audit procedures necessary to express an opinion express Objectives (continued) (continued) Related to all FFA programs, determine whether • Supplementary Schedule of Expenditures of Federal Supplementary Awards is fairly stated Awards • SLG or NPO established internal control systems to SLG internal provide reasonable assurance that each major federal major program is managed in compliance with laws & regulations regulations • SLG or NPO has complied with the laws & regulations SLG complied that may have a material effect on each major federal major assistance program assistance Single Audit Relationships Single GAAS GAGAS SINGLE AUDIT GAAS vs. GAGAS vs. Single Audit GAAS Government Auditing Standards Report on Financial Statements [Opinion] Report on Entity's Internal Control Structure Report on Schedule of Expenditures of Federal Awards [Supplemental Information Opinion] GAAS Standards Report on Entity's Compliance with Laws & Regulations Report on Internal Controls Over FFA Report on "Major" FFA Program Compliance [Opinion] Single Audit: OMB Circular A-133 Report on Schedule of Prior Audit Findings Auditee Responsibilities Auditee • • • Identify all federal awards received and expended Maintain internal controls over federal programs Comply with laws, regulations, provisions of Comply contracts or grant agreements on each major program program • Prepare appropriate financial statements and Prepare schedule of expenditures of federal awards schedule Auditee Responsibilities (continued) (continued) • Ensure that audits required are properly performed Ensure and that audit reports and related information are submitted when due submitted • Follow up and take corrective action on audit Follow findings, which includes preparing a summary of prior audit findings and a corrective action plan prior Auditor Responsibilities – Overview Auditor • • • General Financial Statements Internal Control (overall and for major federal Internal programs) programs) • Compliance (overall and for major federal Compliance programs) programs) • Audit Follow-Up • Data Collection Form Auditing Guidance Auditing • OMB – • Federal Audit Clearinghouse – Federal • AICPA – • GAO – • Major Program Determinations Major 1. Auditor identifies larger federal programs, Auditor known as Type A programs Type 2. Auditor identifies low-risk Type A programs Auditor low-risk programs 3. Auditor identifies high-risk Type B programs Auditor high-risk 4. At a minimum, auditor must audit certain At programs as major programs programs Questioned Cost criteria (808) (808) • • • • Unallowable costs Undocumented costs Unapproved costs Unreasonable costs SLG actions for subrecipients SLG [Pages 815 – 816] • • • • • • • Identify federal awards Advise subrecipients Monitor subrecipient activities Ensure audit requirements are met Issue a management decision Consider adjusting own records Require access Auditor Reports – Single Audit Auditor [Pages 815 – 816] • Opinion of financial statements and Schedule of Opinion Expenditures of Federal Awards Expenditures • Report(s) on internal controls • Report(s) on compliance • Schedule of Findings & Questioned Costs Auditee Single Audit Auditee “Reporting Package” [Page 816] [Page “Reporting • • • • Financial Statements Schedule of Expenditures of Federal Awards Summary Schedule of Prior Audit Findings Auditor’s report(s) – including the Schedule of Auditor’s Findings & Questioned Costs Findings • Corrective Action Plan ...
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