1. Presented by Frank Crawford, CPA Chris Pembrook, CPA, MBA, CGAP, Cr.FA Crawford & Associates, PC, Oklahoma City, OK www.crawfordcpas.com chris@crawfordcpas.com frank@crawfordcpas.com @fcrawfordcpa (Twitter) 1

2.  A refresher on audit materiality, opinion units in audits of government financial statements and even a little materiality issues in Single Audits Although only two broad topics today, there are several sub-topics within… 2

3.  Let’s call this topic… Materiality and the Supermodel 3

4.  Sub topics ◦ Opinion units ◦ Quantitative vs Qualitative ◦ Planning and performing vs evaluation vs forming an opinion But first, let’s talk about materiality in general… 4

5. Coffee New Car New House How many $ would change your mind? 5

6. Town of Dewar, OK City of New York Would a $100,000 error change your mind? 6

7. GASBAICPA USERCPA Materiality 7

8.  Financial Accounting Standards Board (FASB) Concept No. 2, Qualitative Characteristics of Accounting Information, which defines materiality as:  “the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person (i.e., user…my word, not FASB’s) relying on the information would have been changed or influenced by the omission or misstatement.” 8

9.  Misstatements or omissions that individually or in the aggregate could reasonably be expected to influence the economic decisions of users made on the basis of financial statements  Judgments about materiality are made in light of surrounding circumstances, and are affected by size and nature of misstatement, or both  Judgments about materiality are based on a consideration of the common financial information needs of users as a group 9

10.  Citizens  Employees  Board/Council Members  Bond Rating Agencies  Investors  Federal officials, grantors, regulators  State auditors  Other 10

11.  Professional judgment ◦ Assuming that users  have some kind of understanding of the entity and its environment, AND a willingness to study the information with reasonable diligence  Understand that the FS are prepared, presented and audited to levels of materiality  Recognize uncertainties inherent in the use of estimates, judgments, etc…  Make reasonable economic decisions on the basis of information in the FS 11

12.  obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework; and  report on the financial statements, and communicate as required by GAAS, in accordance with the auditor's findings. 12

13.  In all cases when reasonable assurance cannot be obtained and a qualified opinion in the auditor's report is insufficient in the circumstances for purposes of reporting to the intended users of the financial statements, GAAS require that the auditor disclaim an opinion or withdraw from the engagement, when withdrawal is possible under applicable law or regulation. 13

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15.  Do you have enough relevant evidence to determine whether the financial statements as a whole are free from material misstatement (achieved in a government environment by the issuance of separate opinions on each opinion unit), thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework?  Consider: ◦ Is this the correct financial reporting framework ◦ Are the number of opinion units correctly identified 25

16.  From AICPA Clarity Standards ◦ Is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated  From the Crawford boys definition dictionary ◦ Is the risk that the auditor opines cleanly when the financial statements are dirty 16

17.  From the AICPA Clarity Standards ◦ Audit risk (AR) is a function of the risks of material misstatement (RMM) and detection risk (DR)  From the Crawford boys definition dictionary ◦ Jam two things together and see what they produce  Example - If I want to make the color “green, what two colors do I jam together to produce the color “green’?  Answer: Yellow and Blue ◦ So, if I want audit risk (AR) to be green, I must jam together the colors of yellow (RMM) and blue (DR) ◦ So………………………… 17 AR = RMM x DR

18.  From the AICPA Clarity Standards ◦ The risk that the financial statements are materially misstated prior to the audit. This consists of two components, described as follows at the assertion level: Inherent risk. The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. Control risk. The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.  From the Crawford boys definition dictionary ◦ The risk that what they’re doing internally won’t work, when considered in light of the surrounding circumstances 18

19.  From the AICPA Clarity Standards ◦ The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements  From the Crawford boys definition dictionary ◦ The risk that what I am doing as the auditor, in light of what they’re doing internally, won’t work 19

20.  In this example, the lighter the shade of green, the higher the overall audit risk  AR = RMM x DR acceptable  AR = RMM x DR not acceptable  AR = RMM x DR acceptable, but probably not efficient or profitable 20

21.  Sub topics ◦ Major program determination in the Single Audit ◦ Materiality determinations for each major program (think of a major program in the Single Audit as the equivalent of an opinion unit in the financial statement audit) ◦ Quantitative vs Qualitative ◦ Planning and performing vs evaluation vs forming an opinion 21

22.  Obtain sufficient appropriate audit evidence to form an opinion and report at the level specified by the government audit requirement on whether the entity complied in all material respects with the applicable compliance requirements  Identify audit and reporting requirements specified in the governmental audit requirement that are supplementary to GAAS and GAGAS, if any, and perform procedures to address those requirements 22

23.  Do you have enough relevant evidence to determine whether an entity complied, in all material aspects, with the requirement? Consider: ◦ The frequency of the noncompliance ◦ The nature of the noncompliance ◦ The adequacy of the entity’s system for monitoring compliance ◦ Whether any identified noncompliance resulted in likely questioned costs that are material to the government program 25

24.  You have, in your material, an entire set of financial statements for the City of Ymee, Oklahoma ◦ Question 1, how many opinion units are there? ◦ Answer: ◦ Question 2, what element or elements are would you base materiality upon? ◦ Answer: 24

25. ◦ Question 3, from observation procedures of the format of the financial statement only, can you spot any material departures from GAAP in any of the opinion units? ◦ Answer: 25