1. Auditing Governments and Not-For-Profit Organizations
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Auditing Governments and Not-For-Profit Organizations
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2. Learning Objectives Auditing Government & Not-for-Profit vs. Business
Types of audits that governments conduct
Standards of government audits
Role of “Yellow-Book” in governmental auditing
Single Audit Act (A-133)
Auditor reports
Performance audits -Characteristics -Key elements
Impact of Sarbanes-Oxley on governments and not-for-profits
Ethical issues facing governmental and not-for-profit accountants and auditors.
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3. Important Concepts Understand very clearly what is meant by
generally accepted government auditing standards (GAGAS),
the source of GAGAS, and
why GAGAS are much broader than GAAS, in particular for financial audits and performance audits
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4. Overview: Audits Governments & Not-For-Profits Vs. Business
-“examination of records or accounts for accuracy.”
Business sector audits:
-characterized by attest function (i.e. “to affirm to be true.”)
Government/Not-for-Profit sector audits:
-Auditors not only “attest” BUT ALSO independently evaluate.
-Auditors assess whether auditees have achieved the objectives.
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5. Types of Audits:
Government Auditing Standards (2003) characterize government audits into three categories:
Financial Audits: determines if financial statements are in accordance with GAAP.
Attestation engagements: Examine, review, perform agreed-upon procedures
Performance Audits:
Effectiveness of internal controls
Effective usage of entity’s resources (Efficiency)
Verifying that organization is complying with terms of the law, grants, and contracts.
GAGAS standards place much more emphasis on compliance with laws and regulations than do GAAS
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6. GAGAS --Yellow Book
Generally Accepted Government Auditing Standards (GAGAS)
Issued by the Government Accountability Office (GAO).
Prescribes accounting standards and practices for ALL federal agencies (as required by law, regulation, agreement, contract, or policy)
Mirror GAAS in discussion of:
Auditor’s professional qualifications
Quality of audit effort,
Characteristics of
professional/meaningful
audit reports
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7. Generally Accepted Government Auditing Standards (GAGAS)
Contains a total of 32 standards for both financial and performance audits
Required of auditors in a Single Audit
Government auditing standards are divided into:
General standards
Field work standards
Reporting standards
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8. Generally Accepted Government Auditing Standards (GAGAS) Broader than GAAS: This gives an overview of the breadth and depth of GAGAS.
Financial
Audits
Attestation
Engagements
Performance
GAAS
GAGAS
General Standards 3 4 5
Field Work Standards 2 7
Reporting Standards 11 9
Totals 10 20 21 12
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9. GAAS v/s GAGAS General General Independence Independence
-Qualifications:
Professional Proficiency
Knowledge of government programs
CPE requirements
Independence
Due Professional Care
Quality Control
General
-Training and Proficiency
Independence
Due Care
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10. Generally Accepted Government Auditing Standards (GAGAS)
Professional competence requires auditors to have:
A thorough knowledge of governmental auditing and the specific or unique environment in which the audited entity operates
At least 80 hours of CE (CPE) every two years, of which at least 20 hours must be completed in each of the two years and at least 24 hours of which must be related directly to the audit environment
Peer Review: has to be done at least once in 3 years.
Compliance: reasonable assurance in detecting fraud or misstatements (required by AICPA and GAO)
Working Papers
Standards of Reporting:
-Compliance and Internal Controls -Public Inspection
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11. GAAS v/s GAGAS Field Work Field Work Adequate planning and supervision
Evaluate internal control
Obtain competent evidence
Field Work
Adequate planning and supervision
Evaluate internal control
Obtain competent evidence
Supplemental Standards:
Planning – consideration of government programs
Compliance testing
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13. GAAS v/s GAGAS Reporting Adherence to GAAP Consistent application
Adequate disclosure
Expression of opinion
Reporting
Adherence to GAAP
Consistent application
Adequate disclosure
Expression of opinion
Report distribution not restricted
“In accordance with GAAS and GAGAS”
Report on compliance and internal control
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14. Critical Terminology: Unconditional Requirements
GAGAS use the words “must” or “is required” to specify an unconditional requirement.
Required compliance in all cases in which the circumstances exist to which the unconditional requirement applies.
Throughout the “Yellow Book” the professional requirements are identified by this terminology.
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15. Critical Terminology: Presumptively Mandatory
GAGAS use the word “should” to specify a presumptively mandatory requirement
May depart from presumptively mandatory requirement if they document:
the justification for the departure, and
describe how the alternative procedures performed in the circumstances were sufficient to achieve the objectives in the presumptively mandatory requirement.
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16. Critical Terminology: Explanatory Material
GAGAS use the words “may,” “might,” or “could” to describe explanatory information.
The explanatory information is provided to:
Provide further explanation and guidance on the professional requirements, or
Identify/describe other procedures or actions relating to the activities of the auditor/audit organization.
Explanatory material is used to document the objective of a requirement, explain why particular procedures might be considered/used in certain circumstances, or add supplemental information to consider in exercising professional judgment.
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17. Reporting Requirements
Must state compliance with GAGAS in the report when required to follow GAGAS, or representing to to others that the audit followed GAGAS requirements.
“We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our finding and conclusions based on our audit objectives.”
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18. Single Audit Act of 1984
Administered by the Office of Management and Budget (OMB).
Replaces a multitude of grant-by-grant audits with a single, comprehensive, entity-wide audit.
Intended (among other purposes) to improve the efficiency and effectiveness of governmental audit effort
OMB Circular A-133 and the related Compliance Supplement provide implementing guidance.
Federal agencies must agree to this process.
Applies to both direct and indirect recipients of federal $$$
$500,000 (1996 amendment) initiation threshold (multiple awards).
Higher education, state/local governments, and other not-for- profit entities (1996 amendment)
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19. Single Audit Act (Cont’d)
Two main components:
- Audit conducted under GAGAS
- Compliance Audit of federal financial awards/major programs (Single Audit component)
Understand the characteristics of a single audit, including:
the purpose
which entities must have a single audit
what auditing work is required
how major programs are selected for audit
what reports must be rendered, when, and to whom
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20. Single Audit Act (cont’d): Key Requirements
Annual audit of financial statements conducted by an independent auditor encompassing the entity’s financial statements and schedule of expenditures of federal awards
Fair presentation of financial statements and the schedule of federal financial awards is presented fairly in relation to the financial statements.
Study and evaluation of internal controls --understanding of compliance requirements by major program.
Assess control risk and structure control tests accordingly.
Federal and nonfederal “Pass-through” agencies are assigned certain responsibilities for compliance
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21. GAAS - GAGAS - Single Audit Relationships
FOR “MAJOR PROGRAMS”
-Internal Control Audit
-Compliance Audit with Laws and Regulations
-Schedule of Questioned Costs
Single Audit
-General Internal Control Audit
-General Compliance Audit with Laws and Regulations
GAGAS
-Financial Audits
GAAS
GAGAS Incorporates GAAS – and includes additional requirements Single Audit Incorporates GAGAS – and includes additional requirements
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22. Single Audit Act – “Expended”
Requires organizations expending more than $500,000 in federal assistance under more than one program be subject to single audit.
Key task is determining when funds were expended.
Federal award is expended - Basic rule is:
When the federal agency has become at risk, and
The nonfederal recipient has a duty of accountability.
Recipient of funds has to deal only with a single agency (referred to as Cognizant Agency).
--All federal awarding agencies are required to accept the single audit reports as satisfying their program’s audit requirements
Complex as it isn’t a simple reflection of grants awarded in a fiscal year.
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23. Single Audit Act and OMB Circular A-133
No Single Audit or Program Specific Audit required--only GAAS and GAGAS Audit required.
Did the nonfederal entity expend $500,000 or more of federal awards? No
Yes
Did the nonfederal entity 1) expend federal awards under only one federal program--which did not require a financial statement audit, 2) meet other requirements, and 3) properly elect a program specific audit?
Yes
A program-specific audit is required. No
A Single Audit is required.
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24. Single Audit Act: Four Reports Produced:
1) Opinion on the Financial Statements and on the Schedule of Expenditures of Federal Awards
The schedule includes a list of total expenditures of the organization
Proper categorization of expenses
2) Report on Compliance and on Internal Control over Financial Reporting
Directed towards the basic financial statements
Based on audit requirements of Governmental Auditing Standards
Include any material weaknesses in the controls
3) Report on Compliance with Requirements of “Major Programs”
Explain the nature of the examination
Auditors express an opinion
Include any “ reportable conditions”
4) Schedule of Findings and Questionable Costs
Most distinctive and informative
Summary of the results
Describe reportable conditions
Include findings pertaining to major programs
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25. Types of Audits: Financial
The purpose is to perform an independent assessment of and to provide reasonable assurance about whether an entity’s reported financial condition, results, and use of resources are presented fairly (in accordance with recognized criteria)
GAGAS financial reports include reports on:
internal control
compliance with laws and regulations, and the terms and provisions of contracts/grants
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26. Internal Control Audit
Assess internal control system components for adequacy and effectiveness – can it provide reasonable assurance of:
Achieving effective and efficient operations;
Reliable financial and performance reporting; and
Compliance with laws and regulations.
Extremely relevant to government procurement officials for determining organizational capability for successful performance of government contract effort.
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27. Compliance Audits Assess compliance with
established laws;
regulations;
contract provisions;
grant agreements; and
other requirements
To assess the direct or indirect impact on the
acquisition;
protection;
use; and
disposition of the entity’s resources or
quantity;
quality;
timeliness; and
cost of services that the entity produces and delivers.
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28. Single Audit: Compliance Component for “Major Programs”
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29. Compliance Audits of Federal Financial Awards/Major Programs
For each “Major Program” the auditor must test whether the program:
was administered in conformity with the appropriate OMB Circular (A-102 or A-110)
complied with detailed requirements in the A-133 Compliance Circular and other specified requirements.
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30. Selection of “Major Programs”
Using a sliding scale identify “Type A” and “Type B” programs
Identify low-risk programs (based on no audit findings in most recent audit and absence of certain risk factors)
Assess risk of Type B programs (major programs that are not Type A programs)
At a minimum, audit all high risk Type A programs and either
(1) half of the high-risk Type B programs or
(2) one high-risk Type B program for each low-risk Type A program
Audit at least enough major programs to ensure that at least 50% of total federal award expenditures are audited
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31. Risk-Based Approach Step 1: Identify (larger) Type A Programs Step 2:
Identify “low-risk” Type A programs
Step 3:
Identify “high-risk” Type B programs
Step 4:
Select for audit as major programs a minimum of all Type ‘A programs not identified as “low-risk” in Step 2, plus certain “high-risk” Type B programs.
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32. Key Audit Procedures Identify compliance requirements
Plan the engagement
Assess internal control
Obtain sufficient evidence
Consider subsequent events
Evaluate and report on noncompliance
Follow-up procedure
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33. Performance Audits NOT required by Single Audit
Focus on organizational accomplishments
Carried out by “internal” audit departments
General standards are common to both financial and performance audits
3 sections include:
-General
-Field work
-Reporting
Auditors make independent assessments
Performance audits carried out on specific programs
Conducted irregularly
Broader range of evidence
Each performance audit is unique.
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34. Steps in Conducting Performance Audit
Selecting audit target
Establishing scope and purpose
Discerning objectives
Scheduling disbursements
Assessing management controls
Written audit plan
Gathering evidence
Reporting the results
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35. Additional Topics: Ethical Issues
Governments and to a lesser extent not-for-profits have characteristics that present their employees with ethical decisions that are different from those faced by employees of businesses. These are:
Public expectations
Guardians of public funds (OPM)
Activities carried out in open view
Special powers
Conflicting loyalties
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36. Impact of Sarbanes-Oxley Act on Government and NFPs
Even though the Sarbanes-Oxley Act (Act) applies only to publicly traded corporations, it’s impact is being felt by government and NFP organizations.
Key provisions of the Act that are relevant to government and NFP organizations include:
-Section 404 which emphasizes the importance of sound internal controls
-Responsibility of audit committees
-the Act mandates that CEO and CFO certify the financial statements
-the Act provides “whistle-blower” protection to employees.
Perhaps most importantly the Act changed the climate of all organizations.
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37. Summary
Auditors add value to information by being independent and conforming to professional auditing standards (GAAS or GAGAS)
GAGAS are broader than GAAS in that they include standards for financial and performance audits established by the government through the GAO’s Yellow book.
Performance audits differ in concept from financial audits. It makes assessments about an entity’s programs.
Under the Single Audit Act, GAGAS has to be adhered to in all audits of both governments and not-for-profit organizations. However, the Single audit requires only financial audits.
Single audits comprise of 2 elements: an audit of financial statements and an audit of federal financial awards that follows the provisions of OMB Circular A-133.
The single audit improves both the efficiency and effectiveness of audits of nonfederal entities with significant expenditures of federal award.
The Sarbanes-Oxley Act does not apply to government and not-for-profit organizations but has affected their culture.
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