Chapter 151 Auditing Governments and Not-For-Profit Organizations.
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Transcript of Chapter 151 Auditing Governments and Not-For-Profit Organizations.
Chapter 15 1
Chapter 15
Auditing Governments and Not-For-Profit Organizations
Chapter 15 2
Learning Objectives Differentiate between auditing in the government and
not-for-profit sectors and in the business sectors. Influence of yellow-book on auditing Types of audits that governments conduct Standards of government audits Single Audit Act 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.
Chapter 15 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
Chapter 15 4
Audits of Governments and Not-For-Profits Vs. Business
Audit: examination of records or accounts for accuracy.
Business sector audits: characterized by attest function—to affirm to be true.
Government/Not-for-Profit sector: -Auditors not only attest but also independently evaluate.
-Assess whether auditees have achieved the objectives.
Chapter 15 5
Influence of the Yellow Book
Yellow book: Government Auditing Standards issued by the Government Accountability Office (GAO).
Responsible for auditing all federal agencies. Responsible for prescribing accounting standards
and practices of federal agencies. Headed by Comptroller General of the U.S. GAO:
-Issued to elevate auditing practice-No direct control over state and local governments.
Chapter 15 6
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 Verifying that organization is complying with terms of
the law, grants, and contracts.
Chapter 15 7
Generally Accepted Government Auditing Standards (GAGAS)
Standards issued by the U.S. GAO in its “yellow book.”
The Comptroller General of the U.S. appointed the Advisory Council on GAS to review the standards and recommend necessary changes.
The Council includes experts in financial and performance auditing drawn from all levels of government, private enterprise, public accounting, and academia.
FACTS: At the end of fiscal 2005, 85 % of the 1,752 recommendations made in fiscal year 2001 had been implemented by the GAO!
Chapter 15 8
Generally Accepted Government Auditing Standards (GAGAS)
A total of 32 standards for both financial and performance audits
Required of auditors in a Single Audit (for any organization that expends more than $500,000 in federal sources in any year).
Chapter 15 9
AuditsGovernment auditing standards are divided into:
General standards Performed by a person with adequate technical training and
proficiency Independence Due professional care
Field work standards Adequately planned and supervised Understanding internal controls Obtain competent evidential matter
Reporting standards States whether the financial statements are in accordance
with GAAP Identify inconsistencies, if any Informative disclosures Expression of opinion
Chapter 15 10
Generally Accepted Government Auditing Standards (GAGAS) are Broader than GAAS
This gives an overview of the breadth and depth of GAGAS.
Financial
Audits
Attestation
Engagements
Performance
Audits
GAAS GAGAS GAAS GAGAS GAAS GAGAS
General Standards
3 4 5 5 0 4
Field Work Standards
3 7 2 7 0 4
Reporting Standards
4 11 4 9 0 4
Totals 10 22 11 21 0 12
Chapter 15 11
GAGAS audit categories
Financial statements audits Financial related audits Economy and efficiency audits Program audits
-GAGAS standards place much more emphasis on compliance with laws and regulations than do GAAS
Chapter 15 12
Government Vs. Non-government Audits
General Standards: Independence:
-Auditors should not perform management functions-They should not audit their own work-Should not provide nonaudit services.
In government sector, audit organization is independent if:
-It is from a different branch than the units it is to examine
-Whose auditor is elected by citizens of government’s jurisdiction or appointed by legislative body.
Chapter 15 13
Government Vs. Non-government Audits (cont’d) Standard on adequacy of 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. Working Papers Standards of Reporting:
-Compliance and Internal Controls-Public Inspection
Chapter 15 14
Single Audit Act
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
Chapter 15 15
Single Audit Act (cont’d)
Intended (among other purposes) to improve the efficiency and effectiveness of governmental audit effort
By replacing a multitude of grant-by-grant audits with a single, comprehensive, entity-wide audit
All federal awarding agencies are required to accept the single audit reports as satisfying their program’s audit requirements
Chapter 15 16
Single Audit Act (cont’d)
Congress enacted Single Audit Act of 1984. Applies to both direct and indirect recipients of
federal assistance. Requires organizations expending more than
$500,000 in federal assistance under more than one program be subject to single audit.
Recipient has to deal only with single agency. Single Audit be conducted in accordance with
GAO’s Auditing Standards.
Chapter 15 17
Single Audit Act (cont’d) 1996 Single Audit Act Amendments:
– Raises the threshold for a single audit from $100,000 received to $500,000 expended
– Extends statutory requirement for single audit coverage to not-for-profit organizations as well as state and local governments
– Establishes a risk-based approach for audit testing, thus placing greater audit coverage on high risk programs
– Improves the contents and timeliness of single audit reporting
– Permits the Office of Management and Budgeting (OMB) to administratively revise Single Audit requirements without requiring additional legislation
OMB Circular A-133 and the related Compliance Supplement provide implementing guidance for conducting the single audit
Chapter 15 18
GAAS-GAGAS-Single Audit Relationships
Single Audit
Financial & Performance Audits
GAGAS
Financial Audits
GAAS
GAGAS Incorporates GAAS – and includes additional requirementsSingle Audit Incorporates GAGAS – and includes additional requirements
Chapter 15 19
Single Audit Act and OMB Circular A-133
Did the nonfederal entity expend $500,000 or more of federal awards?
No Single Audit or Program Specific Audit required--only GAAS and GAGAS Audit required.
A program-specific audit is required.
Did the nonfederal entity1) 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?
A Single Audit is required.
Yes
Yes
No
No
Chapter 15 20
Single audit objectives related to entity as whole
Fair presentation of financial statements Compliance with laws/regulations
Where noncompliance may have material effect on financial statements
Study and evaluation of internal controls To determine audit procedures necessary to opine
on statements Satisfies laws & regulations applicable to specific
federal award.
Chapter 15 21
Single audit objectives related to Federal financial assistance programs
Fair presentation of schedule of FFA in relation to financial statements
Adequacy of internal control systems over Federal programs
Ascertain compliance with laws/regulations with material effect in each major Federal assistance programs.
Chapter 15 22
City of Austin - Financial Assistance Programs
The notes to the 2004 annual report for the City of Austin include that: – The City participates in a number of federally assisted
and State grant programs, financed primarily by the U.S. Housing and Urban Development (HUD) Department, U.S. Health and Human Services (HHS) Department, and U.S. Department of Transportation (DOT). The City’s programs are subject to program compliance audits by the granting agencies.
– Management believes that no material liability will arise from any such audits.
Chapter 15 23
Single Audit
Two main components: -Audit conducted under GAGAS
-Audit of federal financial awards
Four types of reports Opinions on the financial statements and Schedule
of Expenditures of Federal Awards: -Includes the audit work and opinion on the statements
-The schedule includes a list of total expenditures of the organization
-Proper categorization of expenses
Chapter 15 24
Single Audit Act Requirements Annual audit encompassing the entity’s financial
statements and schedule of expenditures of federal awards.
Audit must be conducted by an independent auditor.
Auditor must determine whether financial statements present fairly in conformity with GAAP and the schedule of federal financial awards is presented fairly in relation to the financial statements.
Auditor must obtain an understanding of internal controls pertaining to the compliance requirements for each major program, and assess control risk and perform tests of control.
Federal and nonfederal “Pass-through” agencies are assigned certain responsibilities for compliance
Chapter 15 25
Single Audit Act (cont’d)
Q: Who has to have an audit under GAGAS?
A: Any state or local government or not-for-profit organization that expends at least $500,000 in federal awards during a year must have an audit in conformity with GAGAS.– If expended only for one program or one program
cluster, the entity can have a program audit. Otherwise the audit must be a single audit
Chapter 15 26
Single Audit Act (cont’d)
Calculation of amount of federal awards expended
– Calculation can be complex
– Basic rule is that a federal award has been expended when the federal agency has become at risk and the nonfederal recipient has a duty of accountability
Chapter 15 27
Compliance Audits (as part of single audit) 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.
Chapter 15 28
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
Selection of Programs for Single Audit
Chapter 15 29
Risk-Based ApproachStep 1:Identify (larger) Type A 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.
Step 3:Identify “high-risk” Type B programs
Step 2:Identify “low-risk” Type A programs
Chapter 15 30
Reports of Single Audits Report on compliance and on internal controls:
-Directed towards the basic financial statements-Based on audit requirements Governmental Auditing Standards-Include any material weaknesses in the controls
Report on compliance with the requirements of major programs: -Explain the nature of the examination -Auditors express an opinion -Include any “ reportable conditions”
Schedule of findings and questioned costs: -Most distinctive and informative-Summary of the results-Describe reportable conditions-Include findings pertaining to major programs
Chapter 15 31
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
Chapter 15 32
Performance Audits 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.
Chapter 15 33
Manner of Conducting Audit
Selecting audit target Establishing scope and purpose Discerning objectives Scheduling disbursements Assessing management controls Written audit plan Gathering evidence Reporting the results
Chapter 15 34
Governmental Vs. Not-for-profit Government employees are involved with ethical
decisions different from those faced by employees of businesses.
Characteristics of Governments:- Public expectations
- Guardians of public funds
- Activities carried out in open view
- Special Powers
- Conflicting loyalties
Chapter 15 35
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.
Chapter 15 36
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 Activities carried out in open view Special powers Conflicting loyalties
Chapter 15 37
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 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.
Summary
Chapter 15 38
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