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Accounting, Audit & Corporate Finance Library

Editorial Materials

Specialized Industries

HUD Audits

Chapter 1 Overview

100 Introduction

100 Introduction

100.1 The U.S. Department of Housing and Urban Development (HUD) sponsors a broad range of programs

designed to revitalize urban neighborhoods, stimulate housing construction, encourage home ownership

opportunities, and provide decent, safe, and affordable housing. The programs are primarily directed toward low

and moderate income families. They are carried out through various forms of federal financial assistance,

including entitlements, grants, direct loans and advances, subsidies, risk-sharing programs, and mortgage

insurance. Depending on the particular program, recipients of the federal aid may be units of local government,

such as states, cities, or counties; public housing authorities that develop, own, or operate housing projects;

other profit motivated or nonprofit builders, developers, or owners of housing projects; mortgage lenders; or

individuals. Examples of HUD program categories are Community Development Block Grants and single,

multifamily, public, and Indian housing programs.

100.2 PPC's Guide to HUD Audits focuses on HUD-assisted multifamily housing projects owned by business

entities (for-profit entities) and nonprofit entities. The Guide's objective is to assist auditors of HUD-assisted

multifamily housing projects in auditing the financial statements in accordance with both generally accepted

auditing standards and generally accepted government auditing standards and reporting on the entity's

compliance with laws and regulations affecting HUD-assisted programs. The Guide also provides guidance

about the accounting and financial statement presentation issues that are common for HUD-assisted projects.

100.3 PPC's Guide to HUD Audits provides limited guidance for auditors of nonsupervised and supervised

mortgages in Chapter 9. This Guide also provides limited guidance to auditors about the Low-Income Housing

Tax Credit (LIHTC). The LIHTC is a federal income tax credit administered by the states that was established to

encourage and finance new construction and rehabilitation of existing housing for low-income households.

Chapter 10 of this Guide provides an overview of the LIHTC regulations, explains the services that auditors may

provide for these projects, discusses compliance issues related to ongoing and initial project completion, and

illustrates independent accountants' reports for LIHTC projects.

100.4 The remainder of this introductory chapter provides an overview of the following topics:

a. HUD's multifamily housing programs.

b. HUD offices that are important to auditors.

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c. Participants in HUD's programs.

d. Audit and accounting guidance applicable to owners of multifamily housing projects that receive

assistance from HUD.

e. Accountants' involvement with HUD clients.

f. The PPC risk assessment process.

g. Organization and scope of PPC's Guide to HUD Audits.

© 2012 Thomson Reuters/PPC. All rights reserved.

END OF DOCUMENT -

© 2013 Thomson Reuters/RIA. All rights reserved.



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HUD Audits

Chapter 1 Overview

101 Types of Multifamily Housing Programs

101 Types of Multifamily Housing Programs

101.1 Most of HUD's multifamily housing programs can be classified into the following broad categories:

a. Multifamily mortgage insurance.

b. Coinsured loans.

c. Risk-sharing programs.

d. Direct loans, capital advances, flexible subsidies, and grants.

e. Rental subsidies.

HUD programs are established by housing legislation. Thus, many HUD programs are identified by a number

that refers to legislation under which the program was enacted. For example, the legal authority for Section 8

rental subsidy programs is Section 8 of the U.S. Housing Act of 1937. HUD programs are implemented through

regulations, which are found at Title 24 of the Code of Federal Regulations.

101.2 From an auditor's perspective, knowing what type of HUD program each multifamily housing project

operates under is important because accounting considerations and specific auditing and compliance

procedures can vary by program type. The discussion beginning at paragraph 101.3 provides an overview of the

principal types of multifamily housing programs. Chapter 2 describes the specific programs within each category

in greater detail.



Insured Loans

101.3 HUD administers several mortgage insurance programs that provide insurance to lenders to encourage

them to make loans to developers and builders who construct or rehabilitate multifamily housing projects.

Depending on the particular program, loan proceeds may be used to finance the construction of new housing or

acquire or rehabilitate existing housing. Under the programs, HUD insures lenders against loss on a mortgage if

a borrower (project owner) defaults during the life of the mortgage loan. If the borrower defaults, the lender can

assign the mortgage to HUD, making HUD responsible for servicing. HUD can also take legal action to take

possession of the property and become the owner.

101.4 The principal HUD multifamily mortgage and loan insurance programs are as follows:

• Section 207 Multifamily Rental Housing

• Section 207 Manufactured Home Parks

• Section 213 Cooperative Housing

• Section 220 Urban Renewal Projects

• Section 221 Multifamily Rental Housing for Low and Moderate Income Families

• Section 223(f) Purchase or Refinancing of Existing Projects

• Section 223(a)(7) Refinancing of Existing Projects

• Section 231 Housing for the Elderly and Handicapped

• Section 232 Nursing Homes, Assisted-Living Facilities, and Intermediate Care Facilities

• Section 234(d) Condominium Housing



• Section 236 Interest Reduction Program

• Section 241(a) Insured Supplemental Loans on Multifamily Housing Projects

• Section 242 Hospitals

As discussed in section 201, some insured loan programs are targeted for low and moderate income housing,

while others are designed specifically for elderly or handicapped persons.

Coinsured Loans

101.5 Housing legislation enacted in 1974 authorized HUD to coinsure mortgages with approved coinsuring

lenders. The objective of the coinsurance programs was to facilitate the efficient processing of mortgage

applications. Under the programs, the coinsuring lenders agreed to abide by HUD's requirements, to perform

HUD's normal loan underwriting functions, and to share a portion of the risk of loss. Many project owners and

coinsuring lenders were unable to honor their financial obligations, however, causing HUD to sustain large

losses. As a result, HUD terminated its coinsurance programs in 1990.

101.6 Although coinsured mortgages are no longer made, HUD continues to service coinsured mortgages

underwritten prior to November 12, 1990, and mortgages to protect owners whose applications were in process

but had not been approved as of that date. Subsequently, multifamily housing mortgages are underwritten by

HUD staff with limited use of “delegated processing” to private sector mortgage companies.

Risk-sharing Programs

101.7 The multifamily risk-sharing program is designed to encourage the production of affordable rental housing

by allowing HUD to provide risk-sharing arrangements to state and local housing finance agencies. Created

under Section 542 of the Housing and Community Development Act of 1992 (also called the Multifamily Housing

Finance Improvement Act), the insurance program was created to demonstrate the effectiveness of providing

new forms of credit enhancement for multifamily loans. A housing finance agency must be approved by HUD to

participate in this program. To be eligible, the agency must be a HUD-approved multifamily mortgagee in good

standing and meet other credit, experience, and management criteria.

Direct Loans, Capital Advances, Flexible Subsidies, and Grants

101.8 Section 202 Direct Loans

Under Section 202 of the National Housing Act of 1959, HUD was authorized to make long-term loans directly to

multifamily housing projects. Loan proceeds were used to finance the construction of housing for persons age

62 or older and handicapped persons. In 1990, amendments to Section 202 replaced the direct loan program



with “capital advance” programs for owners of housing designed for elderly or disabled residents. (See

paragraph 101.11.) HUD continues to service direct loans that were made under the old Section 202 program.

101.9 All projects that received Section 202 direct loans also are eligible for assistance under HUD's Section 8

rent subsidy program. (See paragraph 101.14 and paragraph 205.11.)

101.10 Direct Loans under the Property Disposition Purchase Money Mortgage Program

In the 1970s, a direct loan program was established to facilitate sales of projects that HUD had previously

acquired through foreclosure. Under the Property Disposition Purchase Money Mortgage Program, HUD would

sell the property and take back a purchase money mortgage of up to 90% of the selling price. These projects

were often provided with Section 8 rent subsidies. HUD no longer issues purchase money mortgages when

selling properties in its inventory. It now sells such properties on a “cash only” basis.

101.11 Capital Advance Programs

HUD makes capital advances to nonprofit organizations for the construction, acquisition, or rehabilitation of

housing for persons age 62 or older (under Section 202 of the Housing Act of 1959 as amended) or disabled

persons (under Section 811 of the National Affordable Housing Act). Capital advances bear no interest and

need not be repaid so long as the housing remains available to elderly or disabled persons for at least 40 years.

Only nonprofit projects are eligible for assistance under capital advance programs. Capital advance projects are

typically supplemented with rental assistance. (See paragraph 101.14 and sections 204 and 205.)

101.12 Flexible Subsidies

Two types of loans are available under HUD's flexible subsidy program—operating assistance loans and capital

improvements loans. Both types of loans are generally made to projects with mortgages that are either insured

or held by HUD. Operating assistance loans are made to projects that are experiencing operating deficits. They

are designed to provide temporary funding to replenish project reserves, cover operating costs, and pay for

limited physical improvements. Capital improvements loans are intended to assist projects with the cost of major

repair and replacement of building components when project reserves are insufficient to fund the improvements.

Grant Programs for Nonprofit Owners

101.13 Two grant programs are designed for certain nonprofit owners that participate in HUD programs to

provide housing for the elderly. The Assisted-living Conversion Program provides grants that allow nonprofit

owners of eligible developments to convert some or all of the dwelling units into an assisted living facility for the

frail elderly. The Emergency Capital Repair Program provides grants for emergency capital repairs to nonprofit

owners of eligible developments designated for occupancy by elderly tenants. The one-time grants are used for

emergency items that could not be funded within the project's operating budget or other project resources.

Rental Subsidies

101.14 HUD rent subsidy programs provide financial assistance to low-income tenants of multifamily housing

projects through payments that reduce the rent they pay. Under the programs, eligible tenants are only required

to pay a portion of the market or HUD-approved rent, and HUD pays the difference on behalf of the tenants to



the project owners. Not all units within a HUD project need be rent subsidized; depending on a tenant's income

level, some units may be leased at market rate.

101.15 The largest rent subsidy program is authorized under Section 8 of the U.S. Housing Act of 1937. The

“Section 8 Program” includes eight principal subprograms targeted toward different types of housing projects

and tenants with different income levels. Other rent subsidy programs are (a) rent supplements, (b) rental

assistance payments, and (c) project rental assistance under the Section 202 and Section 811 capital advance

programs. Rental subsidies often accompany insured, direct loan, or capital advance programs.


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HUD Audits

Chapter 1 Overview

102 The HUD Organization

102 The HUD Organization

HUD Headquarters

102.1 The Department of Housing and Urban Development—HUD headquarters—in Washington, D.C.,

administers all HUD programs nationwide. Much of the activity at HUD headquarters relates to HUD's

administrative and legislative functions and, thus, does not directly concern auditors. However, auditors may

interact with certain departments when auditing HUD projects or for practice development purposes. The

departments of primary interest to auditors are discussed in the following paragraphs.

102.2 Office of the Inspector General (OIG)

The HUD OIG is responsible for promoting the integrity, efficiency and effectiveness of HUD programs. It works

to accomplish this by conducting audits and investigating charges of fraud, waste, and abuse in HUD programs.

OIG's other responsibilities include the following:

a. Reviewing auditors' audit documentation to determine compliance with generally accepted auditing

standards (GAAS) and generally accepted government auditing standards (GAGAS). 1 Auditors subject to

review are selected from referrals received from other HUD offices. Firms with significant numbers of HUD

clients are more likely to be reviewed by the OIG.

b. Periodically updating HUD Handbook 2000.04, Consolidated Audit Guide for Audits of HUD Programs

(the “HUD audit guide”) 2 to reflect changes in HUD regulations, GAAS, and GAGAS. (The HUD audit

guide is discussed beginning at paragraph 104.34.)

The HUD OIG can seek administrative sanctions, civil recoveries and/or criminal prosecution of those

responsible for waste, fraud and abuse in HUD programs and operations. A current directory of HUD's OIG

offices may be obtained from www.hudoig.gov/about/offices.php.

102.3 Office of Mortgage Insurance Accounting and Servicing Division



The Office of Mortgage Insurance Accounting and Servicing Division maintains loan ledgers, escrow accounts,

and reserve funds for mortgages of HUD projects that are held by HUD. (HUD may hold the mortgage because

the mortgagor defaulted on a HUD-insured mortgage and the mortgagee assigned the loan to HUD for

insurance benefits or because it directly issued the mortgage.)

102.4 Division of Elderly and Assisted Housing

The Division of Elderly and Assisted Housing administers the direct loan and capital advance programs for the

elderly and disabled. As a result, that office maintains information concerning projects whose owners are in the

process of applying for assistance under those programs. On request, it will send auditors information on

prospective HUD projects in their locality, which auditors may use for practice development purposes.

102.5 Office of the Secretary

Within the Office of the Secretary, the office of greatest interest to auditors is the Mortgagee Review Board,

which examines the conduct of mortgagees and loan correspondents who participate in HUD housing programs.

Chapter 9 of this Guide discusses mortgagees.

102.6 Office of Affordable Housing Preservation

The Office of Affordable Housing Preservation (OAHP) was established in 2004 to administer the Mark-to-

Market program (M2M) after the legislative sunset of the Office of Multifamily Housing Assistance Restructuring

(OMHAR). The M2M program was created to reduce the rents on expiring housing subsidy contracts to market

levels and restructure existing debt to amounts that can be supported by these rents. OAHP also provides

assistance in other affordable housing and preservation programs.

102.7 Real Estate Assessment Center

HUD created its Real Estate Assessment Center (REAC) to centralize the assessment of all HUD housing. Its

mission is to improve housing quality and assure the public trust by providing accurate, credible, and reliable

assessments of HUD's real estate portfolio. It does this through physical inspections and financial assessments.

REAC's financial assessment of multifamily housing programs is performed on the project's financial information

electronically submitted through the FASSUB templates discussed at section 311. This centralized review

ensures consistency of financial statement and supplementary information requirements among projects. In

addition, REAC staff perform quality assurance reviews of auditor's workpapers. In these reviews, REAC staff

visit auditor's offices across the country reviewing their audit documentation for conformance with professional

standards, Government Auditing Standards, and HUD requirements. These reviews, discussed in more detail

beginning at paragraph 401.80, are similar to the IG reviews described in paragraph 102.2.

102.8 Enforcement Center

HUD also created the Enforcement Center to take action against HUD-assisted entities that are responsible for

waste, fraud, and abuse in HUD programs. The center receives referrals from the REAC of entities failing their

financial or physical inspections. The Center seeks remedies from the entities and works with the OIG on

criminal investigations.

HUD Field Offices



102.9 To administer HUD programs throughout the country, HUD has established state offices and area offices.

The field offices have authority for the day-to-day oversight of HUD projects and for interpreting HUD

requirements. Within each field office, the Asset Management Branch and the Mortgage Credit Branch are of

particular importance. The Asset Management Branch controls releases from project reserve funds, conducts

physical inspections of HUD projects, and reviews project accounting procedures and leasing practices. The

Mortgage Credit Branch is responsible for reviewing “cost certifications” submitted by developers of HUD

projects. (See paragraph 105.3.)

102.10 There are currently approximately 80 field offices. A directory of HUD field offices is available on the

Internet at www.hud.gov/localoffices.cfm.

102.11 The field offices are organized into 10 geographic regions, each with a regional office. A “secretary's

representative,” assigned by the HUD secretary to each region, is responsible for ensuring that HUD policies

developed in Washington are implemented throughout the country.

Outsourcing

102.12 In recent years, HUD has implemented dramatic staff reductions. As a result of these reductions, HUD

has outsourced certain functions to consulting and professional services firms, including CPA firms. HUD is

expected to continue this program of outsourcing in the future.

1 Generally accepted government auditing standards are specified in the Government Accountability Office's

(GAO) Government Auditing Standards, also referred to as the “Yellow Book.” The requirements of the Yellow

Book have been incorporated throughout this Guide where relevant. Government Auditing Standards, 2011

Revision, is discussed beginning at paragraph 104.13.

2 The Consolidated Audit Guide for Audits of HUD Programs (HUD Handbook 2000.04, REV-2) can be

accessed from the HUD OIG website at www.hudoig.gov/reports. The HUD audit guide is being updated and

released by the HUD OIG chapter by chapter. See the discussion beginning at paragraph 104.50 about the

current status of this project.


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HUD Audits

Chapter 1 Overview

103 Participants in HUD Programs

103 Participants in HUD Programs

Project Owners

103.1 Form of Organization

In the authors' experience, approximately 70% of multifamily housing projects are owned by noncorporate

entities—usually partnerships but, in a few instances, sole proprietorships. Approximately 25% of multifamily

housing projects are owned by not-for-profit corporations provided tax exempt status under Section 501(c)(3) of

the Internal Revenue Code. (The nonprofit projects are typically either owned by national nonprofit

organizations, for example, the Salvation Army, or community based charitable groups, for example, the

“Council of Presbyterian Churches of XYZ County.”) The remaining 5% of HUD projects are organized as either

C or S corporations.

103.2 Profit-motivated Projects versus Limited Distribution or Nonprofit Projects

Owners of HUD projects can be organized into three broad categories: profit motivated, limited distribution (also

referred to as limited dividend), 3 and nonprofit. For HUD regulatory purposes, the distinction between the three

is based on whether the project owners are permitted to retain “surplus cash.” Surplus cash is a technical term

that essentially refers to cash in excess of that needed to meet all project expenses and reserve requirements.

In the case of profit-motivated projects, all surplus cash generated by the project is available for distribution to

project owners. Limited distribution projects, however, must limit distributions to project owners to a specified

percentage of the owner's initial equity investment. Nonprofit owners may not be paid distributions of surplus

cash. Such projects must deposit surplus cash into a “residual receipts account” that can be used to fund

operating deficits in future years.

103.3 The type of project owner (i.e., profit-motivated, limited distribution, or not-for-profit) can vary based on the

particular HUD program. For example, although profit-motivated owners may participate in most HUD programs,

some programs, such as HUD's capital advance programs for the elderly and the disabled, are restricted to

nonprofit owners. Other programs are predominantly available to limited distribution owners, i.e., profit-

motivated owners who agree to restrict their surplus cash distributions in exchange for HUD subsidies. On the



other hand, many HUD programs allow all three types of owners. Appendix 2A summarizes the types of project

owners that are eligible for HUD's multifamily housing programs.

Project versus Entity Expenses

103.4 For financial reporting purposes, HUD requires that project expenses be segregated from entity

expenses. To aid in that segregation, HUD's chart of accounts has separate account numbers for project

expenses and entity expenses. Project expenses are expenses incurred in connection with the operation of the

project, i.e. reasonable and necessary to the operation of the project. Entity expenses (sometimes referred to as

mortgagor expenses or corporate expenses) are expenses attributable solely to the entity, for example, officers'

salaries, federal and state income taxes, and legal expenses attributable to the entity per se (as distinct from the

project). Entity expenses can only be paid from mortgagor contributions or surplus cash. (See paragraph

300.10.)

Lenders

103.5 Private Sector Lenders

The Federal Housing Administration (FHA) insures loans originated by HUD-approved financial institutions, such

as banks and savings and loans, to finance the purchase of single family and multifamily housing. The lenders,

referred to as “supervised” mortgagees, are subject to periodic review by the Asset Management Branch. HUD

also approves other types of financial institutions for participation in HUD loan programs. Entities like mortgage

companies are referred to as nonsupervised mortgagees. 4

103.6 Quasi-public Lenders

The Government National Mortgage Association (GNMA) and Federal National Mortgage Association (FNMA)

purchase loans made by private sector lenders and resell them to investors. By giving lenders an outlet to sell

such loans, GNMA and FNMA encourage more mortgage lending.

State Housing Agencies and Indian Housing Authorities

103.7 State housing agencies issue bonds to finance multifamily housing projects and act as contract

administrators for Section 8 rent subsidy projects. As contract administrators, the state agencies perform certain

administrative duties on behalf of HUD for a fee. Those duties include providing oversight of project owners and

management agents to assure compliance with HUD requirements.

103.8 Indian housing authorities operate much like housing agencies except the Section 8 subsidies are

directed toward owners of housing for members of federally-recognized Indian tribes. Like housing agencies,

Indian housing authorities serve as contract administrators and provide oversight of project owners to assure

compliance with HUD requirements.

103.9 State housing agencies and Indian housing authorities may have their own audit and accounting

guidelines, and those guidelines may differ from the HUD audit guide's requirements. In such cases, the

auditors need to advise their client of the inconsistencies and meet with HUD and the housing agency or Indian

housing authority to determine filing requirements that are acceptable to all concerned.



Management Agents

103.10 HUD projects may be managed by the project's owner, an outside management agent, or, for certain

types of projects, a project administrator employed by the project. The project owner is responsible for seeking

out and selecting someone to manage the project; however, the decision to self-manage a project or the

selection of a management agent must be approved by HUD. Paragraph 206.6 discusses the Management

Entity Profile and the Management Certification that project owners must file with the HUD field office to obtain

approval of a management agent.

103.11 Management agents provide a variety of services to HUD projects, including marketing the rental units,

bookkeeping, building maintenance, and landscaping. Whether the management fee is subject to review by

HUD is based on the particular type of project.

3 Most accountants, including the authors, prefer using the term limited distribution owner instead of limited

dividend owner. They believe that the term limited dividend owner incorrectly suggests that only corporate

entities are subject to restrictions on owner payments.

4 Nonsupervised mortgagees have always been required to obtain an annual audit performed in accordance

with the HUD audit guide and submit their financial statements electronically to HUD within 90 days of their

fiscal year end. Effective January 1, 2010, FHA-approved supervised mortgagees are generally required to

obtain an audit performed in accordance with the HUD audit guide. Chapter 9 discusses the audit and reporting

requirements that are applicable for both supervised and nonsupervised mortgagors.


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HUD Audits

Chapter 1 Overview

104 Audit and Accounting Guidance Applicable In Audits Of HUD-Assisted Entities

104 Audit and Accounting Guidance Applicable In Audits Of

HUD-Assisted Entities

General Literature

104.1 GAAS and GAAP

Generally accepted accounting principles that apply to business entities and nonprofit organizations are equally

applicable to for-profit or nonprofit entities that own or sponsor HUD programs. Chapter 3 provides an overview

of the accounting guidance commonly applicable for HUD entities. Similarly, all of the Statements on Auditing

Standards (SASs) and Auditing Interpretations generally applicable to audits of financial statements may apply

in HUD engagements. The authoritative auditing literature is discussed throughout this Guide.

AICPA Clarified Auditing Standards

104.2 In response to concerns about the complexity of auditing standards and the need to converge U.S.

generally accepted auditing standards with International Standards on Auditing, the Auditing Standards Board

(ASB) has been working on a large-scale project (the Clarity Project) to revise all existing standards and to

design a format under which all new standards will be issued. In October 2011, the AICPA issued:

• SAS No.122, Statements on Auditing Standards: Clarification and Recodification. This represents a

completely new set of auditing standards revised in format, structure, style, and content from the existing

standards. It supersedes all existing SASs through SAS No. 121, except:

•• SAS No. 51, Reporting on Financial Statements Prepared for Use in Other Countries

(subsequently superseded by SAS No.124).

•• SAS No. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern

(subsequently superseded by SAS No. 126). See paragraph 104.4.



•• SAS No. 65, The Auditor's Consideration of the Internal Audit Function in an Audit of Financial

Statements (currently being redrafted and will be superseded when the clarified version is issued).

•• SAS No. 87, Restricting the Use of an Auditor's Report (subsequently superseded by SAS

No.125). See paragraph 104.3.

•• SAS No. 117 on compliance audits and SAS Nos. 118-120 on supplementary information.

These standards were previously issued in clarified format and are already effective.

• SAS No. 123, Omnibus Statement on Auditing Standards—2011. This SAS amends SAS Nos. 117, 118,

and 122 to address matters that arose after the clarified standards were finalized.

• SAS No. 124, Financial Statements Prepared in Accordance with a Financial Reporting Framework

Generally Accepted in Another Country. This is the clarified and recodified version of SAS No. 51,

Reporting on Financial Statements Prepared for Use in Other Countries.

Auditing interpretations corresponding to a SAS were considered in the development of the clarified standards

and incorporated as necessary. Generally, the interpretations have been withdrawn, except for certain

interpretations that were retained and revised to reflect the issuance of SAS No. 122. Going forward, the ASB

will continue to issue SASs to create, amend, or supersede the auditing standards as necessary.

104.3 In December 2011, the ASB issued SAS No. 125, Alert That Restricts the Use of the Auditor's Written

Communication. SAS No. 125 supersedes SAS No. 87 (AU 532), Restricting the Use of an Auditor's Report, and

amends, among other standards, AU-C 260, The Auditor's Communication With Those Charged With

Governance, and AU-C 265, Communicating Internal Control Related Matters Identified in an Audit, and AU-C

935, Compliance Audits. SAS No. 125 is effective for the auditor's written communications related to audits of

financial statements for periods ending on or after December 15, 2012. For all other engagements conducted in

accordance with GAAS (for example, audits of compliance under AU-C 935, Compliance Audits), this SAS is

effective for the auditor's written communications issued on or after December 15, 2012. The different effective

dates in SAS No. 125 create an important distinction between when the alert described in the SAS is used in the

reports issued in an audit of a for-profit HUD-assisted entity, and when it is used in the reports issued in an audit

of a nonprofit HUD-assisted entity. These matters are discussed and illustrated in chapter 8.



104.4 In June 2012, the ASB issued SAS No. 126, The Auditor's Consideration of An Entity's Ability to Continue

as a Going Concern (Redrafted). SAS No. 126 supersedes SAS No. 59 (AU 341) and is codified in the clarity

auditing standards at AU-C 570. AU-C 570 does not change or expand the previous guidance in AU 341 in any

significant respect. The new guidance is effective for audits of periods ending on or after December 15, 2012.

104.5 Form and Structure of the Standards

The clarified standards were developed using formatting techniques, such as bulleted lists, that make them

easier to read and understand. In addition, each clarified standard is divided into the following topics:

• Introduction. Includes matters such as the purpose and scope of the SAS, subject matter, effective date,

and other introductory material.

• Objectives. Establishes objectives that allow the auditor to understand what he or she should achieve

under the standards. The auditor should use the objectives to determine whether additional procedures are

necessary for their achievement and to evaluate whether sufficient appropriate audit evidence has been

obtained.

• Definitions. Provides key definitions that are relevant to the standard.

• Requirements. States the requirements that the auditor is to follow to achieve the objectives unless the

standard is not relevant or the requirement is conditional and the condition does not exist.

• Application and Other Explanatory Material. Provides further guidance to the auditor in applying or

understanding the requirements. While this material does not in itself impose a requirement, auditors should

understand this guidance. How it is applied will depend on professional judgment in the circumstances

considering the objectives of the standard. The requirements section references the applicable application

and explanatory material. Also, when appropriate, considerations relating to smaller and less complex

entities are included in this section.

104.6 A standard may also contain exhibits or appendices. Appendices to a standard are part of the application

and other explanatory material. The purpose and intended use of an appendix is explained in the standard or in

the title and introduction of the appendix. Exhibits to standards are interpretive publications. Interpretive

publications are not auditing standards and do not contain requirements. Rather, they are recommendations on

applying the standards in particular circumstances that are issued under the authority of the Auditing Standards

Board. Auditors are required to consider applicable interpretive publications when planning and performing the

audit.



104.7 New AU Section Organization

Within the AICPA Professional Standards, the clarified standards use “AU-C” section numbers instead of “AU”

section numbers. “AU-C” is being used temporarily to avoid confusion with references to existing “AU” sections,

which are still effective through 2013. The “AU-C” identifier will revert to “AU” in 2014, when the clarified

standards are fully effective for all engagements. The organization of the new AU-C sections is as follows:

• Preface.

• Glossary.

• AU-C Section 200-299, General Principles and Responsibilities.

• AU-C Section 300-499, Risk Assessment and Response to Assessed Risks.

• AU-C Section 500-599, Audit Evidence.

• AU-C Section 600-699, Using the Work of Others.

• AU-C Section 700-799, Audit Conclusions and Reporting.

• AU-C Section 800-899, Special Considerations.

• AU-C Section 900-999, Special Considerations in the United States.

• Exhibits and Appendixes.

104.8 An exhibit to SAS No. 122 contains a complete two-part cross-reference of AU-C and AU section

numbers. One part of the cross-reference shows which existing AU sections are encompassed by each new AU

-C section. The other part of the cross-reference shows, for each existing AU section, where the corresponding



guidance can be found in the new AU-C sections. Appendix 1B, “List of AU-C Sections Designated by SAS No.

122, Statements on Auditing Standards: Clarification and Recodification, Cross Referenced to List of AU

Sections,” reproduces part of that Exhibit. 5

104.9 Implementation of the Clarified Auditing Standards

With a few exceptions, all of the clarified standards are effective for audits of financial statements for periods

ending on or after December 15, 2012. Generally, early adoption of SAS Nos. 122-126 is not permitted.

However, an auditor may implement aspects of the clarified standards early as long as he or she continues to

comply with existing standards. See the discussion beginning at paragraph 104.26 about how the new

standards are incorporated in this Guide.

Government Auditing Standards

104.10 Audits of HUD programs are conducted in accordance with generally accepted government auditing

standards (GAGAS) as specified in the Government Accountability Office's (GAO), Government Auditing

Standards, often referred to as the “Yellow Book.” The Yellow Book standards relate to scope and quality of

audit efforts and to the characteristics of a professional and meaningful audit report. As stated in Paragraph 1.04

of the 2011 Yellow Book (see paragraph 104.13), GAGAS “provide a framework for conducting high quality

audits with competence, integrity, objectivity, and independence.” They address the concerns of public officials,

legislators, and the general public about whether governmental funds are handled properly and in compliance

with existing laws and whether governmental programs are being conducted efficiently, effectively, and

economically. GAGAS recognize that the AICPA has adopted standards and procedures applicable to audits

performed to express opinions on whether financial statements fairly present the financial position and results of

operations. For financial audits, the Yellow Book incorporates the AICPA's field work and reporting standards

and the related SASs, unless they are specifically excluded or modified. However, Government Auditing

Standards fulfill broader interests and are identified as standards for “broad scope” auditing. The standards

identify the ethical principles that are the foundation of governmental audits and establish requirements for the

scope of audit work, auditor qualifications and independence, competence of the audit staff, exercise of

professional judgment, and quality control and external peer reviews, as well as standards for planning,

supervision, and reporting.

104.11 GAGAS has no authority on its own. In other words, the GAO provides government auditing standards in

the Yellow Book, but has no authority to require compliance with them. As stated in Paragraph 1.06 of the 2011

Yellow Book:

Provisions of laws, regulations, contracts, grant agreements, or policies frequently require audits

be conducted in accordance with GAGAS . . . The requirements and guidance in GAGAS apply to

audits of government entities, programs, activities, and functions, and of government assistance

administered by contractors, nonprofit entities, and other nongovernmental entities when the use

of GAGAS is required or is voluntarily followed.

104.12 In audits of HUD programs, compliance with the Yellow Book is required by HUD's Consolidated Audit

Guide for Audits of HUD Programs for for-profit entities, and the Single Audit Act for nonprofit entities. The

Yellow Book is available in PPC's Government Documents Library at Gov. Doc. No. 2. 6



104.13 Issuance and Applicability of 2011 Revisions to Government Auditing Standards

In December 2011, the GAO issued Government Auditing Standards, 2011 Revision (2011 Yellow Book), which

“represents a modernized version of the standards, taking into account recent changes in other auditing

standards, including international standards.” For financial audits, the 2011 Yellow Book supersedes

Government Auditing Standards, 2007 Revision (the 2007 Yellow Book), effective for periods ending on or after

December 15, 2012. Early implementation is not permitted. 7 The significant changes in the 2011 Yellow Book

are described beginning at paragraph 104.24. The 2007 Yellow Book is discussed beginning at paragraph

104.24.

104.14 Since the requirements in the 2011 revision of the Yellow Book are effective at the same time the

clarified auditing standards are effective (that is, generally for audits of periods ending on or after December 15,

2012), this Guide incorporates the 2011 Yellow Book. However, if there has been a change in Government

Auditing Standards that will cause a change in practice, the authors have provided a discussion of requirements

in both the 2007 Yellow Book and 2011 Yellow Book. Dual guidance about GAGAS requirements is also

provided, where appropriate, in the practice aids in this Guide. See paragraph 104.26.

104.15 Overall Changes.

Overall changes in the 2011 Yellow Book that affect auditors performing a Yellow Book audit are as follows:

• Realignment of Chapters 1 and 2. The foundation and ethical principles for government audits and the

standards for use and application of Government Auditing Standards are consolidated and reorganized.

Chapter 1 includes the introduction and the foundation and ethical principles of government auditing.

Chapter 2 provides an overall discussion on the use and application of Government Auditing Standards.

• Comprehensive Changes to Chapter 3. The general standards, which are contained in Chapter 3, have

been comprehensively revised, primarily as they relate to independence.

• Consolidation of Chapters 4 and 5. The financial audit standards that previously were in Chapters 4

(performance) and 5 (reporting) are consolidated into a single chapter (which is Chapter 4). Although

consolidated, only a few changes were made to these standards.

• Update of Terminology. Terminology for financial audits has been updated to be more consistent with

other standards.

• Limited Use of Footnotes. Footnotes are used only to refer to other sections of Government Auditing

Standards and to other audit standards. Other information that was previously presented in footnotes has

been moved into the text or eliminated.



• Streamlining of Guidance. Streamlining changes include referencing AICPA standards and removing

duplicate information. These changes also emphasize that the Yellow Book should be used in conjunction

with AICPA standards.

104.16 Chapter 1—Government Auditing: Foundation and Ethical Principles..

Chapter 1 provides new definitions for two existing terms:

• The term auditor is used to describe individuals performing audits and attestation engagements under the

Yellow Book, regardless of the person's job title.

• The term audit organization refers to government audit organizations as well as to public accounting or

other firms that perform audits and attestation engagements under Government Auditing Standards.

Chapter 1 also explains that the term audit (as used in Chapters 1 through 3 and corresponding sections of the

Appendix) refers to financial audits, attestation engagements, and performance audits conducted in accordance

with the Yellow Book.

104.17 Chapter 2—Standards for the Use and Application of GAGAS..

Chapter 2 clarifies the use and application of Government Auditing Standards. Among other things, it

emphasizes the role of professional judgment in determining the appropriate type of statement to be used for

stating compliance with Government Auditing Standards in the auditors' report. It also provides updated

guidance and documentation requirements for departures from presumptively mandatory requirements. In

addition, Chapter 2 eliminates the previous requirement to use Government Auditing Standards as the prevailing

standard if inconsistencies exist between the Yellow Book and other standards cited. It also adds clarification on

citing both Government Auditing Standards and other standards in the audit report. Chapter 2 further explains

that interpretative publications issued by the GAO to provide guidance on the application of Government

Auditing Standards in specific circumstances, while not auditing standards, have the same level of authority as

application and other explanatory material in the Yellow Book.

104.18 Chapter 3—General Standards..

Chapter 3 establishes the same broad general standards as those summarized in the 2007 Yellow Book. The

general standards emphasize the importance of the independence of the audit organization and its individual

auditors; the exercise of professional judgment in the performance of work and the preparation of related

reports; the competence of audit staff; and audit quality control and assurance. The most significant changes in

Chapter 3 relate to independence. A detailed discussion of the new requirements is provided in Chapter 4.

104.19 Government Auditing Standards, 2011 Revision



104.19 Chapter 4—Standards for Financial Audits..

Chapter 4 contains requirements and considerations for both performing and reporting on financial audits

conducted in accordance with Government Auditing Standards. It incorporates, by reference, the AICPA's

performance and reporting standards and the corresponding Statements on Auditing Standards. All sections of

the SASs are incorporated, including the introduction, objectives, definitions, requirements, and application and

other explanatory material.

104.20 While no new requirements were added for Yellow Book financial audits, changes were made to existing

requirements. The changes emphasize AICPA standards that may have unique considerations in the

governmental audit environment, including:

• Materiality. It may be appropriate to use a lower materiality level in Yellow Book audits than in non-Yellow

Book audits due to (a) the public accountability of government entities and entities receiving government

funding, (b) various legal and regulatory requirements, and (c) the visibility and sensitivity of government

programs.

• Early Communication of Control Deficiencies. Early communication is important for some internal control

deficiencies because of the significance and urgency for corrective action. When a deficiency is

communicated early, it still must be included in the report on internal control and compliance the auditor

issues at the end of the audit.

104.21 Yellow Book requirements for performing a financial audit that extend beyond those of the AICPA are

clearly identified, including those requirements relating to:

• Auditor communication.

• Previous audits and attestation engagements.

• Fraud, noncompliance, and abuse.

• Developing elements of a finding.

• Audit documentation.



104.22 Yellow Book reporting requirements that extend beyond that of the AICPA relate to:

• Reporting the auditors' compliance with Government Auditing Standards.

• Reporting on internal control and compliance with provisions of laws, regulations, contracts, and grant

agreements.

• Communicating deficiencies in internal control; fraud; noncompliance with provisions of laws, regulations,

contracts, grant agreements; and abuse.

• Reporting views of responsible officials.

• Reporting confidential or sensitive information.

• Distributing reports.

104.23 The following requirements have been deleted from the Yellow Book either to eliminate redundancy with

AICPA standards or because the requirement was of limited value or not always relevant or meaningful:

• Documentation requirements related to communication of inconsequential internal control deficiencies and

instances of noncompliance with provisions of contracts or grant agreements or abuse that do not warrant

the attention of those charged with governance (previously, 2007 Yellow Book, paras. 5.14 and 5.16).

• The discussion of reasonable assurance as it pertains to financial audits (previously, 2007 Yellow Book,

para. 4.01).

• The definitions of deficiencies in internal control (previously, 2007 Yellow Book, para. 5.11).

• Reporting on restatements (previously, 2007 Yellow Book, paras. 5.26-.31).



• Communication of significant matters (previously, 2007 Yellow Book, paras. 5.23-.26).

• Consideration of fraud and illegal acts (previously, 2007 Yellow Book, paras. 4.27-.28).

• Documentation of the results of work performed to the date of termination and why the audit was

terminated (previously, 2007 Yellow Book, para. 4.08).

• Development of policies to address requests by outside parties for access to audit documentation

(previously, 2007 Yellow Book, para. 4.24).

104.24 Government Auditing Standards, 2007 Revision

The 2007 Yellow Book was the fifth revision of the overall Government Auditing Standards since they were first

issued in 1972. 8 The 2007 Yellow Book revised previous standards in the following areas:

• An increased emphasis on audit quality and ethics, including reinforcement of the key role of audits in

maintaining accountability and providing transparency.

• Updated standards for recent major developments in the accountability and audit environment, including:

•• Adopted standardized language to define auditor's professional responsibilities.

•• Updated the fieldwork and reporting standards for financial audits for recent AICPA auditing

developments.

• Enhancements and clarifications were made throughout the standards.

References to Government Auditing Standards, July 2007 Revision, are identified using “2007 Yellow Book” in

this Guide.

104.25 GAO Implementation Tool for 2007 Yellow Book Requirements.



The Yellow Book establishes two specific categories of professional requirements to describe the degree of

responsibility imposed on auditors: unconditional requirements and presumptively mandatory requirements. The

GAO has provided a downloadable tool to help auditors identify and implement all of the unconditional and

presumptively mandatory requirements contained in the Yellow Book. The implementation tool, Government

Auditing Standards Implementation Tool: Professional Requirements Tool for Use in Implementing

Requirements Identified by “Must” and “Should” in the July 2007 Revision of Government Auditing Standards,

lists both general and specific requirements. The general requirements section contains entity-wide

requirements for the audit organization. The specific requirements section contains engagement-specific

requirements for conducting financial audits, attestation engagements, and performance audits. The

implementation tool is available on the GAO website at www.gao.gov/govaud/ybk01.htm. A link to the

implementation tool is also provided in PPC's Government Documents Library at Gov. Doc. No. 2 (see Appendix

1B).

Implementation of the AICPA's Clarified Auditing Standards and the GAO's Government Auditing

Standards, 2011 Revision, in this Guide

104.26 The majority of the requirements in the clarified auditing standards are consistent with the requirements

in the preclarified standards. Thus, the changes to the standards, although extensive, do not create many

substantive changes in practice. With a few exceptions, all of the clarified auditing standards are effective for

audits of financial statements for periods ending on or after December 15, 2012. Although early adoption of the

clarified standards generally is not permitted, an auditor may implement aspects of the clarified standards early

as long as he or she continues to comply with existing standards. Since the majority of the requirements in the

clarified standards are consistent with requirements in the pre-clarified standards, this Guide incorporates the

clarified standards. However, the authors have provided a text discussion of both the pre-clarified and clarified

auditing standards if there has been a change that will cause a change in practice.

104.27 The requirements in the 2011 revision of the Yellow Book (discussed beginning at paragraph 104.13)

are effective at the same time the clarified auditing standards are effective (that is, generally for audits of periods

ending on or after December 15, 2012). Accordingly, this Guide also incorporates the 2011 Yellow Book and

provides a text discussion of requirements in both the 2007 Yellow Book and 2011 Yellow Book if the new

guidance is expected to cause a change in practice.

104.28 This Guide also provides dual guidance where appropriate in the practice aids [the audit programs (HUD

-AP), checklists (HUD-CX), and illustrative letters and communications (HUD-CL)] and auditor's report examples

(Appendixes 8A—8M). In some cases the authors have indicated (by dating or by providing practical

considerations) where a requirement has changed or when it is effective. In other cases separate practice aids

or reports are provided. This means that, for example, Appendix 8A provides four example standard reports on

financial statements and supplementary information: (a) two that are applicable under the clarified auditing

standards and the 2011 Yellow Book (used in periods ending on or after December 15, 2012) followed by (b)

two report examples that are applicable under the pre-clarified auditing standards and the 2007 Yellow Book

(used in periods ending before December 15, 2012).

104.29 Auditors are urged to use caution in determining the appropriate practice aid or report example to use

given the period under audit.



Single Audit Act and OMB Circular A-133

104.30 Nonprofit HUD entities are included in the scope of the amended Single Audit Act and OMB Circular A-

133, Audits of States, Local Governments and Non-Profit Organizations. 9

104.31 The provisions of OMB Circular A-133 10 differ from those in the HUD audit guide in the following

primary areas:

• Audit threshold.

• Major program determination.

• Testing of nonmajor programs.

• Compliance requirements.

• Internal control consideration.

• Reporting findings and questioned costs.

• Submission of reports.

• Auditor's reports.

• Grant reporting.

• Reporting package and requirement to submit the Data Collection Form.

• Report due dates.



See section 814 for a discussion of these differences. They necessitate differences in certain practice aids

provided in this Guide, such as separate engagement and representation letters, and separate compliance audit

programs for nonprofit entities. The practice aids for nonprofit HUD entities are listed in the instructions to

sections HUD-CL, HUD-CX, and HUD-AP. Auditors need to use caution when selecting the proper practice aids

for nonprofit HUD entities.

PPC's Government Documents Library

104.32 In order to provide our subscribers with easy access to most government documents, such as the Yellow

Book and OMB Circular A-133, a compendium of government documents is provided in PPC's Government

Documents Library (Library). The Library is available on Checkpoint and may be accessed free of charge by

subscribers to this Guide. The authors update the website version of the Library periodically—as necessary to

keep the documents current. Appendix 1B lists the documents that are included in the Library at this date.

References in this Guide to documents included in the Library are indicated by Gov. Doc. No. XX.

AICPA Audit Guide

104.33 Guidance for financial statement audits performed under Government Auditing Standards is provided in

Part I (Chapters 1 to 4) of the AICPA Audit Guide, Government Auditing Standards and Circular A-133 Audits

(GAS/A-133 AICPA Audit Guide). 11 This guidance applies to all HUD audits. Guidance for audits conducted

under the Single Audit Act and OMB Circular A-133 is provided in Part II (Chapters 5 to 14) of the GAS/A-133

AICPA Audit Guide. This guidance directly applies to audits of HUD nonprofit entities performed in accordance

with OMB Circular A-133. Also, while the guidance in Part II of the GAS/A-133 AICPA Audit Guide is not directly

applicable to audits of for-profit HUD entities under the HUD audit guide, the authors believe much of that

guidance on aspects of compliance audits also could be considered in audits of those entities. The guidance

provided by the GAS/A-133 AICPA Audit Guide is incorporated in this Guide where applicable.

HUD Literature

104.34 HUD Audit Guide

In addition to GAAS and GAGAS, audits of for-profit HUD entities also must comply with the HUD audit guide

issued by the HUD Office of Inspector General. The Consolidated Audit Guide for Audits of HUD Programs

(HUD Handbook 2000.04 REV-2), originally issued in December 2001, is being updated and released by the

HUD OIG chapter by chapter. As of the date this Guide was completed, the HUD OIG had revised and released

seven of the audit guide chapters (chapters 1 and 3 through 8).

104.35 The HUD audit guide, among other things, requires auditors to apply sufficient audit procedures to

determine whether the HUD-assisted entity complied with HUD regulations and specific subsidy contract

provisions. Highlights of the HUD audit guide include the following:

a. Procedures for Testing the Entity's Compliance with Laws and Regulations Affecting HUD-assisted

Programs. The HUD audit guide includes suggested audit procedures for testing specific compliance

requirements applicable to HUD programs.



b. Requirement to Test Controls in All HUD Audits. The HUD audit guide states that auditors must perform

tests of controls “to evaluate the effectiveness of the design and operation of internal controls in preventing

or detecting material noncompliance with the requirements of the HUD-assisted programs” (HUD audit

guide, Paragraph 1-9).

c. Basic Financial Statements and Supplementary Information. The HUD audit guide identifies the basic

financial statements and describes the types of supplementary information that must be presented with the

basic financial statements. The HUD audit guide also illustrates a format for presenting the basic financial

statements and supplementary information. Generally, an entity's financial statements must be submitted to

HUD within 90 days after the end of the its fiscal year.

d. Auditor's Reports. The HUD audit guide discusses the auditor's reporting responsibilities and illustrates

reports on (1) the basic financial statements and supplementary information, (2) internal control, (3)

compliance with laws and regulation and (4) fair housing.

104.36 April 2011 Revision of Chapter 1 of the HUD Audit Guide

In April 2011, the HUD OIG issued a revision of Chapter 1, “General Audit Guidance,” of the HUD audit guide

(Handbook 2000.04, REV-2 CHG-10), which was effective for audits of fiscal periods ending on or after

September 30, 2011. The changes or new requirements in the revision of Chapter 1 are very broad and affect

many aspects of HUD audits. Several of the new requirements in the revision to Chapter 1 are straightforward,

and while they may impact the auditor's efficiency, they are clearly stated. The implementation of other new or

expanded requirements is less clear. The following paragraphs discuss the significant issues the authors have

identified in the chapter. (The HUD OIG has not issued guidance to clarify these issues since the revision of

Chapter 1 was released in 2011. See the discussion in paragraph 104.49.)

104.37 Program-specific Audits Under OMB Circular A-133.

Paragraph 1-2 of the HUD audit guide, Use of Guide as a Program-Specific Guide, contains new guidance that

would allow auditors to use the HUD audit guide as a program-specific audit guide for audits of nonprofit HUD-

assisted entities that are covered by OMB Circular A-133. Under the guidance, the auditor would still follow

OMB Circular A-133 reporting and major program determination requirements. Paragraphs 1-1 and 1-2 of the

HUD audit guide provide related audit planning and report submission guidance.

104.38 There are some differences of opinion among auditors about how to interpret the new guidance in

Paragraph 1-2 of the HUD audit guide about using it as a program-specific audit guide for audits of nonprofit

HUD-assisted entities. Previous guidance from HUD and OMB clearly indicated nonprofit entities that received

HUD assistance were covered by OMB Circular A-133 and required to obtain a Single Audit. Some auditors



believe the new guidance in Chapter 1 of the HUD audit guide is intended to offer auditors the option of using

that guide for program-specific audits of nonprofit entities even though a financial statement audit is required

and the program is included in the OMB Circular A-133 Compliance Supplement (Compliance Supplement).

Other auditors have concluded the intent is to direct auditors to use the HUD audit guide in compliance audits

for HUD programs that are not specifically included in the Compliance Supplement.

104.39 As discussed in more detail beginning at paragraph 814.1, the new guidance and its apparent conflict

with OMB requirements has created confusion for auditors. The authors believe that until further clarification is

provided, the auditor cannot opt out of using the Compliance Supplement for the compliance audit of a program

that has a financial statement audit requirement and that is included in the Compliance Supplement.

Accordingly, this Guide continues to discuss compliance audits of nonprofit HUD entities from the perspective of

performing those audits in accordance with OMB Circular A-133 and the Compliance Supplement. The authors

believe the HUD audit guide is not applicable for audits of HUD programs that are included in the Compliance

Supplement.

104.40 Sampling Methodology.

Paragraph 1-5 of the HUD audit guide, Sample Selection, requires the attribute sampling methodology and

sample sizes specified in Appendix A to the HUD audit guide to be used for all audits that are conducted in

accordance with that guide. Paragraph 1-7(B), Planning the Audit—Testing, states the minimum sample sizes

specified in the HUD audit guide are to be used “for each of the three areas (financial, compliance, and controls)

to be tested” in a HUD audit. Paragraph 1-7(B) also prohibits the use of dual-purpose testing.

104.41 Some auditors are unsure about implementing the guidance from the HUD audit guide discussed in

paragraph 104.40. They wonder whether it was HUD's intent to override professional standards (SASs) which

allow sampling methods and sample sizes other than those specified in Appendix A of the HUD audit guide.

These auditors believe that AU-C 935, Compliance Audits, directs the auditor to follow the specific compliance

audit guidance provided by the HUD OIG for the compliance portion of HUD audit of a for-profit multifamily

entity, but they question whether HUD can stipulate sampling methods and sample sizes for the financial portion

of a HUD audit.

104.42 The authors believe that until further clarification is provided, the auditor would the attribute sampling

methodology and sample sizes described in Appendix A for the compliance portion of the audit of a for-profit

HUD-assisted entity, but they consider it optional to adopt that guidance for the financial portion of the HUD

audit. Since Chapter 3 of the HUD audit guide already requires using Appendix A for sampling in compliance

tests, this approach would require two changes in current practice; that is, (a) to use the sampling guidance in

Appendix A of the HUD audit guide when sampling is used in tests of internal control over compliance, and (b)

forgo using dual-purpose testing in the compliance portion of the HUD audit. The discussion in Chapter 7 and

the sampling practice aids in this Guide incorporate this approach. See the discussion about implementing this

guidance in paragraph 104.44.

104.43 The discussion in chapter 4 in this Guide about sampling in the financial statement audit and the

sampling practice aids related to the financial statement audit have not been revised to reflect the requirements

of Appendix A of the HUD audit guide. However, the authors believe auditors may use Appendix A for sampling

applications in the financial portion of the audit if they wish. Also, because the HUD audit guide indicates the



HUD OIG's preference against dual purpose tests, the authors suggest auditors use caution when designing

dual purpose tests in the financial statement audit.

104.44 Some auditors are concerned that the elimination of dual purpose testing will have a significant impact

on the auditor's efficiency in a HUD audit. In the author's experience, many HUD-assisted multifamily entities

have few controls over compliance that would be tested using sampling. For example, the controls that assure

compliance with tenant eligibility requirements are often as limited as: (a) the site manager or a

compliance/leasing specialist attends annual HUD training on the requirements in HUD Handbook 4350.3,

Occupancy Requirements of Subsidized Multifamily Housing Programs, (b) a regional manager or a compliance

supervisor performs detailed reviews of the tenant files during the year, and/or (c) an internal auditor performs

site visits and examines numerous files. Evidence of the personnel qualifications, training, and file reviews as

internal controls over compliance would not necessarily need to be tested using sampling; for example, reading

the results of the review and site management's response is a test of the control. The elimination of dual

purpose testing may require the auditor to evaluate his or her understanding of the controls and how the

controls have historically been tested. This may result in redefining the nature of a given control, the applicable

population, and the appropriate audit procedures.

104.45 Reporting Noncompliance.

Paragraph 1-4 of the HUD audit guide, Audit Scope and Approach, includes what appears to represent a

change in the auditor's reporting requirement in the following guidance: “HUD requires the reporting of all

compliance violations and an identification of total questioned cost for each finding as a result of noncompliance.

HUD requires that all instances of noncompliance with any HUD requirement or regulation . . . be reported as

findings in the audit report.” [Emphasis added.] However, the same paragraph directs the auditor to Chapter 2

and the applicable compliance chapter (3 through 8) of the HUD audit guide for specific information about

reporting noncompliance. Paragraph 2-1 of the HUD audit guide directs the auditor to report only material

instances of noncompliance as findings. Paragraph 3-8 of Chapter 3 of the HUD audit guide specifies that, with

respect to for-profit multifamily entities, certain types of compliance violations (equity skimming) must always be

reported as audit findings, but in general, only material noncompliance is required to be reported as an audit

finding. Further, nonmaterial instances of noncompliance must be reported to management separately in writing.

104.46 A related reporting question arises with respect to reporting fraud. New Paragraph 1-6 of the HUD audit

guide, Matters Requiring Immediate Action, requires additional special reporting if the auditor becomes aware

that illegal acts or fraud have occurred, or are likely to have occurred. As discussed more fully in section 808,

the auditor is expected to provide the HUD OIG with an oral briefing about his or her findings. This special

reporting requirement is not limited only to illegal acts or fraud that have a material effect on the financial

statements or on compliance. Thus, it is unclear whether this communication requirement lowers the threshold

for reporting fraud or illegal acts as audit findings.

104.47 The authors believe the intent of the HUD audit guide is to require the auditor to only report material

noncompliance. Until further clarification is provided, the auditor would use the reporting guidance in Paragraph

3-8 of the HUD audit guide, as discussed in section 805 of this Guide, when reporting noncompliance in audits

of for-profit HUD-assisted multifamily entities. However, the auditor has the option of reporting all illegal acts or

fraud that have or occurred or are likely to have occurred as audit findings rather than choosing some to be

communicated in a management letter. The authors believe that in practice it is likely the auditor will be given



direction about reporting potential or actual fraud or illegal acts if it is necessary to discuss such matters with the

HUD OIG single audit coordinator. See paragraph 104.45.

104.48 Other Significant Changes in Chapter 1 of the HUD Audit Guide.

Other significant changes in Chapter 1 of the HUD audit guide, which do not appear to represent significant

implementation issues, are summarized by paragraph as follows:

• Paragraph 1-1, Purpose, directs the auditor to submit directly to the HUD office that provides funding

and/or services (electronically, if possible) any management letter issued in the audit.

• Paragraph 1-4, Audit Scope and Approach, increases the values to be used in making major program

determinations for the HUD programs audited in accordance with the various chapters of the HUD audit

guide. For example, Paragraph 1-4 specifies that HUD program assistance or loan balances equal to

$500,000 or more are to be considered major programs in compliance audits under Chapter 3 of the HUD

audit guide. The prior major program threshold was $300,000.

• Paragraph 1-7(A), Planning the Audit—Engagement Letter, specifies mandatory information that is to be

included in the engagement letter with the aim of ensuring the auditor and the client are in agreement about

the methodology to be used in conducting the audit, reporting requirements, reporting of fraud, key target

dates, and agency access to audit documentation.

• Paragraph 1-7(B), Testing, provides additional guidance for using group project-based testing for certain

compliance areas in Chapter 3 of the HUD audit guide.

• Paragraph 1-7(E), Planning the Audit—Audit Documentation, contains new requirements for the auditor to

retain audit documentation for a minimum of six years and to include a hardcopy bound audit report with the

original auditor's signature.

• Paragraph 1-7(F), Planning the Audit—Communication With Prior Auditor, states that the current auditor

should contact the prior auditor to gain an understanding of any unreported information that may have an

effect on the current audit.

• Paragraph 1-8, Withdrawal From or Termination of an Engagement, requires the auditor to advise the

HUD OIG single audit coordinator and HUD servicing program office in writing if the auditor withdraws or is

terminated from the audit engagement.



• Paragraph 1-10, Quality Control Review of Audits, expands the discussion about the action(s) that can be

taken if a HUD OIG or PIH-REAC reviewer finds the audit report and audit documentation to be

substandard or to contain major inadequacies.

• Paragraph 1-11, Corrective Action Plan, states that audit reporting packages that are submitted to HUD

without a corrective action plan, when one is required, are considered incomplete. If the incomplete

submission is not corrected by the submission deadline the entire submission of the reporting package will

be considered delinquent.

• Appendix A, Attribute Sampling, was released concurrently with the revised Chapter 1 as part of

Handbook 2000.04, REV-2 CHG-10. This new appendix contains the information about the attribute

sampling methodology and required sample sizes that was originally released as an appendix to the July

2007 revision of Chapter 3 of the HUD audit guide. There were no substantive changes to the guidance in

the appendix in the re-release.

The requirements in Chapter 1 of the HUD audit guide are discussed in more detail where applicable throughout

this Guide.

104.49 Sources of Ongoing Implementation Guidance.

The discussion beginning at paragraph 104.36 summarizes the revision of Chapter 1 of the HUD audit guide

and the major implementation issues identified by the authors. These questions have been communicated

informally to the HUD OIG and to the AICPA's Governmental Audit Quality Center (GAQC). However, the HUD

OIG has not issued written guidance to clarify these issues since the revision of Chapter 1 was released in

2011. The authors are aware that the GAQC is involved with efforts to obtain clarifying guidance from the HUD

OIG. The authors recommend auditors stay abreast of developments in this area by monitoring the GAQC's

website at

www.aicpa.org/InterestAreas/GovernmentalAuditQuality/Resources/HUDInformation/Pages/default.aspx,

and the HUD OIG's website at www.hudoig.gov/. The authors will also continue to review any new guidance

that becomes available and will post any critical new information on the Thomson Reuters customer support

website at support.rg.thomsonreuters.com.

104.50 Revisions Still in Progress.

The HUD OIG has not indicated a time frame to complete the revision of the HUD audit guide. When all of the

updated chapters have been released, the Consolidated Audit Guide for Audits of HUD Programs will be

repackaged and released by the HUD OIG in its entirety as HUD Handbook 2000.4, REV-3. Auditors can

monitor the release of new chapters and other developments in this area by monitoring the AICPA's



Governmental Audit Quality Center website at

www.aicpa.org/InterestAreas/GovernmentalAuditQuality/Resources/HUDInformation/Pages/default.aspx.

The HUD audit guide and updated chapters are available on the HUD OIG's website at

www.hudoig.gov/reports.

104.51 As discussed in paragraph 104.34, the HUD OIG is currently updating and releasing the HUD audit

guide chapter by chapter. The chapters that have been released are effective as follows:

• Chapter 1—General Audit Guidance. This chapter was issued in April 2011 and is effective for audits of

entities for periods ending on or after September 30, 2011. Chapter 1 provides an overview of the purpose

of the HUD audit guide and various audit performance, communication, and reporting requirements.

Because of its general nature, the guidance in Chapter 1 affects many aspects of HUD audits; it is

discussed primarily in Chapters 4, 6, 7, and 8 of this Guide.

• Chapter 3—HUD Multifamily Housing Programs. This chapter was issued in July 2008 and was effective

for audits of entities for periods ending on or after December 31, 2008. Chapter 3 provides the compliance

requirements and suggested audit procedures for testing the entity's compliance with requirements

governing multifamily HUD programs. It also requires auditors to test controls to evaluate the effectiveness

of the design and operation of internal control in preventing or detecting material noncompliance with the

requirements of HUD programs. Chapter 7 of this Guide discusses Chapter 3 of the HUD audit guide.

• Chapter 4—HUD Multifamily Hospital Programs. This chapter was issued in July 2008 and was effective

upon issuance. Chapter 4 provides interim audit guidance for the HUD multifamily hospital program while

HUD revises the chapter in its entirety. This Guide does not provide guidance for audits of the HUD

multifamily hospital program.

• Chapter 5—Development Cost Certification Audit Guidance. This chapter was issued in March 2007 and

was effective for audits of entities for periods ending on or after June 30, 2007. See paragraph 107.7 for a

discussion about the limited guidance about cost certification audits provided in this Guide.

• Chapter 6—Ginnie Mae Issuers of Mortgage-Backed Securities Audit Guidance. This chapter provides

guidance to auditors of lenders who participate in GNMA's mortgage-backed securities program. A revision

of this chapter was issued in May 2012 and was effective upon issuance after June 30, 2007. As noted in

paragraph 107.3, this Guide does not provide guidance for audits of lenders in this program.



• Chapter 7—HUD-Approved Title II Nonsupervised Mortgagees and Loan Correspondents Audit Guidance.

This chapter was issued in April 2007 and was effective for audits of entities for periods ending on or after

June 30, 2007. 12 Chapter 9 of this Guide discusses Chapter 7 of the HUD audit guide.

• Chapter 8—HUD-Approved Title I Nonsupervised Lenders and Loan Correspondents Audit Guidance.

This chapter was issued in September 2006 and was effective for audits of entities for periods ending on or

after December 31, 2006. Chapter 9 of this Guide discusses Chapter 8 of the HUD audit guide.

104.52 Requirements for Audit Reports in the HUD Audit Guide..

Chapter 2 of the HUD audit guide, “Reporting Requirements and Sample Reports,” includes illustrative auditor

report examples. As of the date this Guide was completed, the HUD OIG had not issued a complete revision of

Chapter 2 of the HUD audit guide. In March 2011, the HUD OIG released Handbook 2000.04, REV-2 CHG-10,

for Chapter 2 of the HUD Audit Guide. This revision provided five examples of the auditor's reports issued in a

HUD audit that reflect the requirements of SAS No. 117 (AU 801), Compliance Audits. However, these report

examples will no longer be applicable after the effective date of the clarified auditing standards and the 2011

Yellow Book. See paragraph 104.53.

104.53 Considerations for Auditor's Reports that Implement the Clarified Auditing Standards and the 2011

Yellow Book.

As described in paragraph 104.38, the latest reporting guidance provided by HUD was released in March 2011

before the issuance of the clarified auditing standards and the 2011 Yellow Book. As of the date this Guide was

completed, the AICPA has not released interim guidance nor has the HUD audit guide been updated with

illustrative reports for use in Yellow Book and compliance audits for periods ending on or after December 15,

2012. Report examples will be posted on the Thomson Reuters customer support website at

http://support.rg.thomsonreutuers.com after updated reports become available. The reporting requirements

in a HUD audit engagement are discussed in Chapter 8 of this Guide.

104.54 HUD Handbook—Financial Operations and Accounting Procedures for Insured Multifamily

Projects

HUD Handbook, Financial Operations and Accounting Procedures for Insured Multifamily Projects (HUD

Handbook 4370.2 REV-1 CHG-1), provides accounting guidance for most HUD-insured multifamily projects,

including a required chart of accounts, the accounting treatment of specific transactions, such as surplus cash,

residual receipts, and distributions to owners, and requirements for presentation of financial statements and

supplementary information. The handbook has not been updated to reflect the changes in the financial reporting

standards documented on the REAC website (see Appendix 1A and section 311). HUD is expected to update

this handbook to reflect these changes. Auditors need to be alert for the issuance of the revised handbook. In

the meantime, the authors believe that the information posted on the REAC website would be followed, even if it

conflicts with the HUD handbook. (See Chapter 3 of this Guide for guidance on preparing HUD financial

statements.)



104.55 Important notices about technology changes, submission procedures, accounting requirements, and

other developments relating to multifamily housing projects are posted to REAC's webpage devoted to

multifamily housing news at http://portal.hud.gov/hudportal/HUD?

src=/program_offices/public_indian_housing/reac/products/prodmf#fass-audit. Accountants and

auditors can monitor this webpage for current information about electronic submission requirements and links to

useful resources. In addition, the authors believe the following documents are especially helpful for project

owners and auditors of multifamily programs. Links to the documents can be found at

http://portal.hud.gov/hudportal/HUD?

src=/program_offices/public_indian_housing/reac/library/lib_famf.

• Industry User Guide for the Financial Assessment Subsystem-Multifamily Housing (FASSUB 7.1.7.0).

• Summary of Financial Reporting and Auditing Guidance for HUD Multifamily Program Participants and

Independent Auditors (February 2003).

• Guidelines on Reporting and Attestation Requirements of Uniform Financial Reporting Standards (UFRS)

(March 2001).

While not setting new requirements or replacing existing requirements contained in the HUD handbooks, they

do summarize many of the accounting, annual financial reporting, and auditing requirements of multifamily

programs.

104.56 Other HUD Handbooks

HUD has issued a number of handbooks in addition to the HUD audit guide and the handbooks listed in

paragraph 104.55. Exhibit 1-1 is a list of HUD handbooks applicable to HUD-assisted project owners.

Exhibit 1-1

HUD Handbooks

Applicable to HUD-assisted Project Owners

(as of July 2012) a

Handbook No.

Issue Date

or Date of

Latest

Change

Title

Accounting and

Auditing Handbooks:

IG 2000.04 REV-2 b 5/12 Consolidated Audit Guide for Audits of HUD Programs



Handbook No.

Issue Date

or Date of

Latest

Change

Title

4370.1 REV-2 8/95 Reviewing Annual and Monthly Financial Reports

4370.2 REV-1 1/23/96 Financial Operations and Accounting Procedures for Insured

Multifamily Projects

4370.3 6/30/92 Uniform System of Accounts for Cooperative Housing Corporations

Using Manual and Computer Accounting Systems

4370.4 REV-1 6/24/92 Basic Accounting Desk Reference for HUD Loan Servicers

Other Handbooks:

4350.1 REV-1 c 12/1/10 Multifamily Asset Management and Project Servicing

4350.2 REV-1 8/20/93 Section 8 Loan Management Set Aside Program for Projects with

HUD-Insured and HUD-Held Mortgages

4350.3 REV-1 6/23/09 Occupancy Requirements of Subsidized Multifamily Housing

Programs

4350.5 6/14/94 Subsidy Contract Administration and Field Monitoring

4350.6 8/7/95 Processing Plans of Action Under the Low Income Housing

Preservation and Resident Homeownership Act of 1990

4355.1 REV-1 5/29/92 Flexible Subsidy

4381.5 REV-2 6/8/06 Management Agent Handbook

4566.2 8/95 Management, Servicing and Disposition Requirements for Projects

with 223(f) Coinsured Loans

4571.1 REV-2 3/83 Section 202 Direct Loan Programs for Housing for the Elderly or

Handicapped

4571.2 6/3/91 Section 811 Supportive Housing for Persons with Disabilities

4571.3 REV-1 4/9/93 Supportive Housing for the Elderly Section 202 Program

4571.4 6/7/94 Supportive Housing for Persons with Disabilities, Conditional

Commitment—Final Closing

8025.1 REV-2 4/93 Implementing Affirmative Fair Housing Marketing Requirements

Notes:

a HUD handbooks are all available online and can be viewed or downloaded from HUD's website. The web

page at http://portal.hud.gov/ provides links to HUD handbooks, forms, and publications.



b See the discussion beginning at paragraph 104.50 about the current status of the HUD OIG's program to

update the HUD audit guide. A link to the HUD audit guide is available at www.hudoig.gov/reports/.

c HUD has issued revisions to Chapters 6, 9, 14, and 38 of Handbook 4350.1.

____________________

104.57 HUD Internet Sites

Most of the information discussed in section 104, as well as other HUD information and forms, can be obtained

from various sites on the Internet. Appendix 1A contains a listing of sites containing HUD information that the

authors have found useful. A short description of the information available from each site follows the website

address.

5 PPC's Guide to the Clarified Auditing Standards provides extensive guidance about SAS Nos. 122-125. This

new Guide may be ordered by calling (800) 431-9025 or by visiting ppc.thomsonreuters.com.

6 A compendium of government documents is provided in PPC's Government Documents Library. See

paragraph 104.32 and Appendix 1B.

7 There are important new requirements in the 2011 Yellow Book regarding the auditor's independence, and

these requirements should be applied for an engagement from the start of the entity's fiscal year. See the

discussion in section 401.

8 Although the 2011 Yellow Book will be applicable for most HUD audits performed after this Guide is

completed, this discussion about the 2007 Yellow Book highlights important requirements that apply before the

2011 Yellow Book is effective.

9 However, in the revision of Chapter 1 of the HUD audit guide released in April 2011, the HUD OIG has

provided additional guidance. Auditors need to review the discussion about implementation issues related to the

revision of Chapter 1 of the HUD audit guide beginning at paragraph 104.36.

10 In February 2012, OMB released proposed revisions to several Circulars. Proposed revisions to OMB

Circular A-133 would significantly change Single Audit requirements. Other proposed changes would strengthen

the guidance for audit follow-up and reduce burdens on pass-through entities and subrecipients. See the

discussion in section 814.

11 Although this Guide incorporates the clarified auditing standards and 2011 Yellow Book, those standards

were not incorporated in the February 2012 edition of the GAS/A-133 AICPA Audit Guide, which was the most

current edition when this Guide was completed. However, the February 2012 edition does provide a new

appendix that summarizes the 2011 Yellow Book: Appendix A, “Government Auditing Standards, December

2011 Revision,” and a new appendix that identifies the clarified auditing standards changes that might affect an



auditor's practice or methodology: Appendix B, “Guidance Updates, Clarified Auditing Standards.” Auditors need

to remain alert for additional guidance from the AICPA on applying the clarified auditing standards in a

compliance audit.

12 In September 2009, HUD issued Mortgagee Letter 2009-31 (ML 2009-31), Strengthening Counterparty Risk

Management, and significantly expanded the audit requirements of FHA-approved supervised lenders. ML 2009

-31 eliminated the previous exemption for supervised lenders and made Chapter 7 of the HUD audit guide

applicable for these entities. Also, in January 2011 the HUD OIG issued Handbook 2000.04, REV-2 CHG-9 as

an interim update of the HUD audit guide to implement a new compliance requirement in Chapter 7 of the HUD

audit guide for testing and reporting on loan fees.


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HUD Audits

Chapter 1 Overview

105 Accountants' Involvement with HUD Clients

105 Accountants' Involvement with HUD Clients

How Are Auditors Selected?

105.1 HUD Handbook 4370.2 REV-1, Paragraph 3-1, states that project owners should use competitive bidding

when selecting an auditor. The bidding process can vary based on the size and needs of the project and may

range from simple telephone bidding (of at least three auditors) to a request for proposal (RFP).

105.2 Auditors interested in participating in the selection process may contact their area HUD field offices, which

maintain a database of all existing and development stage HUD projects. Many HUD field offices also list the

projects under their supervision on the Internet. Also, as stated in paragraph 102.4, the Division of Elderly and

Assisted Housing will, upon request, provide information on prospective projects for the elderly and disabled,

which auditors can use for practice development purposes.

Other Opportunities for Client Service

105.3 As construction of a project nears completion, developers must submit to HUD “cut-off” financial

statements and a “Mortgagor's Certificate of Actual Costs” (Form HUD-92330). Audits of the financial

statements and Form HUD-92330 are called cost certification audits. Chapter 5 of the HUD audit guide provides

guidance on performing cost certification audits. PPC's Guide to HUD Audits does not provide detailed guidance

on performing cost certification audits. However, section 813 of this Guide discusses factors to consider when

reporting the results of a cost certification audit and includes an illustrative auditor's report. Also, the authors

have provided the practice aid at HUD-CX-11.4, “Cost Certification Audit Checklist,” to assist auditors with cost

certification engagements.

105.4 Other opportunities for client service that should not be overlooked include assisting the client to complete

and electronically submit the project owner's financial report to HUD's REAC, performing the required agreed-

upon procedure engagement relating to the electronic submission (see section 812), preparing the tax return for

the entity that owns the HUD project, and providing consulting services. 13

Considerations for the American Recovery and Reinvestment Act of 2009



105.5 The American Recovery and Reinvestment Act of 2009 (Recovery Act), which was enacted in February

2009, provides almost $800 billion in stimulus funds, of which approximately $13.6 billion is allocated for

projects and programs administered by HUD. These federal funds are intended to supplement existing federal

programs (e.g., existing Section 8 rental assistance), create new programs, or provide more broad fiscal relief.

In some cases, the Recovery Act funds are being passed directly to states and spent at that level. In other

cases, direct recipients of Recovery Act funds pass the funds through to subrecipients such as local

governments or nonprofit organizations. Recovery Act awards are being released in a variety of types of federal

financial assistance, including grants, loans, loan guarantees, interest rate subsidies, and other types of

assistance.

105.6 Although many of its programs have been completed or are winding down, there continues to be a focus

on transparency and accountability for Recovery Act funds. In addition, recipients could be in a hurry to expend

Recovery Act funds in order to meet award deadlines. This amplifies the risk associated with the funds.

105.7 Most of the Recovery Act funds administered by HUD are being passed through to state and local

governments and public and Indian housing authorities. As discussed at paragraph 107.8, this Guide does not

cover audits of these entities, which generally are considered governmental organizations. However, HUD-

assisted multifamily entities may benefit from certain Recovery Act programs. Both profit-motivated and

nonprofit owners are eligible for the following Recovery Act programs:

• The Green Retrofit Program for Multifamily Housing represents a $250 million appropriation for grants and

loans to certain owners of HUD-assisted projects for energy and green retrofit investments in their

properties. This program is being administered by HUD's Office of Affordable Housing Preservation

(OAHP).

• The Project-Based Rental Assistance Program represents a $2 billion appropriation for Section 8 housing

assistance programs. This funding will be used to renew 6,300 Section 8 contracts on a full 12 month cycle

to avoid the payment disruptions experienced in recent years.

These programs are discussed in more detail in sections 204 and 205.

105.8 The Recovery Act also appropriated $2.25 billion to fund the Tax Credit Assistance Program (TCAP).

TCAP is a grant program to provide funds for capital investments in the stalled Low-Income Housing Tax Credit

(LIHTC) program. The LIHTC program is administered by state housing credit agencies. The TCAP funds will be

allocated to these agencies to complete construction of qualified housing projects. The LIHTC program and

further considerations about the TCAP program are discussed in Chapter 10.

105.9 Transparency and Accountability Requirements.

The Recovery Act comes with unprecedented transparency and accountability requirements. The OMB is

responsible for providing guidance for Recovery Act programs and has issued guidance directed at federal

agencies, recipients, and auditors. Guidance issued for federal agencies and recipients has generally been

released through memorandums and Recovery Act frequently asked questions (FAQs) that can be accessed on



the OMB website at www.whitehouse.gov/omb/ recovery_default. This guidance is also informative for

auditors. The OMB Circular A-133 Compliance Supplement is the primary means through which the OMB has

provided Recovery Act guidance to auditors. The 2012 Compliance Supplement includes Recovery Act

guidance in the main sections of the supplement (parts 1-7) and in Appendix VII, “Other OMB Circular A-133

Advisories.”

105.10 Two Recovery Act provisions require quarterly reporting:

• Jobs and Activities. Section 1512 of the Recovery Act requires recipients and sub-recipients of grants

greater than $25,000 to report on the nature of projects and numbers of jobs created and retained. This

information must be reported to FederalReporting.gov, a system created and managed by the Office of

Management and Budget (OMB) and the Recovery Accountability and Transparency Board (RATB).

• Environmental Review. Section 1609 of the Recovery Act requires agencies to report on the status of

compliance with the National Environmental Policy Act (NEPA) for all Recovery Act-funded projects and

activities. HUD has instituted reporting policies and procedures to enable the agency to comply with the

requirement.

Auditors should note, however, that recipients of Recovery Act funds as Housing Assistance Payments (HAP)

through the Section 8 Project-Based Rental Assistance program are exempt from both the Section 1512

reporting and Section 1609 environmental review requirements. Information about how recipients of HUD

Recovery Act funds can comply with the reporting requirements is available at

http://portal.hud.gov/portal/page/portal/HUD/recovery/reporting.

105.11 HUD notes that Recovery Act funds can be used in conjunction with other funding as necessary to

complete projects, but separate tracking and reporting of these funds must be made to meet the Recovery Act

reporting requirements. The special reporting requirements imposed by the act make it important for award

recipients to separately track Recovery Act funds from the time they are received. In addition to the OMB and

agency reporting requirements described in paragraphs 105.12 and 105.9, HUD has established additional

program-specific reporting requirements designed to enable the agency to meet its obligations to publish both

spending and recipient performance reports. These reporting requirements are described in the respective

program plan documents at www.hud.gov/recovery/.

105.12 Recovery Act Implications for Auditors of Recovery Act Award Recipients.

Auditors of HUD-assisted projects that have received Recovery Act funds will have to consider the nature and

specific requirements of those awards when planning their audits. Considerations for auditing these Recovery

Act programs are discussed beginning at paragraph 701.22. Auditors of nonprofit HUD-assisted entities also

should consider the OMB guidance on Recovery Act requirements as it relates to Single Audits. Those

considerations are discussed in section 814. The authors recommend that auditors frequently monitor HUD's

Recovery Act website for periodic updates.



105.13 The Recovery Act's significant increase in federal program expenditures and the accompanying

increased transparency and accountability requirements may increase the amount of work done on HUD audits.

Because of the increased accountability and transparency associated with Recovery Act awards, it is more

important than ever for auditors to carefully plan and perform their single audits. The authors recommend that

auditors do the following as they plan their audits:

105.14 Other Auditor Considerations.

Specific guidance on single audits involving Recovery Act awards is incorporated where applicable throughout

this Guide. Because of the increased accountability and transparency associated with Recovery Act awards, it is

more important than ever for auditors to carefully plan and perform their single audits. The authors recommend

that auditors do the following as they plan their audits:

• Obtain a copy of and read each of the auditee's federal award documents.

• Specifically inquire about whether Recovery Act awards were received.

• If the entity will have a Single Audit, review the guidance in the 2012 OMB Circular A-133 Compliance

Supplement regarding Recovery Act awards, particularly the requirements in Part 3 and Appendix VII.

• Realize that size does not necessarily dictate risk. Some of the smaller Recovery Act programs may be

extremely risky. Appendix VII of the 2012 Compliance Supplement states that even a de minimis amount of

Recovery Act expenditures would not support considering a Type A program to be low-risk. In addition,

even small expenditures of Recovery Act funds in the current year may indicate a large amount of

expenditures in the following year.

• Check the HUD, OMB and other websites for issuance of new guidance. (See paragraph 105.15.)

105.15 Where to Find More Information.

Several resources are available on the Internet for information on Recovery Act funds. These include:

• www.hud.gov/recovery/. This website is HUD's portal for providing information about HUD's

implementation of the Recovery Act. It provides detailed information about each of the HUD Recovery Act

programs. It is also used for reporting funding allocations of Recovery Act programs and significant program

milestones.



• www.recovery.gov. This website is the public's primary source for information about the American

Recovery and Reinvestment Act. It explains the Recovery Act; shows how, when, and where the money is

spent; and provides data to allow individuals to evaluate progress and provide feedback. It also provides

links to related information such as the Recovery Act, itself, the Code of Federal Regulations, agency web

pages, and state web pages.

• State websites. Many states also have established web pages to provide information about their receipt

and use of Recovery Act funds.

• www.whitehouse.gov/omb/memoranda_default. This website provides detailed information to federal

agencies about how to conduct programs and activities relating to the Recovery Act.

• www.whitehouse.gov/omb/recovery_default. This website provides OMB memoranda and responses

to Frequently Asked Questions that are specific to Recovery Act awards.

• www.whitehouse.gov/omb/circulars_default. The authors recommend that auditors involved with

Single Audits monitor the OMB website for the current OMB Circular A-133 Compliance Supplement, and

periodic updates.

• http://gaqc.aicpa.org. This is the AICPA's Governmental Audit Quality Center website.

13 Auditors should be aware that the performance of consulting or nonaudit services may impair their

independence under Government Auditing Standards. See the discussion about independence requirements in

section 401.


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HUD Audits

Chapter 1 Overview

106 The PPC Audit Process

106 The PPC Audit Process

106.1 Generally accepted auditing standards require auditors to use information gathered about the entity and

its environment (including internal control) to identify and assess the risks of material misstatement at both the

overall financial statement and relevant assertion levels, and to determine the nature, timing, and extent of

further audit procedures needed to respond to those risks. Further audit procedures are required to be

performed to obtain audit evidence to support the auditor's opinion.

106.2 The authors have developed a practical approach to that audit process to address the requirements of

authoritative literature and have designed practice aids to assist auditors in meeting those requirements. PPC's

audit approach is designed to be flexible and adaptable, allowing auditors to better leverage their knowledge of

the client to tailor their audit procedures. PPC has tailored this approach for use in all of our industry audit

guides so that auditors can use a common audit approach in all of their audits. The audit approach has been

divided into the following broad steps:

1 Perform procedures regarding acceptance/continuance of the client relationship, evaluate compliance

with ethical requirements (including independence), and establish an understanding with the client in an

engagement letter.

2 Develop a preliminary audit strategy, establish planning materiality and perform risk assessment

procedures to gather information about the entity and its environment that may be relevant in identifying

risks of material misstatement/noncompliance.

3 Gather the information to understand and evaluate the design and implementation of the entity's internal

control system.



4 Synthesize the information gathered, identify risks (both overall and specific risks) that could result in

material misstatement/noncompliance and finalize the overall audit strategy.

5 Assess the risks of material misstatement of the entity's financial statements.

6 Develop and perform appropriate responses (further audit procedures) to the assessed risks of material

misstatement/noncompliance considering the overall audit strategy and planning materiality.

7 Evaluate audit findings and evidence.

8 Prepare required reports and communications.

106.3 Although the requirements and guidance may suggest a sequential process, the audit is a continuous

process of gathering, updating, and analyzing information about the fairness of presentation of amounts and

disclosures in the client's financial statements. Therefore, the audit process is an iterative, nonlinear process,

whereby the required procedures may be performed concurrently with other procedures. In addition, risks

should be evaluated continuously throughout the audit.

Practice Aids

106.4 PPC's Guide to HUD Audits contains practice aids that guide the auditor through the entire audit process.

The practice aids included in this Guide are discussed in the related text guidance.


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HUD Audits

Chapter 1 Overview

107 Organization and Scope of PPC's Guide to HUD Audits

107 Organization and Scope of PPC's Guide to HUD Audits

107.1 Accountants who are familiar with PPC's Guide to Audits of Nonpublic Companies will see similarities

between it and this Guide. This Guide tailors the guidance in PPC's Guide to Audits of Nonpublic Companies to

HUD engagements. It also adopts guidance from PPC's Guide to Single Audits, PPC's Guide to Audits of

Nonprofit Organizations, and PPC's Guide to Real Estate and tailors it to HUD engagements. Nevertheless,

PPC's Guide to HUD Audits is designed to be freestanding and used independently.

Multifamily Housing Projects

107.2 Chapters 1 through 8 focus on HUD-assisted multifamily housing projects owned by for-profit entities and

nonprofit entities. Those chapters (a) provide practical guidance on applying the requirements of generally

accepted auditing standards (GAAS) and the Consolidated Audit Guide for Audits of HUD Programs or OMB

Circular A-133, as applicable, and (b) highlight the provisions of other auditing and accounting guidance

applicable to audits of HUD projects, such as Government Auditing Standards and HUD handbooks. The

chapters discuss HUD regulatory provisions, contracts, and forms; HUD accounting considerations and financial

statement presentation; pre-engagement activities and audit planning; performing substantive procedures;

concluding the audit; auditing compliance with laws and regulations; and auditor's reports and other

communications. There are numerous practice aids throughout this Guide specifically tailored to audits of HUD-

assisted project owners, such as confirmation letters and compliance checklists.

Nonsupervised and Supervised Mortgagees

107.3 Chapter 9 focuses on compliance audits of Title II and Title I nonsupervised and supervised mortgagees

that participate in HUD housing programs. Its objective is to assist auditors in complying with the compliance

provisions contained in Chapters 7 and 8 of the HUD audit guide. This chapter includes a discussion of

handbooks and mortgagee letters issued by HUD that are relevant to compliance audits of nonsupervised

mortgagees and lenders.

107.4 Beginning in 2009, HUD has issued extensive guidance that affects the audit requirements for FHA-

approved supervised and nonsupervised lenders and mortgagees.



107.5 While this Guide does not provide extensive practice aids tailored for compliance audits of nonsupervised

and supervised HUD-approved lenders and mortgagees, Chapter 9 discusses how the illustrative

correspondence and letters, forms, and checklists, as well as the audit report examples in Chapter 8 of this

Guide, may be adapted for audits of these entities in accordance with the HUD audit guide. HUD-AP-15, “Audit

Program for HUD-Approved Title II Nonsupervised and Supervised Mortgagees,” presents a compliance audit

program based on the compliance requirements and suggested audit procedures in Chapter 7 of the HUD audit

guide, as revised.

Low Income Housing Tax Credit Projects

107.6 Chapter 10 provides an overview of the Low Income Housing Tax Credit (LIHTC) regulations, explains the

services that auditors may provide for these projects, and discusses compliance issues related to ongoing and

initial project completion. The chapter also presents illustrative report examples for audit and agreed-upon

procedures engagements for LIHTC projects.

Cost Certification Audits

107.7 This Guide provides limited guidance on performing cost certification audits. Section 813 discusses some

important factors to consider when reporting the results of a cost certification audit. The practice aid at HUD-CX-

11.4, “Cost Certification Audit Checklist,” is designed to assist auditors with cost certification engagements. An

illustrative auditor's report for a cost certification audit engagement is provided at Appendix 8J. Chapter 5 of the

HUD audit guide provides guidance for performing cost certification audits.

State Housing Agencies, Public Housing Authorities, and Indian Housing Authorities

107.8 This Guide does not cover audits of state housing agencies, public housing authorities, or Indian housing

authorities. These entities typically are classified as governmental organizations. Auditors of these entities may

use the guidance and practice aids in PPC's Guide to Audits of Local Governments or PPC's Guide to Single

Audits.

Practice Aids

107.9 By using the following practice aids, auditors can efficiently conduct an audit of a HUD-assisted entity in

accordance with authoritative literature:

• Firm policies (HUD-FP).

• Confirmation and correspondence letters (HUD-CL).

• Audit programs (HUD-AP).

• Checklists and practice aids (HUD-CX).



107.10 Checkpoint Tools.

The following electronic practice aids may provide even more efficiency when conducting an audit of a HUD

entity:

• Practice Aids. PPC's Practice Aids for HUD Audits, a companion product to this Guide, contains electronic

versions of all practice aids included in this Guide that can be easily customized for each engagement.

• SMART Practice Aids.

•• PPC's SMART Practice Aids—Risk Assessment interfaces with PPC's Practice Aids to help

auditors automatically generate tailored audit programs based on their risk assessment for each

client engagement.

•• PPC's SMART Practice Aids—Internal Control integrates with PPC's SMART Practice Aids—

Risk Assessment to guide auditors through a top-down, risk-based approach for evaluating

internal control over financial reporting.

•• PPC's SMART Practice Aids—Disclosure provides a comprehensive financial statement

disclosure preparation and research tool.

•• PPC's SMART Practice Aids—Single Audit automates the process of determining major

programs for audits in accordance with OMB Circular A-133, “low-risk auditee status,” and

appropriate compliance requirements and prepares the compliance audit program and schedule of

expenditures of federal awards.

• Disclosure Libraries. PPC's Interactive Disclosure Library for Nonpublic Companies is an electronic

version of a disclosure checklist that provides hundreds of real-world disclosure examples that can easily

be pasted into a for-profit entity's financial statements. PPC's Interactive Disclosure Library for Nonprofit

Organizations is an electronic version of a disclosure checklist tailored for nonprofit entities.




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HUD Audits

Chapter 1 Overview

Appendix 1A HUD Information Websites

Appendix 1A

HUD Information Websites

http://gaqc.aicpa.org/

The AICPA's Governmental Audit Quality Center (GAQC) is committed to helping its members achieve the

highest standards in performing quality audits of federal dollars. This firm-based voluntary membership center is

designed to help CPAs meet the challenges of performing quality audits in this unique and complex area. Many

items of general interest to auditors and accountants for HUD projects—including current developments from

the GAO, OMB, and HUD—are available to non-members.

www.aicpa.org/InterestAreas/GovernmentalAuditQuality/Resources/HUDInformation/Pages/default.aspx

The AICPA's GAQC provides a HUD Information webpage designed to help CPAs that audit HUD entities. It

provides general information about HUD and links to helpful information and resources. Current developments

affecting auditors of HUD entities are also highlighted on the webpage.

www.housingonline.com

National Housing & Rehabilitation Association's (NH&RA) website provides breaking information for developers,

financiers, professionals, and consultants in the affordable housing and historic rehabilitation businesses. Some

sections are restricted to NH&RA members.

http://portal.hud.gov/portal/page/portal/HUD

HUD's website on the Internet contains a wealth of information about HUD and its programs. This is HUD's

home page which links the user to each of the detailed pages containing HUD handbooks, forms, housing

notices, mortgagee letters, program descriptions, departments, field offices, and phone books. A site map and

search function are provided to expedite information retrieval.

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/rhiip/mfhrhiip



The purpose of HUD's Rental Housing Integrity Improvement Project (RHIIP) is to ensure that rental assistance

payments, made on behalf of HUD assisted tenants, are correct. This website provides information on current

activities and links to helpful resources.

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/progdesc/

This website page lists HUD's multifamily programs and is useful when researching program information.

Subsequent pages include a summary of each program followed by specific information including the purpose,

eligible activities, funding status, and related technical guidance for the program.

www.hud.gov/library/index.cfm

Information can be found quickly when using this HUD webpage titled “Online Library.” This page is organized

into bookshelves by type of information ranging from general to legal.

www.hudoig.gov/

The HUD OIG's home page offers access to OIG audit reports and audit guides, including the latest revisions of

the HUD audit guide and a directory of HUD Regional Inspectors General for Audit.

http://portal.hud.gov/hudportal/HUD?

src=/program_offices/public_indian_housing/reac/library/lib_famf

HUD's Real Estate Assessment Center (REAC) provides a web page for the financial assessment of multifamily

housing where users can monitor current developments for the required electronic reporting standards for

multifamily projects. The site contains links to current updates and details of reporting requirements, handbooks,

guidance, and instructions on the electronic submission process, the templates for electronic submission, and

frequently asked questions. General information about REAC is available at

http://portal.hud.gov/hudportal/HUD?src=/program_offices/public_indian_housing/reac.

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh

This page provides general information on HUD's multifamily programs such as the current funding availability of

programs and expiring Section 8 contracts.

www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm

Mortgagee Letters from 1976 to the present can be accessed quickly from this HUD site page.

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/presrv/mhrowner

HUD's Office of Affordable Housing Preservation (OAHP) uses this webpage to provide information to

accountants and auditors about the mark-to-market program.

www.hud.gov/offices/adm/hudclips/

HUDCLIPS is an acronym for HUD Client Information and Policy System. The HUDCLIPS site offers a library for

all of HUD's official policies and directives. It includes links to HUD handbooks and forms.



http://portal.hud.gov/hudportal/HUD?src=/recovery

This website is HUD's portal for providing information about HUD's implementation of the Recovery Act. It

provides detailed information about each of the HUD Recovery Act programs. It is also used for reporting

funding allocations of Recovery Act programs and significant program milestones.

www.huduser.org

This website is supported and managed by HUD's Office of Policy Development and Research. It provides links

or downloads to HUD publications, periodicals and datasets with current information on housing trends, market

conditions and HUD programs.

www.gao.gov/yellowbook

The GAO maintains this webpage with links to Government Auditing Standards (the Yellow Book). It contains

the most recent edition, any subsequent amendments, and any exposure drafts of proposed amendments.

www.gpo.gov/fdsys/

This National Archives and Records Administration website can be used to search the Federal Register and the

Code of Federal Regulations.

http://harvester.census.gov/sac/

This website is maintained by the Federal Audit Clearinghouse on behalf of the Office of Management and

Budget (OMB). Information about preparing and submitting the Data Collection Form is available at this website.

http://thomas.loc.gov/home/thomas.php

This website maintained by the U.S. Library of Congress is a good place to monitor legislation and other

congressional information and activities.

www.whitehouse.gov/omb/circulars_default

The Office of Management and Budget provides links to it's circulars, including OMB Circular A-133 and the

OMB Circular A-133 Compliance Supplement, at this website.


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Checkpoint Contents


Editorial Materials


HUD Audits

Chapter 1 Overview

Appendix 1B PPC's Government Documents Library

Appendix 1B

PPC's Government Documents Library

In order to provide our subscribers with the most recent government documents and compliance audit

programs, which reflect the most recent edition of the OMB Circular A-133 Compliance Supplement, a

compendium of government documents is provided in PPC's Government Documents Library (Library). The

library is available on the Checkpoint website at checkpoint.riag.com and may be accessed free of change by

subscribers. The authors update the website version of the library periodically—as necessary to keep the

documents current.

The following documents (or links to websites where the most recent documents are posted) are included in the

library at the time this Guide was completed.

Gov. Doc.

No. Description

1 Single Audit Act Amendments of 1996

2 GAO Government Auditing Standards (The Yellow Book) Documents

Gov. Doc. No. 2 includes:

• GAO's Government Auditing Standards, 2011 Revision

• GAO's Government Auditing Standards, July 2007 Revision

• Government Auditing Standards Implementation Tool: Professional Requirements Tool

for Use in Implementing the Requirements Identified by “Must” and “Should” in the July

2007 Revision of Government Auditing Standards

• Government Auditing Standards: Answers to Independence Standard Questions

• Government Auditing Standards: Guidance on GAGAS Requirements for Continuing

Professional Education

• GAO's Interim Guidance on Reporting Deficiencies in Internal Control for GAGAS

Financial Audits and Attestation Engagements



Gov. Doc.

No. Description

3 OMB CIRCULAR A-21, Cost Principles for Educational Institutions

4 OMB CIRCULAR A-87, Cost Principles for State, Local, and Indian Tribal Governments

5 OMB CIRCULAR A-102, Grants and Cooperative Agreements with State and Local

Governments

6 OMB CIRCULAR A-110, Uniform Administrative Requirements for Grants and Agreements with

Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations

7 OMB CIRCULAR A-122, Cost Principles for Nonprofit Organizations

8 OMB CIRCULAR A-133, Audits of States, Local Governments and Non-Profit Organizations

8a Revision of OMB Circular A-133, June 23, 2007

8b Revision of OMB CIRCULAR A-133, June 23, 2003

9 OMB CIRCULAR A-133 Compliance Supplements

9a GSA-AP-5: Audit Program for Federal Award Programs—Compliance Requirements

9b GSA-CX-10.1: Compliance Test Worksheet—Federal Award Programs

10 Uniform Administrative Requirements for Grants and Cooperative Agreements to State and

Local Governments (OMB Common Rule)

11 Data Collection Form (SF-SAC)

12 PCIE Position Statement Nos. 1-6

13 List of Contact Points for Federal Audit Organizations

14 Catalog of Federal Domestic Assistance


END OF DOCUMENT -


