chapter 16granof-5e1 chapter 16 auditing governments and not-for-profit organizations

Chapter 16 Granof-5e 1

Chapter 16

Auditing Governments and Not-For-Profit Organizations


Learning Objectives Auditing Government & Not-for-Profit vs.

Business Types of audits that governments conduct Standards of government audits Role of “Yellow-Book” in governmental auditing Single Audit Act (A-133) Auditor reports Performance audits

-Characteristics-Key elements

Impact of Sarbanes-Oxley on governments and not-for-profits

Ethical issues facing governmental and not-for-profit accountants and auditors.


Important Concepts

Understand very clearly what is meant by generally accepted government auditing

standards (GAGAS), the source of GAGAS, and why GAGAS are much broader than GAAS,

in particular for financial audits and performance audits


Overview: AuditsGovernments & Not-For-Profits Vs. Business

Audit: -“examination of records or accounts for accuracy.”

Business sector audits: -characterized by attest function (i.e. “to affirm to be

true.”)

Government/Not-for-Profit sector audits: -Auditors not only “attest” BUT ALSO independently

evaluate. -Auditors assess whether auditees have achieved the

objectives.


Types of Audits:

Government Auditing Standards (2003) characterize government audits into three categories:

Financial Audits: determines if financial statements are in accordance with GAAP.

Attestation engagements: Examine, review, perform agreed-upon procedures

Performance Audits: • Effectiveness of internal controls• Effective usage of entity’s resources (Efficiency)• Verifying that organization is complying with terms of

the law, grants, and contracts. • GAGAS standards place much more emphasis on

compliance with laws and regulations than do GAAS


GAGAS --Yellow Book

Generally Accepted Government Auditing Standards (GAGAS)

Issued by the Government Accountability Office (GAO). Prescribes accounting standards and practices for ALL

federal agencies (as required by law, regulation, agreement, contract, or policy)

Mirror GAAS in discussion of:oAuditor’s professional qualificationsoQuality of audit effort,oCharacteristics of

professional/meaningful

audit reports



Contains a total of 32 standards for both financial and performance audits

Required of auditors in a Single Audit

Government auditing standards are divided into:

o General standards

o Field work standards

o Reporting standards


Generally Accepted Government Auditing Standards (GAGAS) Broader than GAAS:

This gives an overview of the breadth and depth of GAGAS.

Financial

Audits

Attestation

Engagements

Performance

Audits

GAAS GAGAS GAAS GAGAS GAAS GAGAS

General Standards

3 4 5 5 0 4

Field Work Standards

3 5 2 7 0 4

Reporting Standards

4 11 4 9 0 4

Totals 10 20 11 21 0 12

GAAS v/s GAGAS

• General-Qualifications:

o Professional Proficiencyo Knowledge of government

programso CPE requirements

• Independence

• Due Professional Care

• Quality Control

• General-Training and Proficiency

• Independence

• Due Care

Chapter 16 9Granof-5e



Professional competence requires auditors to have:– A thorough knowledge of governmental auditing and the specific or

unique environment in which the audited entity operates

– At least 80 hours of CE (CPE) every two years, of which at least 20 hours must be completed in each of the two years and at least 24 hours of which must be related directly to the audit environment

Peer Review: has to be done at least once in 3 years. Compliance: reasonable assurance in detecting fraud

or misstatements (required by AICPA and GAO) Working Papers Standards of Reporting:

-Compliance and Internal Controls-Public Inspection

GAAS v/s GAGAS

Field Work Adequate planning and

supervision Evaluate internal control Obtain competent evidence Supplemental Standards:

o Planning – consideration of government programs

o Compliance testing

Field Work Adequate planning and

supervision Evaluate internal control Obtain competent evidence


GAAS v/s GAGAS

Reporting Adherence to GAAP Consistent application Adequate disclosure Expression of opinion Report distribution not

restricted “In accordance with

GAAS and GAGAS” Report on compliance

and internal control

Reporting Adherence to GAAP Consistent application Adequate disclosure Expression of opinion


GAGAS use the words “must” or “is required” to specify an unconditional requirement.

Required compliance in all cases in which the circumstances exist to which the unconditional requirement applies.

Throughout the “Yellow Book” the professional requirements are identified by this terminology.

Critical Terminology: Unconditional Requirements


GAGAS use the word “should” to specify a presumptively mandatory requirement

May depart from presumptively mandatory requirement if they document:

o the justification for the departure, and

o describe how the alternative procedures performed in the circumstances were sufficient to achieve the objectives in the presumptively mandatory requirement.

Critical Terminology: Presumptively Mandatory


GAGAS use the words “may,” “might,” or “could” to describe explanatory information.

The explanatory information is provided to:o Provide further explanation and guidance on the professional

requirements, oro Identify/describe other procedures or actions relating to the

activities of the auditor/audit organization.

Explanatory material is used to document the objective of a requirement, explain why particular procedures might be considered/used in certain circumstances, or add supplemental information to consider in exercising professional judgment.

Critical Terminology: Explanatory Material


Must state compliance with GAGAS in the report when required to follow GAGAS, or representing to to others that the audit followed GAGAS requirements.

“We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our finding and conclusions based on our audit objectives.”

Reporting Requirements


Administered by the Office of Management and Budget (OMB).

Replaces a multitude of grant-by-grant audits with a single, comprehensive, entity-wide audit. Intended (among other purposes) to improve the efficiency and

effectiveness of governmental audit effort

OMB Circular A-133 and the related Compliance Supplement provide implementing guidance.

Federal agencies must agree to this process.

Applies to both direct and indirect recipients of federal $$$

$500,000 (1996 amendment) initiation threshold (multiple awards).

Higher education, state/local governments, and other not-for-profit entities (1996 amendment)

Single Audit Act of 1984



Single Audit Act (Cont’d)

Two main components: - Audit conducted under GAGAS

- Compliance Audit of federal financial awards/major programs (Single Audit component)

Understand the characteristics of a single audit, including:– the purpose– which entities must have a single audit– what auditing work is required– how major programs are selected for audit– what reports must be rendered, when, and to whom


Single Audit Act (cont’d): Key Requirements

Annual audit of financial statements conducted by an independent auditor encompassing the entity’s financial statements and schedule of expenditures of federal awards

Fair presentation of financial statements and the schedule of federal financial awards is presented fairly in relation to the financial statements.

Study and evaluation of internal controls --understanding of compliance requirements by major program.

Assess control risk and structure control tests accordingly.

Federal and nonfederal “Pass-through” agencies are assigned certain responsibilities for compliance


GAAS - GAGAS - Single Audit Relationships

FOR “MAJOR PROGRAMS”

-Internal Control Audit-Compliance Audit with Laws and Regulations

-Schedule of Questioned Costs

Single Audit

-General Internal Control Audit-General Compliance Audit with Laws and Regulations

GAGAS

-Financial Audits

GAAS

GAGAS Incorporates GAAS – and includes additional requirementsSingle Audit Incorporates GAGAS – and includes additional requirements

Requires organizations expending more than $500,000 in federal assistance under more than one program be subject to single audit.

Key task is determining when funds were expended.

Federal award is expended - Basic rule is:• When the federal agency has become at risk, and• The nonfederal recipient has a duty of accountability. Recipient of funds has to deal only with a single agency

(referred to as Cognizant Agency). --All federal awarding agencies are required to accept the single

audit reports as satisfying their program’s audit requirements

Complex as it isn’t a simple reflection of grants awarded in a fiscal year.

Single Audit Act – “Expended”



Single Audit Act and OMB Circular A-133

Did the nonfederal entity expend $500,000 or more of federal awards?

No Single Audit or Program Specific Audit required--only GAAS and GAGAS Audit required.

A program-specific audit is required.

Did the nonfederal entity1) expend federal awards under only one federal program--which did not require a financial statement audit,2) meet other requirements, and 3) properly elect a program specific audit?

A Single Audit is required.

Yes

Yes

No

No


1) Opinion on the Financial Statements and on the Schedule of Expenditures of Federal Awards The schedule includes a list of total expenditures of the organization Proper categorization of expenses

2) Report on Compliance and on Internal Control over Financial Reporting Directed towards the basic financial statements Based on audit requirements of Governmental Auditing Standards Include any material weaknesses in the controls

3) Report on Compliance with Requirements of “Major Programs” Explain the nature of the examination Auditors express an opinion Include any “ reportable conditions”

4) Schedule of Findings and Questionable Costs Most distinctive and informative Summary of the results Describe reportable conditions Include findings pertaining to major programs

Single Audit Act:Four Reports Produced:

The purpose is to perform an independent assessment of and to provide reasonable assurance about whether an entity’s reported financial condition, results, and use of resources are presented fairly (in accordance with recognized criteria)

GAGAS financial reports include reports on:• internal control• compliance with laws and regulations, and the terms

and provisions of contracts/grants

Types of Audits: Financial


Assess internal control system components for adequacy and effectiveness – can it provide reasonable assurance of:

• Achieving effective and efficient operations;• Reliable financial and performance reporting; and• Compliance with laws and regulations.

Extremely relevant to government procurement officials for determining organizational capability for successful performance of government contract effort.

Internal Control Audit


Assess compliance with• established laws;• regulations;• contract provisions;• grant agreements; and• other requirements

To assess the direct or indirect impact on the• acquisition;• protection;• use; and• disposition of the entity’s resources or• quantity;• quality;• timeliness; and• cost of services that the entity produces and delivers.

Compliance Audits


Single Audit:Compliance Component for

“Major Programs”



Compliance Audits ofFederal Financial Awards/Major Programs

For each “Major Program” the auditor must test whether the program:

– was administered in conformity with the appropriate OMB Circular (A-102 or A-110)

– complied with detailed requirements in the A-133 Compliance Circular and other specified requirements.


Using a sliding scale identify “Type A” and “Type B” programs

Identify low-risk programs (based on no audit findings in most recent audit and absence of certain risk factors)

Assess risk of Type B programs (major programs that are not Type A programs)

At a minimum, audit all high risk Type A programs and either

– (1) half of the high-risk Type B programs or

– (2) one high-risk Type B program for each low-risk Type A program

Audit at least enough major programs to ensure that at least 50% of total federal award expenditures are audited

Selection of “Major Programs”


Risk-Based ApproachStep 1:Identify (larger) Type A Programs

Step 4:Select for audit as major programs a minimum of all Type ‘A programs not identified as “low-risk” in Step 2, plus certain “high-risk” Type B programs.

Step 3:Identify “high-risk” Type B programs

Step 2:Identify “low-risk” Type A programs


Key Audit Procedures Identify compliance requirements Plan the engagement Assess internal control Obtain sufficient evidence Consider subsequent events Evaluate and report on noncompliance Follow-up procedure


Performance Audits NOT required by Single Audit Focus on organizational accomplishments Carried out by “internal” audit departments General standards are common to both financial and

performance audits 3 sections include:

-General-Field work-Reporting

Auditors make independent assessments Performance audits carried out on specific programs Conducted irregularly Broader range of evidence Each performance audit is unique.


Steps in Conducting Performance Audit

Selecting audit target Establishing scope and purpose Discerning objectives Scheduling disbursements Assessing management controls Written audit plan Gathering evidence Reporting the results


Additional Topics: Ethical Issues

Governments and to a lesser extent not-for-profits have characteristics that present their employees with ethical decisions that are different from those faced by employees of businesses. These are: Public expectations Guardians of public funds (OPM) Activities carried out in open view Special powers Conflicting loyalties


Impact of Sarbanes-Oxley Act on Government and NFPs

Even though the Sarbanes-Oxley Act (Act) applies only to publicly traded corporations, it’s impact is being felt by government and NFP organizations.

Key provisions of the Act that are relevant to government and NFP organizations include: -Section 404 which emphasizes the importance of sound internal controls

-Responsibility of audit committees

-the Act mandates that CEO and CFO certify the financial statements

-the Act provides “whistle-blower” protection to employees.

Perhaps most importantly the Act changed the climate of all organizations.


Auditors add value to information by being independent and conforming to professional auditing standards (GAAS or GAGAS)

GAGAS are broader than GAAS in that they include standards for financial and performance audits established by the government through the GAO’s Yellow book.

Performance audits differ in concept from financial audits. It makes assessments about an entity’s programs.

Under the Single Audit Act, GAGAS has to be adhered to in all audits of both governments and not-for-profit organizations. However, the Single audit requires only financial audits.

Single audits comprise of 2 elements: an audit of financial statements and an audit of federal financial awards that follows the provisions of OMB Circular A-133.

The single audit improves both the efficiency and effectiveness of audits of nonfederal entities with significant expenditures of federal award.

The Sarbanes-Oxley Act does not apply to government and not-for-profit organizations but has affected their culture.

Summary

chapter 16granof-5e1 chapter 16 auditing governments and not-for-profit organizations

Documents

gagas standards

accounting standards

proceduresperformance

auditing governments

business types of audits

business sector audits

profit sector audits

depth of gagas