Learning Objectives · expenditures of federal awards. Fair presentation of financial statements...

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Granof, et al. – 7th edition Chapter 16 |

Chapter 16 Auditing Governments and Not-For-Profit Organizations

© 2016 John Wiley & Sons, Inc. All rights reserved. 1


Learning ObjectivesAuditing 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

Characteristics and key elements of performance audits

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


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FACTU.S. Government Accountability Office (GAO) Audit of the U.S.

Government

For the past 17 YEARS, from 1997 to 2014, the GAO has Disclaimed an Opinion on the U.S. Government’s Financial Statements

http://www.gao.gov/press/financial_report_2013jan17.htm

https://www.fiscal.treasury.gov/fsreports/rpt/finrep/fr/14frusg/FR_02252015_Final.pdf (page 225)


Granof, et al. – 7th edition Chapter 16 |© 2016 John Wiley & Sons, Inc. All rights reserved. 4

“While significant progress has been made in improving federal financial management since the federal government began preparing consolidated financial statements 17 years ago, three major impediments continued to prevent us from rendering an opinion on the federal government's accrual-based consolidated financial statements over this period: (1) serious financial management problems at DOD that have prevented its financial statements from being auditable, (2) the federal government's inability to adequately account for and reconcile intra-governmental activity and balances between federal entities, and (3) the federal government's ineffective process for preparing the consolidated financial statements.”http://www.gao.gov/assets/670/661639.txt


https://www.fiscal.treasury.gov/fsreports/rpt/finrep/fr/14frusg/FR_02252015_Final.pdf


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Three major impediments(1) SERIOUS financial management problems at the Department of Defense

(2) the federal government's INABILITY to adequately account for and reconcile intra-governmental activity and balances between federal agencies

(3) the federal government's INEFFECTIVE process for preparing the consolidated financial statements.



State and local governments are a substantial part of the U.S. economy

•Based on the 2012 census there are 90,106 local governments in the U.S.

•In 2013, federal and state governments account for 31% of 2013 U. S. GDP (2011, U.S. Bureau of Economic Analysis)

•In May 2013, federal and state governments account for 16.07% of paid employment (May 2013, U.S. Bureau of Economic Analysis)

•In 2013, expenditures of state and local governments were over $9.4 trillion (2014, U.S. Bureau of Economic Analysis) – 14.1% of the 2013 U.S. GDP ($ 67.072 trillion)


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Important ConceptsUnderstand 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



Audits of Governments & NFPs Vs. BusinessAudit:

• “examination of records or accounts for accuracy.”

Business sector audits:

• characterized by attest function (i.e. “to affirm to be correct, true, or genuine.”)

• Attest function adds credibility to the assertions of others

Government/Not-for-Profit sector audits:

• Auditors not only “attest” BUT also independently evaluate.

• Auditors assess whether auditees have achieved the objectives.


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Types of AuditsGovernment Auditing Standards (2011) characterize government audits into three categories:

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

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

Performance Audits:o Effective usage of entity’s resources (Efficiency)

o Effectiveness of internal controls

o Verifying that organization is complying with the terms of laws, grants, and contracts.

o Provide guidance on how the organization can improve

GAGAS standards place much more emphasis on compliance with laws and

regulations than do GAAS



GAGAS --Yellow BookGenerally Accepted Government Auditing Standards (GAGAS)

Issued by the Government Accountability Office (GAO).

Prescribes accounting standards and practices for ALL federal agencies (as required by law, regulation, agreement, contract, or policy)

Mirror GAAS in discussion of:• Auditor’s professional qualifications

• Quality of audit effort,

• Characteristics of

• professional/meaningful

• audit reports


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Generally Accepted Government Auditing Standards (GAGAS)Contains a total of 32 standards for both financial and performance audits

Required of auditors in a Single Audit

Government auditing standards are divided into:

General standards

Field work standards

Reporting standards



Levels of Reporting in Governmental Single Audits


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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 GAGASGeneral

-Training and Proficiency

Independence

Due Care

General

-Qualifications:

• Professional Proficiency

• Knowledge of government programs

• CPE requirements

Independence

Due Professional Care

Quality Control


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Generally Accepted Government Auditing Standards (GAGAS)Professional competence requires auditors to have:

o A thorough knowledge of governmental auditing and the specific or unique environment in which the

audited entity operates

o 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 government

environment and government audit

Peer Review: has to be done at least once in 3 years.

Compliance and Internal Controls: reasonable assurance in detecting fraud or

misstatements (required by AICPA and GAO)

Public Availability: audit reports are available for public inspection



GAAS v/s GAGASField Work

•Adequate planning and supervision

•Evaluate internal control

•Obtain competent evidence

Field Work

•Adequate planning and supervision

•Evaluate internal control

•Obtain competent evidence

•Supplemental Standards:

• Planning – consideration of government programs

• Compliance testing


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GAAS v/s GAGASReporting

•Adherence to GAAP

•Consistent application

•Adequate disclosure

•Expression of opinion

Reporting

• Adherence to GAAP

• Consistent application

• Adequate disclosure

• Expression of opinion

• Report distribution not restricted

• “In accordance with GAAS and GAGAS”

• Report on compliance and internal

control



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

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


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Single Audit Act of 1984Administered 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

• Federal agencies must agree to this process.

• Applies to both direct and indirect recipients of federal money

• $750,000 (1996 amendment) initiation threshold (multiple awards).

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

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



Single Audit (Cont’d)Two main components:

• Audit conducted under GAGAS

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

Understand the characteristics of a single audit, including:

• the purpose

• which entities must have a single audit

• what auditing work is required

• how major programs are selected for audit

• what reports must be rendered, when, and to whom


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Single Audit: Key RequirementsAnnual audit of financial statements conducted by an independentauditor 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



Federal Single AuditEntity receives funding under a federal grant or allocation (CDBG,Student Financial Aid, etc.)

Greater than $750,000 must have “single audit” or program-specificaudit.

Implemented in 1984 – “Single Audit Act” ; OMB Circular A-133 containsrequirements.

Standardized audit requirements pertaining to the federal assistance.

Organization-wide financial and compliance audit.• Financial component of audit - basically the same as non-federal audit; includes the financial

statements and accompanying notes.

• Compliance component – tests of compliance with applicable laws and regulations.


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Federal Programs: Compliance Requirements

Fourteen compliance requirements:1. Activities allowed or unallowed2. Allowable costs/cost principles3. Cash management4. Davis-Bacon Act5. Eligibility6. Equipment and real property management7. Matching level of effort earmarking8. Period of availability of funds9. Procurement, suspension and debarment10. Program income11. Real property acquisition and relocation assistance12. Reporting13. Subrecipient monitoring14. Special tests and provisionsSource: Adapted from OMB Circular A-133 Compliance Supplement, 2014.



GAAS - GAGAS Single Audit Relationships

FOR “MAJOR PROGRAMS”

-Internal Control Audit

-Compliance Audit with Laws and Regulations

-Schedule of Questioned Costs

Single Audit

-General Internal Control Audit

-General Compliance Audit with Laws and Regulations

GAGAS

-Financial Audits

GAAS

GAGAS Incorporates GAAS – and includes additional requirements

Single Audit Incorporates GAGAS – and includes additional requirements

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Single Audit Act – “Expended”Requires organizations expending more than $750,000 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

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



Single Audit Act and OMB Circular A-133

Did the nonfederal

entity expend

$750,000 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 entity

1) expend federal awards under only

one federal program--which did not

require a financial statement audit,

2) meet other requirements, and

3) properly elect a program specific

audit?

A Single Audit is required.

Yes

Yes

No

No

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Single Audits: Four Reports Produced

1) Opinion on the Financial Statements and on the Schedule of Expenditures of Federal Awards

◦ The schedule includes a list of total expenditures of the organization

◦ Proper categorization of expenses

2) Report on Compliance and on Internal Control over Financial Reporting

◦ Directed towards the basic financial statements

◦ Based on audit requirements of Governmental Auditing Standards

◦ Include any material weaknesses in the controls

3) Report on Compliance with Requirements of “Major Programs”

◦ Explain the nature of the examination

◦ Auditors express an opinion

◦ Include any “ reportable conditions”

4) Schedule of Findings and Questionable Costs

◦ Most distinctive and informative

◦ Summary of the results

◦ Describe reportable conditions

◦ Include findings pertaining to major programs


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Types of Audits: FinancialThe 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



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

• Achieving effective and efficient operations;

• Reliable financial and performance reporting; and

• Compliance with laws and regulations.

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


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Compliance AuditsAssess compliance with

• established laws

• regulations

• contract provisions

• grant agreements

• other requirements

To assess the direct or indirect impact on the

• acquisition;

• protection;

• use; and

• disposition of the entity’s resources or

• quantity;

• quality;

• timeliness; and

• cost of services that the entity produces and delivers.



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Compliance Audits of Federal Financial Awards/Major Programs

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

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

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



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Selection of “Major Programs”Using a sliding scale identify “Type A” and “Type B” programs

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

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

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

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

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

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


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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


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Performance AuditsNOT required by Single Audit

Performance audits carried out on specific programs

Carried out by “internal” audit departments

Focus on organizational accomplishments

General standards are common to both financial and performance audits

Auditors make independent assessments

Conducted irregularly

Broader range of evidence

Each performance audit is unique

Requires more program-specific knowledge



Steps in Conducting Performance AuditSelecting the audit target

Establishing scope and purpose

Discerning the objectives

Scheduling disbursements or other population

Assessing management controls

Preparing a written audit plan

Gathering evidence

Reporting the results of the audit


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Additional Topics: Ethical IssuesGovernments 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



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

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

•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.

•Performance audits differ in concept from financial audits. It makes assessments about an entity’s programs. They are an important supplement to conventional financial audits.

•Government accountants and auditors face ethical dilemmas similar to those in the private sector which they must resolve in the face of public expectations and as guardians of public funds.


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