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Chapter Eleven

Chapter Eleven. Auditing of Governmental and Not-for-Profit Organizations. Learning Objectives. After studying Chapter 11, you should be able to:

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Chapter Eleven

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  1. Chapter Eleven Auditing of Governmental and Not-for-Profit Organizations

  2. Learning Objectives • After studying Chapter 11, you should be able to: • Explain the essential characteristics of financial auditsby independent CPAs, conducted in accordance with generally accepted auditing standards (GAAS), including: • the objective(s) of financial audits, • the source and content of generally accepted auditing standards (GAAS). • the types of audit reports that can be rendered, and • the contents of an unqualified and a qualified audit report.

  3. Learning Objectives (cont’d) • Explain 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

  4. Learning Objectives (cont’d) • Explain 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 • Describe the role of audit committees.

  5. Types of Governmental Audits • Financial • Provide an auditor’s opinion as to whether financial statements are fairly stated in conformity with GAAP, or that financial reports comply with other finance-related criteria. • Performance • Provide an auditor’s determination of the extent to which government officials are efficiently, economically, and effectively carrying out their responsibilities or whether governmental programs are producing desired results.

  6. Generally Accepted Auditing Standards (GAAS) • Standards issued by the AICPA. • 10 standards (expanded on by about 90 Statements on Auditing Standards, or SASs.) • 3 general standards, • 3 field work standards, and • 4 reporting standards • Applicable to financial audits only.

  7. Generally Accepted Government Auditing Standards (GAGAS) • Standards issued by the U.S. General Accounting Office in its “yellow book.” • A total of 32 standards for both financial and performance audits • Required of auditors in a Single Audit (for any organization that expends more than $300,000 in federal sources in any year.

  8. .Generally Accepted Government Auditing Standards (GAGAS) are Broader than GAAS GAAS GAGAS (AICPA)(GAO) General Standards 3 4 Field Work Standards: Financial audits 3 9 Performance audits 5 Reporting Standards: Financial audits 4 9 Performance audits 5 Total 1032

  9. Unique Aspects of GAGAS (cont’d) • Standard on adequacy of professional proficiency requires auditors to have: • A thorough knowledge of governmental auditing and the specific or unique environment in which the audited entity operate • 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

  10. Unique Aspects of GAGAS (cont’d) • GAGAS standards place much more emphasis on compliance with laws and regulations than do GAAS

  11. Auditor’s Standard Report • Paragraphs in a standard audit report: • Opening Identifies the financial statements being audited • Scope Describes the nature of the audit • Opinion Expresses the auditor’s opinion about the fairness of the financial statements • Explanatory Used in most governmental audits but seldom used in corporate audits

  12. Types of Auditor’s Opinions • Unqualified (clean) (see Ill. 11-2) • Explanatory language added (but still unqualified) • Qualified opinion - Except for matter noted, financial statements still present fairly in conformity with GAAP (See Ill. 11-3) • Adverse opinion - Financial statements do not present fairly in conformity with GAAP • Disclaimer of opinion - Often due to inability to obtain records or non-existence of records

  13. Single Audit • Intended (among other purposes) to improve the efficiency and effectiveness of governmental audit effort • by replacing a multitude of grant-by-grant audits with a single, comprehensive, entity-wide audit • All federal awarding agencies are required to accept the single audit reports as satisfying their program’s audit requirements

  14. Single Audit (cont’d) • 1996 Single Audit Act Amendments: • Raises the threshold for a single audit from $100,000 received to $300,000 expended • Extends statutory requirement for single audit coverage to not-for-profit organizations as well as state and local governments • Establishes a risk-based approach for audit testing, thus placing greater audit coverage on high risk programs

  15. Single Audit (cont’d) • 1996 Single Audit Act Amendments: • Improves the contents and timeliness of single audit reporting • Permits the Office of Management and Budgeting (OMB) to administratively revise Single Audit requirements without requiring additional legislation • OMB Circular A-133 and the related Compliance Supplement provide implementing guidance for conducting the single audit

  16. Single Audit (cont’d) Q: Who has to have an audit under GAGAS? (see Ill. 11-5) A: Any state or local government or not-for-profit organization that expends at least $300,000 in federal awards during a year must have an audit in conformity with GAGAS • If expended only for one program or one program cluster, the entity can have a program audit. Otherwise the audit must be a single audit

  17. Single Audit (cont’d) • Calculation of amount of federal awards expended • Calculation can be complex • Basic rule is that a federal award has been expended when the federal agency has become at risk and the nonfederal recipient has a duty of accountability • Recommend working Case 11-1 to understand nuances of calculation

  18. Single Audit Requirements • Annual audit encompassing the entity’s financial statements and schedule of expenditures of federal awards • Audit must be conducted by an independent auditor • Auditor must determine whether financial statements present fairly in conformity with GAAP and the schedule of federal financial awards is presented fairly in relation to the financial statements

  19. Single Audit Requirements (cont’d) • Auditor must obtain an understanding of internal controls pertaining to the compliance requirements for each major program, and assess control risk and perform tests of control • Federal and nonfederal “Pass-through” agencies are assigned certain responsibilities for compliance

  20. Compliance Audits (as part of single audit) • For each major program the auditor must test whether the program: • was administered in conformity with the appropriate OMB Circular (A-102 or A-110) • complied with detailed requirements in the A-133 Compliance Circular and other specified requirements

  21. Selection of Programs for Single Audit • Using sliding scale shown on p. 522 of text, identify “Type A” 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)

  22. Selection of Programs for Single Audit (cont’d) • 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

  23. Required Reporting Under Single Audit • Both auditee and auditor have responsibilities for the “reporting package” that must be sent to the single audit clearinghouse in Indiana • Reporting package consists of: • Financial statements and schedule of expenditures of federal awards • Summary schedule of prior audit findings • Auditor’s reports (see Ill. 11-8; now condensed to three reports by AICPA SOP 98-3) • Corrective action plan

  24. Required Reporting Under Single Audit • Schedule of findings and questioned costs • Describes such matters as internal control weaknesses, instances of noncompliance, questioned costs, fraud, and material misrepresentations by the auditee • Internal control weaknesses are reported as either reportable conditions (significant internal control deficiencies that could adversely affect compliance), or • material weaknesses (severe reportable conditions that render internal controls ineffective in reducing risk of noncompliance to an acceptably low level)

  25. Schedule of Findings and Questioned Costs (cont’d) • A questioned cost usually involves an instance of noncompliance with a law or regulation where the costs are either not allowable, are unreasonable, or are not supported by adequate documentation • Known questioned costs greater than $10,000 or likely costs greater than $10,000 must be reported in the schedule of findings and questioned costs

  26. Cognizant Agencies and Oversight Agencies • To promote quality control, nonfederal entities expending more than $25 million in federal awards are assigned a cognizant agency—usually the agency providing the predominant amount of support. • Cognizant agency provides technical advice and liaison, conducts quality control reviews, refers substandard audits for disciplinary action, and facilitates communication

  27. Cognizant Agencies and Oversight Agencies (cont’d) • Nonfederal entities expending less than $25 million are assigned an oversight agency rather than a cognizant agency • Oversight agencies have similar but less extensive responsibilities than oversight agencies

  28. Summary • Auditors add value to information by being independent and conforming to professional auditing standards (GAAS or GAGAS) • GAGAS applies to audits of nonfederal entities that expend at least $300,000 of federal awards • GAGAS are broader than GAAS in that they include standards for financial and performance audits. • The single audit improves both the efficiency and effectiveness of audits of nonfederal entities with significant expenditures of federal award. END

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