Chapter 15 1

Chapter 15

Auditing Governments and Not-For-Profit Organizations

Chapter 15 2

Learning Objectives Differentiate between auditing in the government and

not-for-profit sectors and in the business sectors. Influence of yellow-book on auditing Types of audits that governments conduct Standards of government audits Single Audit Act Auditor reports Performance audits

-Characteristics-Key elements

Impact of Sarbanes-Oxley on governments and not-for-profits Ethical issues facing governmental and not-for-profit

accountants and auditors.

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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

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Audits of Governments and Not-For-Profits Vs. Business

Audit: examination of records or accounts for accuracy.

Business sector audits: characterized by attest function—to affirm to be true.

Government/Not-for-Profit sector: -Auditors not only attest but also independently evaluate.

-Assess whether auditees have achieved the objectives.

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Influence of the Yellow Book

Yellow book: Government Auditing Standards issued by the Government Accountability Office (GAO).

Responsible for auditing all federal agencies. Responsible for prescribing accounting standards

and practices of federal agencies. Headed by Comptroller General of the U.S. GAO:

-Issued to elevate auditing practice-No direct control over state and local governments.

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Types of Audits

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

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

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

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

the law, grants, and contracts.

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Generally Accepted Government Auditing Standards (GAGAS)

Standards issued by the U.S. GAO in its “yellow book.”

The Comptroller General of the U.S. appointed the Advisory Council on GAS to review the standards and recommend necessary changes.

The Council includes experts in financial and performance auditing drawn from all levels of government, private enterprise, public accounting, and academia.

FACTS: At the end of fiscal 2005, 85 % of the 1,752 recommendations made in fiscal year 2001 had been implemented by the GAO!

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Generally Accepted Government Auditing Standards (GAGAS)

A total of 32 standards for both financial and performance audits

Required of auditors in a Single Audit (for any organization that expends more than $500,000 in federal sources in any year).

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AuditsGovernment auditing standards are divided into:

General standards Performed by a person with adequate technical training and

proficiency Independence Due professional care

Field work standards Adequately planned and supervised Understanding internal controls Obtain competent evidential matter

Reporting standards States whether the financial statements are in accordance

with GAAP Identify inconsistencies, if any Informative disclosures Expression of opinion

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

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

Financial

Audits

Attestation

Engagements

Performance

Audits

GAAS GAGAS GAAS GAGAS GAAS GAGAS

General Standards

3 4 5 5 0 4

Field Work Standards

3 7 2 7 0 4

Reporting Standards

4 11 4 9 0 4

Totals 10 22 11 21 0 12

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GAGAS audit categories

Financial statements audits Financial related audits Economy and efficiency audits Program audits

-GAGAS standards place much more emphasis on compliance with laws and regulations than do GAAS

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Government Vs. Non-government Audits

General Standards: Independence:

-Auditors should not perform management functions-They should not audit their own work-Should not provide nonaudit services.

In government sector, audit organization is independent if:

-It is from a different branch than the units it is to examine

-Whose auditor is elected by citizens of government’s jurisdiction or appointed by legislative body.

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Government Vs. Non-government Audits (cont’d) Standard on adequacy of professional competence requires

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

unique environment in which the audited entity operates

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

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

misstatements. Working Papers Standards of Reporting:

-Compliance and Internal Controls-Public Inspection

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Single Audit Act

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

whom

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Single Audit Act (cont’d)

Intended (among other purposes) to improve the efficiency and effectiveness of governmental audit effort

By replacing a multitude of grant-by-grant audits with a single, comprehensive, entity-wide audit

All federal awarding agencies are required to accept the single audit reports as satisfying their program’s audit requirements

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Single Audit Act (cont’d)

Congress enacted Single Audit Act of 1984. Applies to both direct and indirect recipients of

federal assistance. Requires organizations expending more than

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

Recipient has to deal only with single agency. Single Audit be conducted in accordance with

GAO’s Auditing Standards.

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Single Audit Act (cont’d) 1996 Single Audit Act Amendments:

– Raises the threshold for a single audit from $100,000 received to $500,000 expended

– Extends statutory requirement for single audit coverage to not-for-profit organizations as well as state and local governments

– Establishes a risk-based approach for audit testing, thus placing greater audit coverage on high risk programs

– Improves the contents and timeliness of single audit reporting

– Permits the Office of Management and Budgeting (OMB) to administratively revise Single Audit requirements without requiring additional legislation

OMB Circular A-133 and the related Compliance Supplement provide implementing guidance for conducting the single audit

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GAAS-GAGAS-Single Audit Relationships

Single Audit

Financial & Performance Audits

GAGAS

Financial Audits

GAAS

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

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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

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Single audit objectives related to entity as whole

Fair presentation of financial statements Compliance with laws/regulations

Where noncompliance may have material effect on financial statements

Study and evaluation of internal controls To determine audit procedures necessary to opine

on statements Satisfies laws & regulations applicable to specific

federal award.

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Single audit objectives related to Federal financial assistance programs

Fair presentation of schedule of FFA in relation to financial statements

Adequacy of internal control systems over Federal programs

Ascertain compliance with laws/regulations with material effect in each major Federal assistance programs.

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City of Austin - Financial Assistance Programs

The notes to the 2004 annual report for the City of Austin include that: – The City participates in a number of federally assisted

and State grant programs, financed primarily by the U.S. Housing and Urban Development (HUD) Department, U.S. Health and Human Services (HHS) Department, and U.S. Department of Transportation (DOT). The City’s programs are subject to program compliance audits by the granting agencies.

– Management believes that no material liability will arise from any such audits.

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Single Audit

Two main components: -Audit conducted under GAGAS

-Audit of federal financial awards

Four types of reports Opinions on the financial statements and Schedule

of Expenditures of Federal Awards: -Includes the audit work and opinion on the statements

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

-Proper categorization of expenses

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Single Audit Act Requirements Annual audit encompassing the entity’s financial

statements and schedule of expenditures of federal awards.

Audit must be conducted by an independent auditor.

Auditor must determine whether financial statements present fairly in conformity with GAAP and the schedule of federal financial awards is presented fairly in relation to the financial statements.

Auditor must obtain an understanding of internal controls pertaining to the compliance requirements for each major program, and assess control risk and perform tests of control.

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

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Single Audit Act (cont’d)

Q: Who has to have an audit under GAGAS?

A: Any state or local government or not-for-profit organization that expends at least $500,000 in federal awards during a year must have an audit in conformity with GAGAS.– If expended only for one program or one program

cluster, the entity can have a program audit. Otherwise the audit must be a single audit

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Single Audit Act (cont’d)

Calculation of amount of federal awards expended

– Calculation can be complex

– Basic rule is that a federal award has been expended when the federal agency has become at risk and the nonfederal recipient has a duty of accountability

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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.

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

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

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

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

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

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

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

Selection of Programs for Single Audit

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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

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Reports of Single Audits Report on compliance and on internal controls:

-Directed towards the basic financial statements-Based on audit requirements Governmental Auditing Standards-Include any material weaknesses in the controls

Report on compliance with the requirements of major programs: -Explain the nature of the examination -Auditors express an opinion -Include any “ reportable conditions”

Schedule of findings and questioned costs: -Most distinctive and informative-Summary of the results-Describe reportable conditions-Include findings pertaining to major programs

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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 Audits Focus on organizational accomplishments Carried out by “internal” audit departments General standards are common to both financial and

performance audits 3 sections include:

-General-Field work-Reporting

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

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Manner of Conducting Audit

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

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Governmental Vs. Not-for-profit Government employees are involved with ethical

decisions different from those faced by employees of businesses.

Characteristics of Governments:- Public expectations

- Guardians of public funds

- Activities carried out in open view

- Special Powers

- Conflicting loyalties

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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.

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Ethical Issues

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

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

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

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

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

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

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

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

Summary

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