What’s up with the hand? The hand cast is a result of: a. carpel tunnel from my adding machine b. striking pee-wee football players on the helmet c. angry audit clients d. angry audience after hearing the new audit requirements within this presentation! e. none of the above 2
Auditing Standards o AICPA (GAAS) o Government Auditing Standards (Yellow Book or GAGAS) o Louisiana Audit Guide o OMB Circular A-133 (Single Audit) 3
Clarity Project o SAS 122 o Complete re-draft of codification o Clearly state objections and requirement o Converge with international standards o Addresses issues regarding Group Audits o Effective for audits of years ending after December 31, 2012 4
Clarity Project Goals o Address concerns over length and complexity of standards o Make standards easier to read, understand and implement o Lead to enhancements in audit quality 5
Clarity Format o Introduction o Objectives o Definitions o Requirements o Application Material o Appendices and Exhibits 6
Considerations for Audits of Governmental Entities o Most clarified standards have guidance for audits of governmental entities About uniqueness of governmental entities About uniqueness of state audit organizations Opinion units Materiality Laws and regulations, e.g., “withdrawal from engagements” 7
Substantive Changes (Non-Group Audits) Initial audits -Reliance on review of prior audit work not solely sufficient for beginning balances New Audit Report!!!! Changes for restricted use communications under GAGAS 8
Restriction on Auditor Communication o Old Wording o New Wording 9 The purpose of this [report, letter,….solely to [describe the purpose of the auditor's written communication, such as to describe the scope of our testing of internal control over financial reporting and compliance, and the result of that testing, and not to provide an opinion on the effectiveness of the entity's internal control over financial reporting or on compliance ]. This [report, letter,…is an integral part of an audit performed in accordance with Government Auditing Standards in considering [describe the results that are being assessed, such as the entity's internal control over financial reporting and compliance]. Accordingly, this [report, letter,….is not suitable for any other purpose. This report is intended solely for the information and use of management, City Council, others within the entity, a federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. The restriction on the use of the report is required. Though restricted in use, reports issued in connection with an audit of a local government may be a matter of public record.
Determination of Audit Groups 11 When is an audit a group audit? o Group audit – is an audit of group financial components (two or more) that are otherwise audited separately o Same auditor o Different auditors o Component – is an entity or business activity for which group or component management prepares financial information that should be included in the group financial statements.
Considerations for Governments o For governments with multiple opinion units, components will commonly exist within: Aggregate discretely presented as component units -Individual component units whether audited by same audit firm or other auditors Aggregate remaining fund information -Pension or OPEB trust funds -Investment trust funds o Departments within a major fund that are separately managed may also be components 12 Most governments with multiple opinion units will be a group audit
Basic Group Audit Responsibilities 13 Planning Establish group audit strategy and plan using top-down risk based approach Understand group, its components, and their environment Determine materiality for group and component Understand component auditor and component Performance Respond to assessed risks Understand group-wide controls and the consolidation process Perform procedures over subsequent events Communicate with component auditor Evaluate sufficiency and appropriateness of audit work of group (including component auditors) Reporting Communicate with group management and those charged with governance Make reference to other auditors
Understanding Component Auditor o Whether a component auditor understands and will comply with ethical requirements o Component auditors professional competence o Extent to which group engagement team will be able to be involved in the work of component auditor o Whether component auditor operates in a regulatory environment that actively oversees auditors o Communications 14 When component auditor does not meet independence requirements or group has serious concerns about above considerations, should not make reference to work other auditors. Additionally, should not use or rely on the other auditor’s work.
Making Reference to Component Auditor o Component’s financial statements are prepared using same financial framework o Component auditor performed audit of component in accordance with GAAS and has issued report that is not restricted to use o Reading component’s financial statements and component auditor’s report to identify significant finding and issues, and when necessary, communicating with component auditor in this regard o Other additional procedures required when not making reference 15
Subsequent Events Procedures When Making Reference o Obtaining understanding of group management’s procedures for identifying subsequent events o Requesting component auditor to update subsequent events procedures to the date of the auditor’s report on the group financial statements o Requesting written representation from component management regarding subsequent events o Reading available interim financial information of the component and making inquiries of group management o Reading minutes of meetings of the governing board, or any other administrative board with management oversight, held since the financial statement date o Reading subsequent year’s capital and operating budgets o Inquiring of group management 16
Take Away!! o If you have component units or other components, meet with auditors EARLY (group and components) and get on the same page. 17
2011 Yellow Book Effective for audits of years ending on or after 12/15/2012 18
Nonaudit Services o Services that are considered nonaudit services include: Financial Statement Preparation Bookkeeping services Cash to accrual conversions (a form of bookkeeping) Other services not directly related to audit 19
Steps to Evaluate and Document Nonaudit Services Independence 1.Identify nonaudit services 2.Determine if a prohibited service 3.Management responsibilities (preconditions) 4.Evaluate and document SKE 5.Assess whether threats are significant 6.Identify and apply safeguards Follows the conceptual framework decision model. Process must be done PRIOR to performance on nonaudit services. 20
Threat Categories o Management participation o Self review o Bias o Familiarity o Undue influence o Self interest o Structural 22
Routine Audit Services o Routine audit services pertain directly to the audit and include: Providing advice related to an accounting matter Researching and responding to an audited entity’s technical questions Providing advice on routine business matters Educating the audited entity on technical matters o Other services not directly related to the audit are considered nonaudit services 23
Prohibited Services o Valuation Services o Signing checks, approving vendors, custodianship of assets o Financial Advisory Services o Certain internal audit activities o Designing and developing IT Systems (1-year layoff) o Making or changing JE’s and accts w\o management approval 24
o M&M has audited Small Town, LA for the last 3 years o Small Town is governed by a 5-member town council o Employees Mike, Town Manager, worked for Small Town, LA for 15 years. Mike is an ex-policeman that has some business training but no formal accounting training Gwen, Finance Director, 5 years with Small Town, LA and similar role at prior governmental entity. Gwen obtained as associates degree from BRCC and studied bookkeeping Shelly, Account Clerk, worked for Small Town 15 years 25 Case Study Facts and Circumstances
o Small Town, LA provides a trial balance to M&M Firm but does not make any year-end adjusting entries o M&M provides a listing of fixed asset additions and deletions and M&M Firm prepares the depreciation schedule o M&M Firm prepares the town’s financial statements including the cash-to-accrual conversion o M&M Firm prepares the property tax roll reconciliation for Small Town 26 Case Study Facts and Circumstances
o Finance Director reviews and approves all adjusting entries o Capital assets for the 12/31/2012 YE are not material to the town’s financial statements o Town Manager assumes all management responsibilities related to nonaudit services 27
SKE Evaluation o Auditor Preparation of F/S Audited entity need not have the understanding and ability to prepare the F/S and disclosures based on GAAP Auditor may assist the designated individual in obtaining the necessary understanding so that he or she is in position to review and accept responsibility -For example, explain certain accounting principles and disclosure requirements that were applied in preparing the F/S so that the individual has the necessary SKE Bottom line – designated individual should be able to review the F/S, with an emphasis on significant issues and disclosures. 31
Critical failures will occur when… o Auditor fails to identify all nonaudit services o SKE evaluation is not thoughtful assessment but is a rationalization o You apply safeguards to respond to lack of SKE. There are no safeguards sufficient to mitigate when there is insufficient SKE o Safeguards are not adequate o Peer Reviewers and OIG’s will be watching!!! 32
Louisiana Audit Guide o Louisiana Revised Statute 24:513 establishes the Louisiana Governmental Audit Guide as the standard for the reports of agencies that are required to report to LLA. o Substantive changes to the Louisiana Governmental Audit Guide include: Section 321.03 relative to the compensation portion of routine engagements has been revised to include LLA's current policy that all engagement agreements must include a not-to-exceed amount. Section 321.04 has been revised to include LLA's current policy requiring that ICPA's provide LLA with the estimated and actual cost of engagements. Section 350.02, illustrative engagement agreements, and other related documents have been revised to include LLA's current policy regarding the confidentiality of audit/engagement documentation. Section 354.04 and the FAQ under "Findings" have been revised for additional information regarding agreed-upon procedures engagements that may be required for agencies whose annual financial reports include unresolved findings. Various legal citations throughout the audit guide have been updated for changes in legislation. The new LLA policy regarding CPA firms providing their peer reviews to LLA has been added to the FAQ under "CPA Firm Approval.” The FAQ under "Reporting Questions" has been updated for the new LLA policy regarding consequences to agencies whose audit reports have disclaimed or adverse opinions. 33
OMB Circular A-133 o FFATA Reporting Requirements Non-Recovery Act Programs Direct recipient awards to first tier subrecipients FAIN Clarifying Guidance www.fsrs.govwww.fsrs.gov o Recovery Act dwindling but requirements still exist 34
OMB Circular A-133 o OMB Issued Advance Notice for potential reform ideas, February 2012 o Current Status FS audit if $500K – $1M of federal funds Compliance Audit if > $1M; however, compliance areas to be streamlined 35
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