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Auditing Governments and Not-For-Profit Organizations

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1 Auditing Governments and Not-For-Profit Organizations
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. Chapter 15

3 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 Chapter 15

4 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. Chapter 15

5 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. Chapter 15

6 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. Chapter 15

7 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! Chapter 15

8 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). Chapter 15

9 Audits Government 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 Chapter 15

10 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 GAAS GAGAS General Standards 3 4 5 Field Work Standards 7 2 Reporting Standards 11 9 Totals 10 22 21 12 Chapter 15

11 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 Chapter 15

12 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. Chapter 15

13 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 Chapter 15

14 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 Chapter 15

15 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 Chapter 15

16 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. Chapter 15

17 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 Chapter 15

18 GAAS-GAGAS-Single Audit Relationships
Financial & Performance Audits GAGAS Financial Audits GAAS GAGAS Incorporates GAAS – and includes additional requirements Single Audit Incorporates GAGAS – and includes additional requirements Chapter 15

19 Single Audit Act and OMB Circular A-133
No Single Audit or Program Specific Audit required--only GAAS and GAGAS Audit required. Did the nonfederal entity expend $500,000 or more of federal awards? No Yes 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? Yes A program-specific audit is required. No A Single Audit is required. Chapter 15

20 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. Chapter 15

21 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. Chapter 15

22 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. Chapter 15

23 Single Audit Two main components: Four types of reports
-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 Chapter 15

24 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 Chapter 15

25 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 Chapter 15

26 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 Chapter 15

27 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. Chapter 15

28 Selection of Programs for Single Audit
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 Chapter 15 3

29 Risk-Based Approach Step 1: Identify (larger) Type A Programs Step 2:
Identify “low-risk” Type A programs Step 3: Identify “high-risk” Type B 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. Chapter 15

30 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 Chapter 15

31 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 Chapter 15

32 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. Chapter 15

33 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 Chapter 15

34 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 Chapter 15

35 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. Chapter 15

36 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 Chapter 15

37 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. 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. Chapter 15 3

38 Copyright © 2007 John Wiley & Sons, Inc. All rights reserved
Copyright © 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Chapter 15

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