Chapter 11 Auditing of Governmental and Not-for-Profit Organizations

CHAPTER 11:

AUDITING OF GOVERNMENTAL AND NOT-FORPROFIT ORGANIZATIONS

OUTLINE T!pe"T#$% S&#&u$ 're: 1("e) 1!-" revised 1!-1 1!-! Ne) Ne) 1!-$ 1!-& 1!-* 1!-, 1!-11 1!-1 1!-! 1!-$ revised 1!-& Ne) Ne) 1!-+ 1!-1 1!-! revised 1!-$ 1!-& revised Ne) 1!-*

Number *ue$&io+$: 11-1 11-! 11-$ 11-& 11-" 11-* 11-+ 11-, 11-11-11 C#$e$: 11-1 11-! 11-$ 11-& 11-" 11-* 11-+

Topi

Definition of audit, GAGAS audits #evels of audit Opinion units GAAP hierar'h( Single Audit guidan'e Government audit report GAGAS versus GAAS GAGAS and not-for-profits .is/-0ased approa'h Audit 'ommittee Audit ris/ Single audit Government audit 'onsiderations Single audit and ma2or programs Auditing a federal program Auditor sele'tion and independen'e Audit 'ommittees

Define, e plain Define, e plain % plain % plain Compare, e plain % plain % plain % plain % plain Des'ri0e Assess %valuate %valuate %valuate 3nternet % plain #o'ate % amine 6ultiple Choi'e Anal(sis Anal(sis Anal(sis %rror anal(sis

E,er i$e$"Prob-em$: 11-1 % amine the CA4. 11-! 5arious 11-$ Continuing professional edu'ation 11-& Single audit 11-" GAAS versus GAGAS standards 11-* Audit report

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Chapter 11 Auditing of Governmental and Not-for-Profit Organizations

CHAPTER 11:
Ans)ers to 7uestions

AUDITING OF GOVERNMENTAL AND NOT-FORPROFIT ORGANIZATIONS

11-18 An audit involves an independent revie) of information or pro'esses 0( an e ternal part( for the purpose of evaluating the validit( and relia0ilit( of information or assessing a program or pro'ess8 9he goal of an audit is to e press an opinion or assuran'e on the data, programs, or pro'esses evaluated 0ased on )or/ performed on a test 0asis8 Government Auditing Standards defines three ma2or t(pes of servi'es performed 0( auditors: finan'ial statement audits, attestation engagements, and performan'e audits8 Financial audits provide an auditor;s opinion that finan'ial statements present fairl( an entit(;s finan'ial position, 'hanges in finan'ial position, and, )here appli'a0le, 'ash flo)s in 'onformit( )ith generall( a''epted a''ounting prin'iples, and informs users that the( 'an rel( on that information8 Attestation engagements are e aminations or revie)s on su02e't matter that provide various levels of assuran'e on finan'ial or nonfinan'ial matters depending upon the user<s needs8 Performance audits provide an auditor;s independent assessment =0ut not an opinion> of the e tent to )hi'h government offi'ials are effi'ientl(, e'onomi'all(, and effe'tivel( 'arr(ing out their responsi0ilities8 11-!8 9he three levels of audit appli'a0le to governments and not-for-profit organizations are generall( a''epted auditing standards =GAAS>, generall( a''epted governmental auditing standards =GAGAS>, and the single audit8 GAAS are esta0lished 0( the A3CPA, )hile the Government A''ounta0ilit( Offi'e =GAO> esta0lishes GAGAS8 9he single audit is the result of a la) ena'ted 0( Congress8 ?o)ever, regulation related to implementation of the la) is esta0lished 0( the Offi'e of 6anagement and @udget =O6@> and is availa0le to users in Circular A-133 and the related Compliance Supplement8 11-$8 An opinion unit is related to the finan'ial reporting format of governments8 Opinion units in'lude: governmental a'tivities, 0usiness-t(pe a'tivities, aggregate dis'retel( presented 'omponent units, ea'h ma2or governmental and enterprise fund, and the aggregate remaining funds8 Auditors need to 0e familiar )ith the num0er of 'lient opinion units sin'e the auditor is reAuired to opine on ea'h unit8 @e'ause an opinion is needed on ea'h unit, GAAS reAuires that materialit( determinations 0e made for ea'h opinion unit8 9he num0er of opinion units affe'ts the 'omple it(, time, and 'ost of an audit8 11-4. .eferring to 3llustration 11-&, state and lo'al governments and federal government entities possess offi'iall( esta0lished a''ounting prin'iples, in'luding statements and interpretations issued 0( the Governmental A''ounting Standards @oard and the 4ederal A''ounting Standards Advisor( @oard, respe'tivel(8 Authoritative standards for nongovernmental entities are set 0( the 4inan'ial A''ounting Standards @oard =4AS@> and are in'luded )ithin the 4AS@ Codification8 If the accounting treatment for a transaction or event is not specified by a pronouncement an accountant or auditor may refer to nonauthoritative accounting literature identified by the GASB, FASB or FASAB.

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Chapter 11 Auditing of Governmental and Not-for-Profit Organizations Ch8 11, Ans)ers =Cont<d>

11-"8 An auditor performing a single audit should 0e familiar )ith the uniAue purpose served 0( ea'h of these resour'es8 O6@ Circular A-133 provides information and guidan'e for federal fund re'ipients and auditors regarding 'omplian'e )ith single audit reAuirements set forth in the Single Audit A't of 1-,& =P8#8 -,-"1!>, as amended 0( Single Audit A't Amendments of 1--* =P8#8 11&-1"*>8 9he audit staff mem0er )ould 0e most interested in su0part %, )hi'h 'overs s'ope of audit, audit reporting, audit findings, audit )or/ing papers, ma2or program determination, 'riteria for federal program ris/, and 'riteria for a lo)-ris/ auditee8 Bhile O6@ Circular A-133 is generi' for all single audits, the Compliance Supplement provides spe'ifi' audit reAuirements and suggested auditing pro'edures for ea'h individual federal program =!&, in !111>8 Government Auditing Standards =the (ello) 0oo/> is mu'h 0roader and provides auditing standards reAuired to 0e follo)ed )hen performing a single audit8 11-*8 9he government audit report is longer due to in'reased audit reAuirements8 9he audit report of a government )ill in'lude one or more explanatory paragraphs e plaining: =1> that supplemental information in'luded as part of the government<s annual report is not part of the 0asi' finan'ial statements, =!> )hether auditors applied auditing or 'ertain limited pro'edures to the supplemental information, and =$> )hether the auditors e press an opinion on the supplemental information8 Additionall(, re'all from Chapter - that 'ertain parts of the annual report, su'h as the 6DCA, are reAuired supplementar( information =.S3> and as su'h, the auditors )ill need to 'ondu't and report on 'ertain limited pro'edures applied to the .S38 %ven the introdu'tor(, s'ope and opinion paragraphs 'an 0e longer in a government audit report sin'e the auditor is opining on a num0er of opinion units8 11-+8 GAGAS is the a'ron(m for generall( a''epted government auditing standards =also referred to as GAS>, the standards set forth 0( the Comptroller General in the D(ello) 0oo/8E GAAS is the a'ron(m for generall( a''epted auditing standards esta0lished 0( the A3CPA8 GAAS are designed to ena0le an auditor to e press an opinion on the finan'ial statements8 GAGAS are designed to ena0le auditors to report on finan'ial statement audits, attestation engagements, and performan'e audits =e8g8, operational audits to assess the effi'ien'( and effe'tiveness of an organization>8 3n effe't, GAGAS is 0roader than GAAS and generall( en'ompasses and e pands on the A3CPA<s generall( a''epted auditing standards8 =See 3llustration 11-*8> 9he A3CPA also has standards on Attestation %ngagements =SSA%s> and Standards on Consulting Servi'es8 11-,8 Disagree8 Government auditing standards =GAGAS> 'an appl( to an( entit( re'eiving federal funds8 3f the not-for-profit organization re'eived federal funds and e pended F"11,111 or more in federal program funds it is su02e't to GAGAS8 Additionall(, the entit( needs to 'onsider )hether it has entered into a legal or 'ontra'tual agreement that reAuires GAGAS8 4or e ample, the not-for-profit ma( re'eive state grant funds and 0e operating in a state that reAuires GAGAS audits of entities re'eiving andGor e pending state funds8

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Chapter 11 Auditing of Governmental and Not-for-Profit Organizations Ch8 11, Ans)ers =Cont<d>

11--8 9he risk-based approac =see 3llustration 11--> is applied as follo)s8 4irst, the DlargerE =per the sliding s'ale presented in Chapter 11> federal programs are identified as D9(pe A8E All other programs are identified as D9(pe @E programs8 Se'ond, an( lo)-ris/ 9(pe A programs are identified8 9his involves auditor 2udgment after full( 'onsidering the fa'tors dis'ussed in Chapter 118 9hird, high-ris/ 9(pe @ programs are identified8 ?o)ever, the auditor is not e pe'ted to perform ris/ assessments on relativel( small federal programs, as defined in Chapter 118 At a minimum, the auditor should audit as ma2or programs all 9(pe A programs not identified as lo) ris/ and 'ertain of the highris/ 9(pe @ programs, using one of the follo)ing options: =a> audit at least half of the high-ris/ 9(pe @ programs, 0ut the auditor is not reAuired to audit more 9(pe @ than 9(pe A programs identified as lo) ris/H or =0> audit one high-ris/ 9(pe @ program for ea'h 9(pe A program identified as a lo)-ris/ program8 As man( ma2or programs as ne'essar( must 0e audited to ensure that at least "1I of total federal a)ards e pended are audited8 11-118 Audit 'ommittees, )hen properl( organized and utilized, 'an provide su0stantial 0enefit to all 'on'erned parties8 9hese 0enefits in'lude: =1> strengthening the ste)ardship reporting fun'tion of the governing 0oard, =!> improving 'ommuni'ation 0et)een the independent auditor and management, and =$> enhan'ing the auditor;s independen'e 0( serving as an o02e'tive 0uffer 0et)een the auditor and management8 4or ta pa(ers and 'reditors, audit 'ommittees help ensure ma imum value and 0enefit from the audit8 9he Sar0anes-O le( A't reAuires audit 'ommittees for pu0li'l( traded 'ompanies and man( governments and not-for-profit organizations are esta0lishing audit 'ommittees as a 0est pra'ti'e8 9he A3CPA has a resour'e 'alled Audit Committee !oolkits for both government and not-for-profit organizations availa0le at )))8ai'pa8org8

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Chapter 11 Auditing of Governmental and Not-for-Profit Organizations

Solutions to Cases 11-18 .eading something li/e this a0out an audit 'lient ma( 'ause (ou to reassess )hether (ou )ant to retain the 'lient8 3t )ill definitel( 'ause (ou to reevaluate an( audit plans that have 0een made to date8 Additionall(, given that the item has made the ne)spaper, (ou )ill )ant to /eep in mind the in'reased politi'al visi0ilit( of the audit8 Bhile there are numerous fa'tors (ou )ould )ant to 'onsider, fa'tors related to the SAS ris/ assessment suite =SAS 11&-111> and other information dis'ussed in the 'hapter in'lude: 18 6anagement assertions, parti'ularl( )ith regard to internal 'ontrol pro'edures for data s(stems se'urit( and 'apital asset management pro'edures8 !8 .is/ assessment it )ould appear that the pro0a0ilit( of the ris/ of material misstatement is high8 9o determine the ris/ of material misstatement a 0etter understanding is needed 'on'erning )hat the theft indi'ates and the impa't on the finan'ial reports8 4ollo)ing the ris/ assessment suite: Jou )ill )ant an in-depth understanding of the entit(8 Bhat is the tone at the topK Are poli'ies and pro'edures implemented and monitoredK Jou )ill )ant an in-depth understanding of internal 'ontrol8 Do 'ontrol pro0lems e tend 0e(ond the ta 'olle'tor and or propert( management =e a'tl( )ho )as responsi0le>K ?o) )as someone a0le to )al/ off )ith t)o serversK Bhat impa't does the data or the pervasiveness of the pro0lem have on material misstatement in the finan'ial reportsK $8 On'e ris/s are assessed, further audit pro'edures )ill li/el( need to 0e performed in response to the identified ris/s8 GAGAS reAuirements )ould en'ompass all ris/ assessment performed for a GAAS audit8 ?o)ever, )hen assessing the ris/ of material misstatement, GAGAS also reAuires the auditor to 'onsider a0use as a possi0le sour'e of ris/8 Given the information in the ne)s arti'le it is possi0le a0use is o''urring or has o''urred8

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Chapter 11 Auditing of Governmental and Not-for-Profit Organizations Ch8 11, Solutions =Cont<d>

11-!8 9his 'ase highlights t)o issues: =1> determining )hether an organization has e pended suffi'ient federal a)ards to reAuire either a single audit or program-spe'ifi' audit =not al)a(s an eas( tas/>H and =!> the auditor<s responsi0ilities to 'ommuni'ate to the auditee that a single audit is reAuired and to e er'ise due professional 'are in planning and 'ondu'ting the audit8 9hese issues are addressed in the follo)ing solutions to the three reAuirements of the 'ase8 a" Anal(sis of e penditures of federal a)ards sho)s that 6ountain #a/e 6ental ?ealth Affiliates e pended more than F"11,111 in federal a)ards and therefore is reAuired to have a single audit8 9otal e penditures of federal a)ards is determined as follo)s: 3tem 18 !8 $8 &8 "8 Grant from Cit( Private gifts 6edi'are servi'es 4ree rent Counseling servi'es 9otal b8 4ederal A)ards % pended F +",111 -1-1$1,111 &11,111 F"1",111 ="1I of F1"1,111 e pended> =not appli'a0le> =e 'luded> =ma imum>

As )ith an( good 'ase, formulating a solution for this reAuirement ma( reAuire some independent resear'h of the authoritative literature =A3CPA Professional Standards, the (ello) 0oo/, and O6@ Circular A-133>8 @ased on su'h resear'h, one 'ould 'on'lude that 6r8 Bise )ould 0e un)ise to a''ept this engagement for F",111 sin'e a single audit 'ondu'ted in a''ordan'e )ith GAGAS and O6@ Circular A-133 reAuires 'onsidera0l( more audit planning, audit )or/, and audit reporting than a finan'ial statement audit 'ondu'ted in a''ordan'e )ith GAAS8 6r8 Bise should prepare an engagement letter stating that the audit )ill 0e a single audit to 0e 'ondu'ted in a''ordan'e )ith GAAS, GAGAS, and O6@ reAuirements8 3deall(, the audit 'ontra't )ould spe'if( 6r8 Bise<s hourl( 0illing rate and that of an( audit staff and provide for pa(ment 0ased on a'tual hours of audit )or/ performed8 ?o)ever, audit 'ontra'ts often provide for a ma imum audit fee to prote't the auditee8 6ore often than not the a'tual fee is the ma imum allo)ed under the 'ontra't8

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Chapter 11 Auditing of Governmental and Not-for-Profit Organizations Ch8 11, Solutions, Case 11-! =Cont<d>

3f 6ountain #a/e refused to 'ontra't for a full-s'ope single audit, 6r8 Bise )ould 0e o0ligated under A3CPA Professional Standards, AL M,1181&, to 'ommuni'ate to 6ountain #a/e<s management and audit 'ommittee =or, if no audit 'ommittee, to the governing 0oard> that an audit in a''ordan'e )ith GAAS does not meet the legal and regulator( reAuirements esta0lished 0( the federal government for re'ipients )ho e pend F"11,111 or more in federal a)ards8 4urther, the auditor should 'onsider the impli'ations of the illegal a't =of not having the reAuired audit> and the potential that the auditee ma( 0e attempting to 'over other illegal a'ts or other non'omplian'e 0( avoiding the single audit8 3n su'h a 'ase, 6r8 Bise )ould 0e o0ligated 0( GAGAS to report the auditee<s refusal to 'ontra't for a single audit to an appropriate federal offi'ial8 O6@ Circular A-133 provides for a variet( of san'tions if a nonfederal entit( does not o0tain a reAuired single audit8 Prefera0l(, in this 'ase, 6r8 Bise )ould )ithdra) from the engagementH 0ut if he should de'ide to 'ondu't the audit in a''ordan'e )ith GAAS, he )ould 0e reAuired to issue a Aualified or adverse opinion, or dis'laim an opinion if he )as una0le to perform needed audit )or/8 c8 6a(0e8 6r8 Bise )ould 0e reAuired to referen'e the GAGAS conceptual framework for independence shown in Illustration 11-7. While the task of preparing routine ta filings )as previousl( listed in the GAO<s Amendment No8 $ to the 1--* Government Auditing Standards on independen'e as an e ample of a servi'e that )ould not impair the independen'e of an auditor, the 'urrent standards do not list a''epta0le pra'ti'es 0ut instead reAuire use of the 'on'eptual frame)or/ for guidan'e8

11-$8 9here is a great deal more information (ou )ill )ant 0efore ma/ing (our 0id8 Some of the fa'tors affe'ting pri'e that (ou might have on (our list in'lude: 18 Num0er of ma2or programs and 'omponent units8 9he larger the num0er of ma2or programs the more opinion units on )hi'h (ou )ill need to determine materialit( and opine8 An auditor should 'onsider )hether the do)nto)n development distri't is a 'omponent unit of the 'it( for reporting purposes8 !8 Prede'essor auditor8 Bhen a prior auditor 'hooses not to pursue an audit engagement it ma( indi'ate that there is an element of audit ris/ involved8 An in'oming auditor )ill )ant to determine )hether there )ere disagreements 0et)een the prior auditor and management or the ne) administrationK 3t also raises the Auestion of )hether there are pro0lems that the previous audits failed to un'over and )hether prior (ear )or/ papers )ould 0e made availa0le8 $8 9he amount of aid re'eived from the federal government8 3f the 'it( e pends over F"11,111 in federal funds it is su02e't to a single audit, in'reasing the 'omple it( of the audit8 &8 9he num0er of federal programs and the amount of funds e pended 0( ea'h program8 9he num0er and size of federal programs 'an affe't the ma2or programs sele'ted for program 'omplian'e revie), and thus the 'omple it( of the audit8

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Chapter 11 Auditing of Governmental and Not-for-Profit Organizations Ch8 11, Solutions, Case 11-$ =Cont<d>

"8 Spe'ifi's of the former )aste)ater emplo(ee la)suit and allegations of improper pa(ments8 9hese issues involve internal 'ontrols at the fa'ilit(, potential illegal a'ts, and 'ontingent lia0ilities to the 'it(8 %a'h of these areas impa'ts audit planning and field)or/8 *8 Other than the ne) administration and the la)suit, other ris/ fa'tors8 9he ne) 'ontroller is a CPA )ith government audit e perien'e, )hi'h ma( help mitigate some ris/8 ?o)ever, the 'ontroller is ne) to the 'ulture and environment of the 'it( government8 3tem & indi'ates that other ris/ fa'tors 'ould in'lude a 0udgetar( defi'it and the adeAua'( of finan'ial reserves8 .is/ fa'tors 'an in'rease the amount of testing reAuired, thus driving up the pri'e8 11-&8 9he o02e'tives of this 'ase are to familiarize (ou )ith government audit resour'es availa0le on the 3nternet and to illustrate the pro'ess for sele'ting ma2or programs for audit using the ris/-0ased approa'h8 a" 9he Department of %du'ation sponsors 9itle 3 =C4DA ,&8111> and 9.3O Student Support Servi'es =C4DA ,&81&!>8 9he National S'hool #un'h Program =C4DA 118""">, S'hool @rea/fast Program =C4DA 118""$>, and Child and Adult Care 4ood Program =C4DA 118"",> are sponsored 0( the Department of Agri'ulture8 ?ead Start =C4DA -$8*11> is sponsored 0( the Department of ?ealth and ?uman Servi'es8 b" 9)o of the Department of Agri'ulture sponsored programs 'an 0e treated as a 'luster for audit purposes8 9he( are the National S'hool #un'h Program and the National S'hool @rea/fast program8 c" 9otal e penditures are F,-*,!*1H therefore, the 'riterion for sele'ting a ma2or 9(pe A program )ould 0e F$11,111 in federal funds e pended8 ?ead Start is the onl( program that meets this reAuirement8 9he 'luster of programs =S'hool #un'h and S'hool @rea/fast> at F$$,1&-, the 9.3O-Student Support Servi'es program at F"",111 and the Child and Adult Care 4ood Program at F!,,11! fall 0elo) the threshold and )ould 0e e empt from 'onsideration 0ased on their size8 d" @ased on size alone, it )ould 0e reasona0le to sele't the ?ead Start program8 ?ead Start is a 9(pe A program and the resour'es e pended are over half of those re'eived 0( the entit(8 Sin'e there are no lo)-ris/ 9(pe A programs, onl( the ?ead Start program )ould need to 0e audited8 e" 9his is a diffi'ult Auestion8 Noti'e that the onl( )a( the "1 per'ent 'overage rule 'an 0e met is 0( auditing the ?ead Start program8 One single audit pro0lem that O6@ and GAO have identified in the past relates to the same programs al)a(s 0eing audited8 9his presents one situation )here the auditor ma( 'ontinue to audit a lo)ris/ program 2ust to meet A-1$$ reAuirements8 9he auditor should anal(ze the

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Chapter 11 Auditing of Governmental and Not-for-Profit Organizations Ch8 11, Solutions, Case 11-& =Cont<d>

auditee to determine if the auditee )ould Aualif( as a lo)-ris/ auditee8 3f the auditee is lo)-ris/ the auditor need audit !" per'ent of federal funds e pended8 9he auditor must still sele't at least one 9(pe @ for ea'h lo) ris/ 9(pe A8 Lsing the lo)-ris/ 'riterion, F!!&,1** of e pended funds )ould need to 0e audited8 9o meet the reAuirements the auditor 'ould sele't the 9itle 3 program8 f" All of the programs identified e ist to serve e'onomi'all( disadvantaged 'hildren =9itle 3, ?ead Start, and the student support servi'es program>, or funding is in'reased if e'onomi'all( disadvantaged 'hildren are served =the food programs>8 9he in'ome eligi0ilit( of the 'hildren served 0e'omes an important 'omplian'e issue sin'e a violation of this 'omplian'e reAuirement indi'ates federal funds have 0een misspent )ith regard to program purpose8 11-"8 Although this 'ase reAuires no anal(sis, it is a useful e er'ise to give students a feel for the resour'es auditors use to test for 'omplian'e in performing single audits8 a8 b" 9he Catalog of Federal #omestic Assistance =C4DA> num0er for this program is readil( determina0le from the Catalog: 1*8+118 9he program<s o02e'tive, as stated on the C4DA )e0 site, is to advan'e the pra'ti'e of 'ommunit( poli'ing as an effe'tive strateg( in 'ommunities; efforts to improve pu0li' safet(8 A''ording to the Compliance Supplement, the program<s o02e'tive is to provide resour'es to address la) enfor'ement needs )ith a fo'us on in'reasing the 'apa'it( of re'ipients to implement 'ommunit( poli'ing strategies8 @ased on the matri provided in Part ! of the 6ar'h !111 A-133 Compliance Supplement, the des'ription of 'omplian'e reAuirements in Part $ of the Compliance Supplement, and the more detailed 'omplian'e reAuirements in Part &, the follo)ing generi' 'omplian'e reAuirements are appli'a0le to the program8 NNote: these are assigned the same identif(ing letters as sho)n in the Compliance Supplement8O A8 A'tivities Allo)ed or Lnallo)ed @8 Allo)a0le CostsGCost Prin'iples C8 Cash 6anagement D8 %Auipment and .eal Propert( 6anagement %8 6at'hing, #evel of %ffort, %armar/ing 48 Period of Availa0ilit( of 4ederal 4unds G8 Pro'urement and Suspension and De0arment ?8 .eporting

c"

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Chapter 11 Auditing of Governmental and Not-for-Profit Organizations Ch8 11, Solutions, Case 11-" =Cont<d>

d" =1> No8 3t does not appear that a 4ourth of Pul( pi'ni', even if it did improve 'ommunit( relations, )ould Aualif( as allo)a0le a'tivities8 Allo)a0le 'osts primaril( relate to hiring 'osts8 =!> Partiall(8 9he salar( for an entr(-level la) enfor'ement offi'er is allo)a0le8 ?o)ever, the salar( limit is F1!",111 =in the !111 Compliance Supplement>H thus F1!",111 is allo)ed under the grant, and the remainder is the responsi0ilit( of the 'ount(8 =$> Jes8 9he hiring of 'ivilian personnel to develop a neigh0orhood )at'h appears to fall under the guidelines and o02e'tives of the Pu0li' Safet( Partnership and Communit( Poli'ing Grants program8 9he 'osts should 0e 'harged to the nonhiring CPD grant8 11-*8 a" 9he seven threats found in GAGAS Se'tion $811 are as follo)s: =1> Self-interest threat - the threat that a finan'ial or other interest )ill inappropriatel( influen'e an auditor<s 2udgment or 0ehavior8 =!> Self-revie) threat - the threat that an auditor )ill not appropriatel( evaluate the results of a previous 2udgment made or servi'e performed 0( the auditor, or the audit organization, on )hi'h the auditor )ill rel( )hen forming a 2udgment signifi'ant to an audit8 =$> @ias threat - the threat that an auditor )ill, as a result of politi'al, ideologi'al, so'ial, or other 'onvi'tions, promote a position held 0( the auditor or the audited entit( to the point that the auditor<s o02e'tivit( is 'ompromised8 =&> 4amiliarit( threat - the threat that due to a long or 'lose relationship )ith management or personnel of an audited entit( or emplo(er, an auditor )ill 0e too s(mpatheti' to their interests or too a''epting of their )or/8 ="> Lndue influen'e threat - the threat that e ternal influen'es or pressures )ill impa't an auditor or audit organization<s a0ilit( to ma/e independent and o02e'tive 2udgments8 =*> 6anagement parti'ipation threat - the threat that results from an auditor<s ta/ing on the role of management or other)ise performing management fun'tions on 0ehalf of the entit( undergoing an audit or attestation engagement8 =+> Stru'tural threat - the threat that an audit organization<s pla'ement )ithin a government entit(, in 'om0ination )ith the stru'ture of the government entit( 0eing audited, )ill impa't the audit organization<s a0ilit( to perform )or/ and report results o02e'tivel(8 9hree of the seven threats 'ould appl( to this situation8 Sin'e the a''ounting firm put the a''ounting s(stem in pla'e, the auditor 'ould 0e in a position of revie)ing or evaluating his o)n )or/ or set of 'ontrols =self-revie) threat>8 3f the ne) auditor is familiar enough )ith the a''ounting s(stem to have the a0ilit( to override 'ontrols, management parti'ipation threat 'ould 0e a pro0lem8 4inall(, if the personnel that implemented the a''ounting s(stem 'hange spent a great deal of time in the 'it( offi'es, familiarit( threat 'ould also prove to 0e an issue8

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Chapter 11 Auditing of Governmental and Not-for-Profit Organizations Ch8 11, Solutions, Case 11-* =Cont<d>

b" A reAuest for proposals for governmental audit servi'es should des'ri0e a''ountingrelated 'hara'teristi's of the governmental entit( and detail the s'ope of audit servi'es 0eing reAuested, as )ell as the spe'ifi' Aualifi'ations desired of audit firms responding to the .4P8 An .4P should 0e )idel(-dispersed to Aualified audit firms and advertised in lo'al 0usiness and professional periodi'als8 9he introdu'tor( se'tion t(pi'all( in'ludes information a0out the governmental entit( and the audit8 Some governments, primaril( those )ith large, 'omple audits, reAuire that a lo'al or minorit( audit firm 0e su0'ontra'ted for portions of the audit8 A se'tion outlining the details of the audit should also 0e in'luded8 3t )ill 'over the s'ope of servi'es 'ontained in the proposal =finan'ial audit, single audit, and an( additional 'omplian'e auditing>, the auditing standards to 0e follo)ed =GAAS, GAGAS, or state-mandated standards>, reports to 0e issued, assistan'e to 0e provided to the auditor, and other 'onsiderations, su'h as )or/ing paper retention and a''ess to )or/ing papers8 9he government see/ing an audit should also 0e des'ri0ed in the .4P8 Summar( finan'ial data =e8g8, total revenues, num0er of funds, 'omponent units> and a''ounting fun'tion staff 'hara'teristi's should 0e dis'losed8 Prospe'tive auditors )ill also 0e interested in the availa0ilit( of prior finan'ial reports and re'ords, in'luding 2ournal entries, as )ell as management letters issued and pension plan information8 %ngagement spe'ifi's, su'h as the timing of the audit, )or/ s'hedules, estimated hours, prior (ear audit fees, and due date are also important8 9he governmental entit( should also spe'if( the reAuired Aualifi'ations of the auditing firm, in terms of e perien'e, staff size, li'ensing and training, and independen'e8 .eferen'es from other governmental audit 'lients and results of peer revie)s might 0e reAuested8 3f availa0le, evaluation 'riteria should 0e provided )ithin the .4P8 A solution this 'omplete )ould reAuire some resear'h on the part of the student8 A good referen'e arti'le is availa0le at http:GG)))8nhlg'8orgGpu0li'ationsGitemQdetail8aspK9CArti'le3DR-*8 11-+8 9he Sar0anes-O le( A't 0rought attention to audit 'ommittees, although man( organizations have 'harged su0sets of the 0oard or 'oun'il )ith spe'ifi' duties relating to the audit and auditors8 a" 9here are man( resour'es, )or/shops, arti'les and 0oo/s on the topi' of audit 'ommittees in general8 4or governments, in parti'ular, the A3CPA has a resour'e titled Government Audit Committee !oolkit availa0le at )))8ai'pa8org8

11-11

Chapter 11 Auditing of Governmental and Not-for-Profit Organizations Ch8 11, Solutions, Case 11-+ =Cont<d>

b" 9he 0enefits of an audit 'ommittee in'lude helping the auditors remain independent of the management8 A 'oun'il )ith an audit 'ommittee )ill 0e a0le to more 'losel( monitor the )or/ of the auditors and 'ommuni'ate )ith the )ider 0oard a0out audit findings8 Duties )ill in'lude retaining the pu0li' a''ounting firm that 0est meets the sele'tion 'riteria set forth in a reAuest for proposal =.4P>, and then meeting periodi'all( throughout the (ear )ith the auditors to dis'uss the audit plan, progress, and findings8 @oard or 'oun'il mem0ers )ho serve on the audit 'ommittee )ould 0e e pe'ted to have finan'ial e pertise in the area of finan'ial reporting or auditing in order to )or/ effe'tivel( )ith the auditors and report 0a'/ to the 0oard or 'oun'il as a )hole8 9he 'osts of an audit 'ommittee might in'lude the time and energ( it )ill ta/e to re'ruit and orient 0oard or 'oun'il mem0ers to serve on su'h a 'ommittee, as )ell as the time it ta/es to meet periodi'all( throughout the (ear8 %a'h student<s report should demonstrate not onl( strong )ritten 'ommuni'ation s/ills, 0ut also effe'tive and persuasive language a0out the 0enefits and 'osts of audit 'ommittees to guide the 'it( 'oun'il in its deli0erations8

11-1!

Chapter 11 Auditing of Governmental and Not-for-Profit Organizations

Solutions to % er'ises and Pro0lems 11-18 %a'h student should have a different governmental annual report, so )ill have different ans)ers to Auestions in this e er'ise8 Some time spent in 'lass to allo) students to report on their o)n ans)ers and to get an idea of the range of the ans)ers of other students is useful8 11-!8 18 !8 $" &8 "8 d" d8 b8 c" d" *8 +8 ,8 -8 118 a" c" a8 c" b"

11-$8 18 7 *8 DN7S !8 DN7SS +8 7 $8 7 ,8 7 &8 7 -8 DN7SS "8 7 118 7 S 9his is 0asi' /no)ledge an a''ountant should possess8 SS9his is to help individual 'lients, and is not related to government8 11-4. a. Total federal awards expended for the year are $15,217,000. Using the sliding scale for deter ining the threshold for a Type ! progra "fo#nd earlier in this chapter$, it can %e deter ined that the threshold is $45&,510 "$15,217,000'.0($. Those progra s that wo#ld %e classified as Type ! %eca#se they exceed the threshold wo#ld %e )rogra s 1, (, 4, and *. The Type + progra s wo#ld %e )rogra s 2, 5, &, 7 and 10. %. )rogra s 1, (, and * wo#ld %e selected for a#dit in the c#rrent year. )rogra 4 is a low-ris, Type ! progra so it does not need to %e a#dited in 10 ha.e declined a,ing the c#rrent period. -#nds expended for )rogra

it a Type + progra , additionally it is low-ris, %ased on prior a#dit res#lts. )rogra s 1, ( and * are Type ! progra s that ha.e not %een classified as low ris, so they #st %e a#dited. The total f#nds expended for these #st %e considered. progra s are $7,5/4,000, which is short of the 50 percent co.erage re0#ire ent of $7,&0/,5001 therefore Type + progra s

11-1$

Chapter 11 Auditing of Governmental and Not-for-Profit Organizations Ch8 11, Solutions, 11-& =Cont<d>

2ince one Type ! progra Type + progra

was identified as low-ris, at a

ini #

one eet

sho#ld %e selected. !ny of the Type + progra s will

the 50 percent co.erage r#le. 3f there are no ris, considerations that wo#ld ca#se the a#ditor to select one Type + progra wo#ld pro%a%ly select )rogra c. 4es. 5ith a new, inexperienced 7. anager, )rogra 4 co#ld now %e 4 was now high ris,, o.er the other, the a#ditor

considered high ris,. 3f it was dee ed that )rogra percent co.erage r#le1 howe.er, it is a ini #

the progra s a#dited wo#ld %e 1, (, 4 and *. This wo#ld exceed the 50 co.erage r#le and does not ta,e precedence o.er identification of high-ris, Type ! progra s. d. )rogra s 1 and 4 %oth for a#dit. eet the 256 co.erage ini # "$5,217,000'.25 7

$(,/04,250$, %#t since progra

4 is low-ris, progra

1 sho#ld %e selected

11-5.

1. 2. (. 4. 5.

8!8!2 8!!2 8!!2 8!8!2 8!8!2

&. 7. /. *. 10.

8!!2 8!8!2 8!!2 8!!2 8!8!2

11-&. 2o e of the changes that wo#ld need to %e

ade to %ring the 2teele and

2teele a#dit report into confor ance with a#dit standards incl#de9 3n the introd#ctory paragraph the opinion #nits on which the a#ditor will opine #st %e identified. #st identify that the generally accepted a#diting The scope paragraph

standards are U.2. standards.

11-1&

Chapter 11 Auditing of Governmental and Not-for-Profit Organizations

Ch8 11, Solutions, 11-* =Cont<d>

3n the opinion paragraph the a#ditor each opinion #nit.

#st pro.ide an opinion relati.e to

The explanatory infor ation is inco plete. The a#ditor has addressed so e s#pple entary infor ation, howe.er, ore than the 2tatistical 2ection is considered s#pple entary. !ny introd#ctory infor ation, co %ining state ents or indi.id#al non a:or financial state ents sho#ld also %e entioned. The a#ditor also needs to indicate that re0#ired s#pple entary infor ation incl#ded in the financial report is o#tside the scope of the a#dit and address any li ited proced#res applied to re0#ired s#pple entary infor ation.

!dditionally, the report

entions go.ern ent a#diting standards in the

scope paragraph. 3f a 8!8!2 a#dit was perfor ed the report sho#ld also incl#de an internal control report on financial reporting and co pliance with law, reg#lation, and pro.isions of contracts and grants, or a state ent indicating that the report has %een separately iss#ed "8!8!2 reporting standard 2$.

11-1"