Auditing

1. Auditing

2. Overview Objectives of a Financial Audit Generally Accepted Auditing Standards (GAAS) Auditor’s Standard Report Opinions; Materiality; RSI;SAS Types of governmental audits General Accountability Office Generally Accepted Government Auditing Standards (GAGAS)

3. Overview Independence Standards & Safeguards Audit & Non-audit services Single Audits External Auditor’s Role Management’s Role Certified Information Systems Auditor ARRA (American Recovery & Reinvestment Act of 2009)

4. Objectives of a Financial Audit Render a report by independent auditors expressing an opinion that FS present fairly the financial position, changes in financial position, &, where applicable, cash flows of the organization.

5. Objectives of a Financial Audit “Present fairly” means in conformity with appropriate generally accepted accounting principles (GAAP) Opinions based on reasonable assurance the financial statements are free from material misstatements (error or fraud) Audits DO NOT provide absolute assurance

6. Auditors performing financial statement audits (non issuers) follow GAAS, reflected in Statements of Auditing Standards (SAS) issued by the Auditing Standards Board of the AICPA 10 standards* (expanded by more than 100 SASs) general standards (3) field work standards (3) reporting standards (4) Generally Accepted Auditing Standards (GAAS) *Does not reflect new audit risk standards

7. Generally Accepted Auditing Standards General Standards Adequate technical training & proficiency as auditor Independence in mental attitude Due professional care

8. Generally Accepted Auditing Standards Standards of Field Work Adequate planning & proper supervision Study & evaluation of internal control New standard focuses on understanding entity (including IC) & its environment to assess risk of material misstatement (RMM) Sufficient competent evidential matter…basis of opinion

9. Generally Accepted Auditing Standards Standards of Reporting State if financial statements presented in accordance with GAAP GAAP consistently observed in current & preceding period Informative disclosures reasonably adequate Expression of opinion or reason why not

10. Paragraphs in a standard audit report: Opening Identifies FS being audited Scope Describes nature of the audit Opinion Expresses auditor’s opinion re: “fairness” of FS Explanatory Used in most governmental audits, usually related to auditor’s role in reviewing supplementary information Auditor’s Standard Report

11. Unqualified (clean) FS present fairly financial position & changes in position (and cash flows, if applicable) according to GAAP Qualified opinion FS contain material departure from GAAP or there is a material change between periods in GAAP Adverse opinion FS do not present fairly in conformity with GAAP Disclaimer of opinion Often due to inability to examine records. Types of Auditor’s Opinions

12. Materiality DEFINITION In the auditor’s judgment, level at which the quantitative or qualitative effects of misstatements will have a significant impact on users’ evaluations Auditors make separate materiality determinations for each opinion unit. Governmental activities Business-type activities Aggregate discretely presented component units Each major governmental & enterprise fund Aggregate remaining fund information

13. Statement on Auditing Standards (SAS) Most important for PG: SAS 114 – Communicating with those charged with governance Auditor’s responsibilities under GAAS Overview of planned scope & timing of audit Significant findings from the audit Qualitative aspects of significant accounting policies Significant difficulties Material misstatements (uncorrected and/or uncorrected) Disagreements with management Other significant issues discussed with management Auditor’s choice (oral or written)

14. Statement on Auditing Standards (SAS) Most important for PG: SAS 115 - Communicating IC Related Matters Replaces SAS 112 effective 9/30/2010 Definition of terms: Control Deficiency Significant deficiency (replaces reportable condition) Material weakness Requires written communication of significant deficiencies and material weaknesses to management and those charged with governance

15. Statement on Auditing Standards (SAS) Most important for PG: SAS 115 - Communicating IC Related Matters Definition of terms: Control deficiency: A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis.

16. Statement on Auditing Standards (SAS) Most important for PG: SAS 115 - Communicating IC Related Matters Definition of terms (continued): Significant deficiency: A control deficiency, or combination of control deficiencies such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected. Material weakness : A significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

17. Auditing Required Supplementary Information (RSI) RSI, such as: MD&A budgetary comparison schedules pension information modified approach information are normally outside the scope of the FS audit Auditors apply “certain limited procedures” in connection to RSI to provide assurance that they are fairly presented in relation to the basic financial statements

18. Financial Opinion as to whether FS are presented fairly in conformity with GAAP & all material facts are disclosed Types of Governmental Audits

19. Attestation engagement Examinations/procedures that lead to a report & assertion about subject matter that is the responsibility of another party Internal controls Compliance MD&A Contract amounts Performance measures Types of Governmental Audits

20. Performance Determination of whether managers are using resources efficiently & effectively in accomplishing organizational goals Types of Governmental Audits

21. U.S. General Accountability Office (GAO) Establishes Generally Accepted Government Auditing Standards (GAGAS) Intended to supplement GAAS Standards in “Yellow Book”

22. Required for Single Audit* of organizations that expend more than $500,000 in federal financial assistance in any year May be required by states of its local governments All governments required in FL Generally Accepted Government Auditing Standards (GAGAS) *Single Audit Act of 1984

23. Standard re: professional proficiency Thorough knowledge of governmental auditing & the specific or unique environment in which audited entity operates Applies to all governmental auditors regardless of professional certifications At least 80 hours CPE every 2 years At least 20 hours in each of the 2 years At least 24 hours related directly to the audit environment Unique Aspects of GAGAS

24. 80 hours CPE Remaining 56 hours must improve proficiency to audit & attest if involved In any level of planning, supervision, reporting, or reviewing More than 20% of time in fieldwork on these types of engagements Proficiency standards apply to internal experts as well as governmental auditors Unique Aspects of GAGAS

25. GAGAS standards place much more emphasis on compliance with laws and regulations & ethicsthan do GAAS Unique Aspects of GAGAS

26. Independence Standards Independence is the cornerstone of the auditing profession and the second general standard in both the AICPA’s GAAS and GAO’s GAGAS Non audit services That solely performed for the benefit of the entity requesting the work & does not provide for a basis for conclusions, recommendations, or opinions as would a financial audit, attestation engagement, or performance audit

27. GAO Independence Standards–Non-audit Services Two overarching principles: (1) Auditorsshould not perform management functions or make management decisions (2) Auditorsshould not audit their own workor provide nonaudit services in situations when the nonaudit services are significant to the audit subject matter

28. Safeguards: Preclude nonaudit personnel from planning audit Do not reduce audit scope Document Consideration of nonaudit work Understanding with client of objectives & scope of audit work GAO Independence Standards–Nonaudit Services

29. Safeguards: Include policies to ensure compliance with independence standards Independent in fact & appearance Avoid certain nonaudit work Make all documentation available for peer review GAO Independence Standards–Nonaudit Services

30. GAO Independence Standards Nonaudit Services Acceptable - no safeguards needed Providing routine advice/methodologies Serving on advisory committees Answering technical questions Providing training

31. GAO Independence Standards Nonaudit Services Prohibited Maintaining accounting records Posting transactions Recommending a single person for a position Supervising information technology system

32. GAO Independence Standards Nonaudit Services Permitted When safeguards are in place Preparing draft FS based on management’s TB Maintaining depreciation schedules Management determines key elements in calculations Proposing adjusting & correction entries Management chooses to accept

33. GAO Independence Standards Nonaudit Services Revised “Yellow Book” – 2011 New section of conceptual framework Assess threats to independence Establish safeguards No change in current status regarding independence 33

34. Improve the efficiency & effectiveness of governmental audit effort Single Audit Act of 1984 Amended 1996 Replaced multitude of grant-by-grant audits with single, comprehensive, entity-wide audit Risk based approach Provide all federal awarding agencies a single report to satisfy program’s audit requirements Single Audits

35. 1996 Single Audit Act Amendments: Establishes risk-based approach Places greater audit coverage on high risk programs Improves contents & timeliness of single audit reporting Permits OMB to administratively revise SA requirements without requiring additional legislation Circular A-133 & related Compliance Supplement Single Audits

36. Those that expend more than $500,000 in federal financial assistance in a year Up from $100,000 (1984) & $300,000 (1996) Major program threshold still $300,000 or formula driven Increased to $500,000 in 2005 What Entities Must Have a Single Audit?

37. State & local governments, not-for-profit organizations, including hospitals. If expended only for one program or one program cluster, may have a program audit, otherwise the audit must be a single audit What Entities Must Have a Single Audit?

38. Calculation of amount of federal awards expended Expended may not only be cash disbursed Calculation can be complex Cash or accrual basis allowed Basic rule Award expended when federal agency becomes at risk & nonfederal recipient has duty of accountability Single Audit

39. All high risk** Type A** programs AND either Half high-risk Type B programs OR One high-risk Type B** program for each low-risk Type A program Not required to audit more high risk “B”s than low risk** “A”s Audit at least enough major programs to ensure that at least 25% - 50% of total federal award expenditures are audited Selection of Major Programs* *Based on dollars spent **Formula driven & subjective (A-133)

40. Schedule of findings & questioned costs Describes such matters as Internal Control weaknesses Significant deficiencies Results in more than remote likelihood than material noncompliance will not be detected Material weaknesses Instances of noncompliance Questioned costs Fraud Material misrepresentations by the auditee Reporting Under Single Audit

41. Schedule of findings & questioned costs Questioned cost Usually involves instance of noncompliance with a law/regulation where costs are Unallowable Unreasonable Not supported by adequate documentation Must be reported in schedule Known questioned costs > $10,000 Likely costs > $10,000 Reporting Under Single Audit

42. External Auditor’s Role Adhere to standards of ethics & performance. Independent in both fact and appearance Assures users of FS they are free of material misstatements ”Reasonable but not absolute assurance” May provide advice, research materials & recommendations to assist management in performing its functions & making decisions

43. Management’s Role Full responsibility Fair presentation of the FS Management Discussion & Analysis Accompanying notes RSI SI Completeness & reliability of all information supporting FS amounts Internal control structure

44. Management’s Role Audit process Select auditor Meet with auditor in entrance & exit conferences Respond to auditor questions in a timely manner Consider & implement as appropriate auditor recommendations

45. Certified Information Systems Auditor Control tests balance transaction details to the total transaction Uses generalized audit software to Provide totals of unusual items Check for duplicate entries Check for missing information Verify calculation totals & routines

46. ARRA American Recovery & Reinvestment Act of 2009 Rules complex “Yellow Book” program Recipient = any entity receiving funds directly from Fed. Gov’t