Understanding HUD Audit and Reporting Issues for 2011 Audits of Supervised Mortgagees

1. Understanding HUD Audit and Reporting Issues for 2011 Audits of Supervised Mortgagees A Governmental Audit Quality Center Web Event January 6, 2012

2. Administrative Notes Troubleshooting Tips No Audio? Ensure that your computer speakers are turned on and turned up. Check to ensure that audio streaming is enabled on your computer. If the presentation slides stop advancing during the presentation, you should: Hit the red �Exit� button located to the right of the main screen; this will close out of the presentation and re-launch the webcast. If you are still having audio or other technical difficulty� Check with your IT personnel at your firm. Click on the �Support� tab on the lower right-hand side of your screen. Finally, call the AICPA Service Center at 888.777.7077. 2

3. Administrative Notes We encourage you to submit your technical questions � please limit your questions to the content of today�s program You can submit your questions at any time during this Web event by clicking on the �Q & A� tab on the lower right-hand side of your screen You can also download slides in PDF or PowerPoint by clicking on �Handouts� tab This event is being recorded and will be posted in an archived format to the GAQC Web site 3

4. Continuing Professional Education To document your participation and obtain CPE, you must click �OK� on 75% of pop-up markers There will be a total of 8 pop-up markers during the event (i.e., about 1 every 15 minutes) At end of today�s presentation we will provide steps for obtaining your CPE certificate Contact the Service Center for help with obtain CPE at 888.777.7077 or service@aicpa.org If you are not receiving CPE for this event, ignore the pop-up markers if they appear. 4

5. PresentersJean M. Joy, CPA Wolf & Company, P.C.&Amanda Nelson, CPA KPMG LLP 5

6. What We Will Cover HUD Audit Requirements and Related Updates GAGAS Financial Statement Audit Financial Statements and Supplementary Information SAS 119, Supplementary Information in Relation to the Financial Statements as a Whole Compliance Audit HUD OIG Handbook 2000.04,REV-2, Consolidated Audit Guide for Audits of HUD Programs (HUD Audit Guide) LASS Electronic Submission/Challenges Annual Filing Requirements � Mortgagee Letter (ML) 2011-25 Resources 6

7. HUD Audit Requirements � Who? Who is Subject to the HUD Audit Requirements? Supervised and nonsupervised HUD approved mortgagees and lenders regardless of the number of loans made. Loan Correspondents/TPOs Reminders Loan correspondents are no longer approved participants in FHA programs but will continue to have the opportunity to participate in FHA programs as third-party originators (TPOs) through sponsorship by FHA-approved mortgagees, as is currently the case, or through application to be approved as an FHA-approved mortgagee. FHA-approved mortgagees assume full responsibility to ensure that a TPO adheres to FHA�s loan origination and processing requirements. TPOs are not subject to annual recertification and reporting requirements of FHA. 7

8. HUD Audit Requirements � Where? Where Can You Find Further Guidance on HUD Audit Requirements? HUD Audit Guide http://www.hudoig.gov/reports/consolidated.php Various HUD Handbooks (e.g., 4060.1) as referenced through this presentation AICPA Governmental Audit Quality Center (GAQC) HUD information http://www.aicpa.org/InterestAreas/GovernmentalAuditQuality/Resources/HUDInformation/Pages/default.aspx 8

9. HUD Audit Guide � Which Chapters Apply? Auditors of supervised mortgagees need to refer to various chapters of the HUD Audit Guide, as appropriate Chapter 1 - General Audit Guidance (always applies) Chapter 2 - Reporting Requirements and Sample Reports (always applies) Chapter 6 - Ginnie Mae Issuers of Mortgage-Backed Securities Audit Guidance Chapter 7 - HUD-Approved Title II Nonsupervised Mortgagees and Loan Correspondents Audit Guidance Chapter 8 - HUD-Approved Title I Nonsupervised Mortgagees and Loan Correspondents Audit Guidance Today�s presentation will focus on: Chapters 1, 2, and 7 9

10. HUD Audit Requirements � What? What are the Audit Requirements? HUD Title I and Title II approved lenders and mortgagees are required to have an annual audit and submit their audited financial statements and compliance reports electronically through the Lender Assessment Subsystem (LASS) within 90 days of the end of their fiscal year The audit should be performed in accordance with Generally Accepted Government Auditing Standards (GAGAS) and Generally Accepted Auditing Standards (GAAS) or Public Company Accounting Oversight Board (PCAOB) Standards, as appropriate 10

11. HUD Audit Requirements: Reports What are the required reports? Financial Statement Audit: Opinion on the financial statements Report on internal control over financial reporting (no opinion is issued) An opinion on supplementary information in relation to the financial statements as a whole: consolidating schedules (if required), schedule of adjusted net worth, and Financial Data Templates HUD Compliance Audit: Report on internal control over compliance with HUD requirements (no opinion is issued) Report on compliance with applicable laws and regulations related to HUD-assisted programs Major program (opinion is issued) Non major program Refer to Chapter 2, Reporting Requirements and Sample Reports, of the HUD Audit Guide for more information 11

12. Update to Requirements: Small Lenders ML 2011-25 (7/28/11): Alternative Reporting Requirements for Small Supervised Lenders and Clarification of Requirements for Supervised Lenders in Parent-Subsidiary Relationships FHA-approved supervised lenders that are regulated by the FDIC, OTS, or NCUA whose consolidated assets do not meet the threshold (currently $500MM) required by those agencies for submitting audited F/S are not required to submit audited F/S to FHA, nor an audited computation of net worth. (Expires on April 7, 2012) The Q4 Call Report that aligns with the supervised lender�s fiscal year-end is required to be submitted. 12

13. Update to Requirements: Small Lenders (continued) Small lenders are still required to submit an independent auditor's report on: internal control as it relates to administering HUD-assisted programs; and compliance with specific requirements applicable to major and non-major HUD programs. The auditors� report on compliance for non-major programs is a negative assurance report based on a financial statement audit and can only be issued when auditors are engaged to perform the financial statement audit. 13

14. Update to Requirements: Consolidated Lenders Per ML 2011-25, FHA-approved supervised lenders that submit audited consolidated financial statements of a parent company are no longer required to submit internally prepared consolidating schedules. Net worth and liquidity requirements must be met by the FHA-approved lender regardless of the lender�s financial reporting documentation. Related FAQ 14

15. Update to Requirements: Adjusted Net Worth Requirements New Net Worth Requirements � ML 2010-20 (June 2010): Required effective 5/20/11 (for lenders w/FHA approval as of 5/20/10): Small business - >$500K Not a small business - >$1MM A supervised lender is considered a small business if average assets are <$175MM. Additional changes effective 5/20/13 15

16. Government Auditing Standards (GAGAS) 16

17. Overview of GAGAS Requirements (2007) GAGAS are published by the Comptroller General of the United States http://www.gao.gov/new.items/d07731g.pdf Terms GAGAS, GAS, and Yellow Book often used interchangeably 2007 Revision of GAGAS to be used for 2011 audits (see hyperlink above) As an FYI � GAO has issued a new 2011 Edition of GAGAS that will not be effective until periods ending on or after 12/15/2012