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Auditing. 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). Overview.

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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)


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)

objectives of a financial audit
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.

objectives of a financial audit1
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

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

generally accepted auditing standards
Generally Accepted Auditing Standards

General Standards

Adequate technical training & proficiency as auditor

Independence in mental attitude

Due professional care

generally accepted auditing standards1
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

generally accepted auditing standards2
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

Paragraphs in a standard audit report:


Identifies FS being audited


Describes nature of the audit


Expresses auditor’s opinion re: “fairness” of FS


Used in most governmental audits, usually related to auditor’s role in reviewing supplementary information

Auditor’s Standard Report

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



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

statement on auditing standards sas
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)

statement on auditing standards sas1
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

statement on auditing standards sas2
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.

statement on auditing standards sas3
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.

auditing required supplementary information rsi
Auditing Required Supplementary Information (RSI)

RSI, such as:


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


Opinion as to whether FS are presented fairly in conformity with GAAP & all material facts are disclosed

Types of

Governmental Audits

Attestation engagement

Examinations/procedures that lead to a report & assertion about subject matter that is the responsibility of another party

Internal controls



Contract amounts

Performance measures

Types of

Governmental Audits


Determination of whether managers are using resources efficiently & effectively in accomplishing organizational goals

Types of

Governmental Audits

u s general accountability office gao
U.S. General Accountability Office (GAO)

Establishes Generally Accepted Government Auditing Standards (GAGAS)

Intended to supplement GAAS

Standards in “Yellow Book”

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

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

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

GAGAS standards place much more emphasis on compliance with laws and regulations & ethicsthan do GAAS

Unique Aspects of GAGAS

independence standards
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

gao independence standards non audit services
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


Preclude nonaudit personnel from planning audit

Do not reduce audit scope


Consideration of nonaudit work

Understanding with client of objectives & scope of audit work

GAO Independence Standards–Nonaudit Services


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

gao independence standards nonaudit services
GAO Independence Standards Nonaudit Services

Acceptable - no safeguards needed

Providing routine advice/methodologies

Serving on advisory committees

Answering technical questions

Providing training

gao independence standards nonaudit services1
GAO Independence Standards Nonaudit Services


Maintaining accounting records

Posting transactions

Recommending a single person for a position

Supervising information technology system

gao independence standards nonaudit services2
GAO Independence Standards Nonaudit Services


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

gao independence standards nonaudit services3
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


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

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

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?

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?

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

All high risk** Type A** programs AND either

Half high-risk Type B programs


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)

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


Material misrepresentations by the auditee

Reporting Under Single Audit

Schedule of findings & questioned costs

Questioned cost

Usually involves instance of noncompliance with a law/regulation where costs are



Not supported by adequate documentation

Must be reported in schedule

Known questioned costs > $10,000

Likely costs > $10,000

Reporting Under Single Audit

external auditor s role
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

management s role
Management’s Role

Full responsibility

Fair presentation of the FS

Management Discussion & Analysis

Accompanying notes



Completeness & reliability of all information supporting FS amounts

Internal control structure

management s role1
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

certified information systems auditor
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

arra american recovery reinvestment act of 2009
ARRA American Recovery & Reinvestment Act of 2009

Rules complex

“Yellow Book” program

Recipient = any entity receiving funds directly from Fed. Gov’t