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Single Audit Quality Update IIA Washington DC Chapter. November 16, 2012. Presenter. Rafael Roman, CPA

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Single Audit Quality Update IIA Washington DC Chapter

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    1. Single Audit Quality UpdateIIA Washington DC Chapter November 16, 2012

    2. Presenter • Rafael Roman, CPA Rafael is a Technical Manager at the American Institute of Certified Public Accountants in Washington, DC, where his primary responsibility is to assist with governmental auditing and accounting matters. He manages the activities of the AICPA Governmental Audit Quality Center and helps staff both the AICPA Governmental Audit Quality Center Executive Committee and the State and Local Government Expert Panel. Rafael joined the AICPA on March 2005. Prior to joining the AICPA, Rafael was a manager at a large national firm working on Federal financial audits. However, the majority of his governmental audit experience was obtained as an internal auditor for the U.S. Marine Corps. Rafael is a graduate of Mary Washington College and is a CPA, CGMA, CIA, CGAP, and CCSA.

    3. What Will Cover • The history of Single Audit Quality • The latest on the auditing standards that apply to compliance audits • The 2012 Compliance Supplement • The status of the federal government’s efforts to revise the single audit rules • Activity of federal agencies that have compliance audit requirements outside of the single audit • GAQC update and available audit tools

    4. Brief History of Single Audit Quality

    5. History of Single Audit Quality Issues • History of quality issues: • Federal Single Audit Quality Study Results • The Project issued a report titled, Report on National Single Audit Sampling Project (the PCIE report), that was issued by the President’s Council on Integrity and Efficiency (PCIE) and can be accessed in its entirety at :

    6. History of Single Audit Quality Issues • Improvements needed in many areas including: • Internal Control: Lack of Understanding and Testing • Documentation Issues • Lack of Due Professional Care • Sampling • Compliance Testing Problems • Lack of Testing of SEFA • Unreported Findings • Material Reporting Errors

    7. AICPA Task Forces Seven task forces to examine the study's detailed findings and recommendations for the AICPA as follows: Sampling/Materiality Issues In A Single Audit Environment Internal Control And Compliance Responsibilities In A Single Audit Environment Schedule Of Expenditures Federal Awards Reporting Issues Reporting Audit Findings In A Single Audit Single Audit Training Needs And Continuing Professional Education Evaluation Practice Monitoring In A Single Audit Environment Compliance Auditing Considerations In Audits Of Governmental Entities And Recipients Of Governmental Financial Assistance History of Single Audit Quality Issues

    8. GAQC Mission and History • Overall mission to improve governmental audit quality and to be a resource to members • Why Center launched? • Indicators of problems with these audits from federal agencies (e.g., PCIE study), peer reviews, and ethics referrals • Proactive launch in light of expected federal study on single audit quality which began in 2005 (report issued in 2007) • Milestones • Council approved concept in 2003 • Board approved GAQC membership requirements in 2004 • Center launched September 2004 • Board approved state audit organization membership in 2009

    9. Latest on the Auditing Standards that Apply to Compliance Audits

    10. Technical Matters Impacting Single Audits • AICPA • SAS No. 119 • Clarity, including SAS No. 125 • AICPA GAS-A133 and other relevant Guides • 2011 Government Auditing Standards • Office of Management and Budget • 2012 Compliance Supplement • Changes to various parts and sections • Potential revisions to single audit related regulations • Federal Audit Clearinghouse

    11. Technical Update – AICPA SAS No. 119, Supplementary Information in Relation to the Financial Statements as a Whole • Effective for audits of financial statements for periods beginning on or after 12/15/10. • Scope • When the auditor is engaged to report on whether SI is fairly stated, in all material respects, in relation to the f/s as a whole • Affects SEFA in-relation-to opinion (related GAQC Practice Aids have been updated for SAS 119) • Requires the auditor to determine certain conditions are met • Provides for specific management representation

    12. Technical Update – AICPA SAS No. 119, Supplementary Information in Relation to the Financial Statements as a Whole • Specific procedures using the materiality level used in the audit of the F/S • However, keep in mind that auditor has to perform procedures beyond SAS No. 119 due to the compliance audit • Consideration of subsequent events not required for SI, however still have to consider any information related to the F/S • Reporting requirements under various scenarios (some changes in report language) • Dating – not earlier than the date on which the auditor completed procedures on SI

    13. Technical Update – AICPA Clarity • Standards Issued • SAS No. 122, Statements on Auditing Standards: Clarification and Recodification • SAS No. 123, Omnibus Statement on Auditing Standards–2011 • SAS No. 124, Financial Statements Prepared in Accordance With a Financial Reporting Framework Generally Accepted in Another Country • SAS No. 125, Alert That Restricts the Use of the Auditor’s Written Communication • Effective for audits of periods ending on or after December 15, 2012; no early implementation • Includes revisions to SAS 117 • Appendix regarding what auditing standards do NOT apply to compliance audit to be revised • Reporting changes

    14. Technical Update – AICPA Clarity • Keep in mind that many of the clarity standards have “governmental consideration” paragraphs that are specific to the public sector • May cover Yellow Book/compliance audit considerations • May cover financial statement audit considerations • Group audits will be more challenging in financial statement arena • Still looking at impact of group audits on compliance audits

    15. Technical Update – AICPA Clarity • SAS No. 125 - Government Auditing Standards reports(including A-133 reports) will contain purpose alert instead of restriction alert • Pay particular attention to effective date • Effective for the auditor’s written communications related to audits of financial statements for periods ending on or after 12/15/12 • For all other engagements conducted in accordance with GAAS, this SAS is effective for the auditor’s written communications issued on or after 12/15/12 • There has been a lot of discussion on how this effective date affects single audit reports issued after 12/15/12 (e.g., relating to 6/30/12 or 9/30/12) • ASB currently looking at issuing a question and answer addressing this

    16. Clarity section of Standards Videos Mapping from extant to new standards More Listen to archived GAQC member web events Implementing the Clarified SASs in a Governmental and Not-For Profit Audit Environment: What, When, and How? Understanding the Potential Impacts of the New Group Audits SAS on Your Governmental and NPO Audit Engagements Getting to Know the AICPA Clarity Standards

    17. Technical Update – AICPA A&A Guides • Primary Focus • Government Auditing Standards & Circular A-133 Audits • Other Industries Include • State and Local Governments • Not for Profit Entities • Health Care Entities • Gaming • Sampling • Audit Risk Alerts • Checklists & Illustrative Statements

    18. Technical Update – AICPA A&A Guides • AICPA Audit Guide, Government Auditing Standards and Circular A-133 Audits • 2012 edition issued in May • SAS No 119 is fully incorporated into guide (including the illustrative reports and SEFA practice aids in chapter 7) • Appendix added with a summary of 2011 Yellow Book revisions • Two new “clarity” Appendixes • Information on AU-C sections with substantive changes or significant clarifying changes resulting from clarity • Table that maps current AU sections to the new AU-C section numbers • 2012 GAS-A133 Audit Risk Alert also issued • Guide - Looking forward • Clarity and new Yellow Book

    19. Technical Update – AICPA A&A Guides • AICPA A&A Guide, State and Local Governments • 2012 Edition issued in July 2012 • Incorporated GASB 62 (earlier than normal) but did so with appropriate footnotes to assist those that have not early implemented. • Also updated for SAS Nos. 118, 119 & 120; illustrative reports updated for these statements and will also be posted on GAQC Web site • Plans for 2013 and 2014 • SLG Audit Risk Alert • Other SLG Publications • Updated SLG Practice Aid for Other Comprehensive Basis of Accounting

    20. Technical Update – Not-for-Profit • AICPA A&A Guide, Not-for-Profit Entities – Overhaul • Overhaul in process; exposure draft posted for comment • Some of the main areas being addressed • Reporting relationships with other entities • Reporting and measuring noncash gifts • A new chapter on program-related investments and microfinance loans • Reporting the expiration of donor-imposed restrictions • Suggestions for audit procedures an auditor might consider as a supplement to the risk assessment procedures • AICPA A&A Guide, Not-for-Profit Entities– Conforming Changes • 2012 edition issued in May 2012 • Normal update changes for new standards

    21. Technical Update – Health Care A&A Guide • Covers governmental, not-for-profit, and for-profit health care entities • 2012 edition expected in November 2012 • Clarity standards to be incorporated

    22. Technical Update – Government Auditing Standards • Final 2011 edition issued • Main change relates to independence, especially when performing nonaudit services • Very few changes made from interim version previously posted • Effective date same as AICPA clarity • For financial audits for periods ending on or after 12/15/12 • No early implementation • However, auditors need to be independent for entire audit period • New Yellow Book independence requirements for nonaudit services may need to be considered as early as 1/1/12

    23. Technical Update – Government Auditing Standards • Resources for 2011 Yellow Book (should be referred to in other AICPA offerings – all open to the public) • Archived GAQC Web event, The New 2011 Yellow Book: What You Need to Know Now, provides a more in-depth discussion on 2011 Yellow Book • GAQC practice aid titled, 2011 Yellow Book Independence—Nonaudit Services Documentation Practice Aid • Archived GAQC Web event, Understanding the AICPA's Yellow Book Independence Practice Aid for Performing Nonaudit Services • Ethics comparison of AICPA standards versus GAO

    24. Technical Update – Government Auditing Standards • New! Yellow Book Independence Practice Aid • New practice aid developed by GAQC, working with the AICPA ethics and peer review teams, to assist auditors in meeting the Yellow Book requirements • Federal agency representatives reviewed the practice aid and provided feedback • Includes documentation template to illustrate one way to prepare required documentation in this area and many informative appendices • Issued free to AICPA members in flat PDF version and also a for-sale version that permits input responses to the documentation template

    25. Technical Update – Government Auditing Standards • Purpose of GAQC YB Practice Aid • To assist auditors in: • Applying the independence conceptual framework • Identifying and evaluating threats to independence for nonaudit services • Identifying safeguards where necessary • Assessing management’s Skills, Knowledge, or Experience (SKE) • Complying with YB documentation requirements • Practice Aid highlights nonaudit services frequently performed for smaller entities: • Preparing financial statements (F/S) • Preparing journal entries other than proposed audit entries • Preparing reconciliations

    26. Section II: Example Documentation

    27. Section III: Example Documentation

    28. Government Auditing Standards Practice Aid • Become familiar with the Practice Aid and its Appendixes:

    29. Technical Update – GAO – 2011 Yellow Book • How to Obtain the Practice Aid • Flat PDF Version. Free to AICPA members, including GAQC members. Access the free pdf version of the Practice Aid on the GAQC Web site • For Sale Version. Practice Aid Version Designed for Auditor Documentation Input (Supplement) available for a small fee to AICPA members, GAQC members, and non-members; order the for-sale Supplement • Can be saved and included as part of auditor’s documentation

    30. The 2012 Compliance Supplement

    31. Technical Update – OMB Compliance Supplement • Final issuance Supplement issued in July 2012 • Accessing the Final Supplement • Upon issuance, go to OMB's Web site at "Grant Management Circulars" link: down to the "Audit Requirements" section) • Both current and prior Supplements available (use the correct version!) • OMB previously provided a draft Supplement for Audit “Planning” Purposes • Previously posted on GAQC Web page • Do not use the draft now that the final is issued

    32. Technical Update – OMB Compliance Supplement • Program changes by the numbers • Review Appendix V for changes made • Don’t overlook Appendix VII • Effect of Recovery Act Awards on major program determination Guidance • List of Recovery Act programs not covered by Parts 4 or 5 but that could be subject to a single audit and list of Recovery Act programs not subject to single audit • Late Filings and Low-Risk Auditee Status • Treatment of Large Loan and Loan Guarantee Programs

    33. Technical Update – OMB Compliance Supplement • Part 3, Requirement I, “Procurement and Suspension and Debarment” • Addressed relationship between procurement requirements of A-102 common rule and change in federal simplified acquisition threshold • Part 3, Requirements L, "Reporting" • Clarified subaward reporting under the Federal Funding Accountability and Transparency Act of 2006 (FFATA) • Removed timeliness as an element of financial reporting compliance requirement (change from draft Supplement) • Part 3, Requirement M, "Subrecipient Monitoring“ • Modified to add “subrecipient risk” as another factor for pass-through entities to consider when determining the nature, timing, and extent of during-the-award monitoring

    34. Technical Update – OMB Compliance Supplement • What is FFATA? • It is the federal award reporting requirements for direct recipients of non-Recovery Act federal awards • Direct recipients required to report certain first-tier subawards • Public view Web site: • Input version of Web site: • Some similarities to section 1512 reporting for Recovery Act awards but also several differences

    35. Technical Update – OMB Compliance Supplement • When Does FFATA Apply? • For grants and cooperative agreements, the effective date was October 1, 2010, for all discretionary and mandatory awards equal to or exceeding $25,000 made with a new FAINon or after that date. • Once the requirement applies, the recipient must report, for any subaward under that award with a value of $25,000 or more, each obligating action of $25,000 or more in federal funds. • For contracts, implementation was phased-in based on their total dollar value(Supplement describes staggered phase-in)

    36. Technical Update – OMB Compliance Supplement State makes subawards of federal funds to local governments Local government expends direct federal funds but makes no subawards Not-for-profit expends federal funds received from local government and makes no subawards FFATA may apply to state (but not to local governments unless they receive other direct awards and make subawards) FFATA does not apply to local government (makes no subawards) FFATA does not apply to not-for-profit (not a direct recipient)

    37. Technical Update – OMB Compliance Supplement • Clarifying FFATA Guidance • How to understand if there is a new FAIN • Obligating actions versus funding • Incorporation in Supplement of Q&A issued on in February 2011 • If direct recipient made best effort to comply and has documented evidence, no finding needs to be reported (assuming no other issues) • Guidance on how prior year findings in this area affect current year major program determination • Access the 2011 Q&A:

    38. Technical Update – OMB Compliance Supplement • Part 5, Clusters of Programs, • Student Financial Assistance (SFA) cluster has been modified • Changed references to requirements associated with Federal Family Education Loans, • Numerous updates and deletions to various compliance requirements and procedures specific to SFA • Research and Development (R&D) cluster • Modified to reflect an update to the "Indirect Cost Limitation" based on the elimination of the requirement in 2011 • No change to NSF R&D (draft Supplement had indicated there would be a change but it was removed in final) • The Other Clusters have been revised for: • Program changes to certain clusters

    39. Technical Update – OMB Compliance Supplement • Recovery Act • Recovery Act funds dwindling but will still will affect many auditees • Compliance Supplement guidance • Clusters of programs with new Recovery Act CFDA number would fail 2-year lookbackand have to be audited (excludes R&D and SFA clusters) • Type A programs having Recovery Act expenditures generally would not be low-risk unless meet defined exception (2012 Supplement revised exception – next slide) • Type B programs still considered higher risk

    40. Technical Update – OMB Compliance Supplement • Exception for Type A Recovery Act programs slightly revised • An auditor may consider a Type A program or cluster to be low-risk if all of the following conditions exist: • Program or cluster had Recovery Act expenditures in the prior audit period; • Program or cluster was audited as a major program in EITHER OF THE TWO PRIOR AUDIT PERIODS; • Recovery Act expenditures in the current audit period are less than 20% of the total program or cluster expenditures; and • Auditor has followed Section 520(c) and 525 of OMB Circular A-133 and determined that the program or cluster is otherwise low-risk

    41. Technical Update – OMB Compliance Supplement • Other Tools • GAQC issued GAQC Alert 198 to alert members of the release of the Supplement and how differed from the draft • GAQC issued GAQC Alert 195 to alert members of the release of the draft Supplement and what it contained • Caution! If you began planning or performing interim work using the draft Supplement, you need to check the final Supplement • GAQC member-only Web event on draft version of the 2012 Supplement held with two additional rebroadcasts – still useful

    42. Using the Compliance Supplement Correctly • Use all parts for a correct Single Audit • 2: Matrix of Compliance Requirements • 3: Compliance Requirements • 4: Agency Program Requirements • 5: Clusters of Programs • 6: Internal Control • 7: Guidance for Auditing Programs not Included in the Supplement • Don’t forget Appendices – especially Appendix 7 if auditee has Recovery Act funds • Use the correct year’s Supplement

    43. Technical Update – OMB – Continued Single Audit Quality Issues • Major Program Determination, including improper clustering • Risk Assessment Documentation • Internal Control Understanding and Testing • Sampling • Schedule of Expenditures of Federal Awards • Summary of Prior Year Findings • Exception and deviation disposition • Finding Detail

    44. The Status of the Federal Government’s Efforts to Revise the Single Audit Rules

    45. Technical Update – OMB – Single Audit Revisions • Various Executive Orders and Memorandums over last several years has partially led to the revisions being considered today. • OMB issued Memorandum 12-01 on October 27, 2011, creating Council on Financial Assistance Reform (COFAR): • Charged with creating a more streamlined and accountable structure to coordinate financial assistance • COFAR is co-chaired by the Office of Federal Financial Management at OMB and includes the eight largest grant making agencies as well as one rotating member • This group is leading the charge on single audit and other related revisions

    46. Technical Update – OMB – Advance Notice • OMB issued Advance Notice on potential reform “ideas” on February 24, 2012 ( • Comments were due April 30 (access the AICPA comment letter) • Specific regulatory proposed revisions next step The reforms proposed are intended to improve the performance of federal grants and cooperative agreements ,while targeting waste, fraud, and abuse to ensure accountability in the use of funds

    47. Technical Update – OMB – Advance Notice • Increase audit threshold from $500K to $1M • Establish “limited scope” single audit for entities with expenditures between $1M and $3M: • Test only two compliance requirements for a major program • Allowable costs always tested • Second requirement selected by federal agencies • Target risk of improper payments, waste, fraud, and abuse • Require “full” single audit (with modifications) for entities with expenditures more than $3M • Streamlined compliance requirements

    48. Technical Update – OMB – Advance Notice • Full single audit modifications • Target subset of compliance requirements for increased testing, larger samples, and/or lower levels of materiality (e.g., Allowable or unallowable activities and costs, Eligibility, Period of availability, Reporting, Subrecipients) • Reduce testing of other requirements by making them optional, smaller samples, and/or higher levels of materiality (e.g., Cash management, Davis-Bacon Act, Program income)

    49. Technical Update – OMB – Advance Notice • Other Ideas for Change in Advance Notice • Strengthening audit follow-up • More cross-agency coordination • Combining and clarifying cost principles • Modifications to administrative requirements

    50. Technical Update Circular A-133 – Status of Changes • Federal Register notice of proposed changes expected before year-end with revisions to: • OMB Circular A-133 • Cost principles and administrative requirements • GAQC has heard: • Financial statement audit for entities expending between $500K and $1M with in-relation to reporting on the SEFA • Abandoned “limited scope single audit” between $1M and $3M • A streamlined single audit for all above $1M (fewer compliance requirements) • Other changes likely (e.g., change in major program and finding threshold. percentage of coverage, etc.) • No word on proposed effective date • No plans to amend Single Audit Act that we are aware of