Chapter 15
Auditing Governments and
Not-For-Profit Organizations
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Learning Objectives
 Differentiate between auditing in the government and
not-for-profit sectors and in the business sectors.
 Influence of yellow-book on auditing
 Types of audits that governments conduct
 Standards of government audits
 Single Audit Act
 Auditor reports
 Performance audits
-Characteristics
-Key elements
 Impact of Sarbanes-Oxley on governments and not-for-profits
 Ethical issues facing governmental and not-for-profit
accountants and auditors.
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Important Concepts
 Understand very clearly what is meant by
-generally accepted government auditing standards
(GAGAS),
-the source of GAGAS, and
-why GAGAS are much broader than GAAS, in
particular for financial audits and performance audits
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Audits of Governments and
Not-For-Profits Vs. Business
 Audit: examination of records or accounts for
accuracy.
 Business sector audits: characterized by attest
function—to affirm to be true.
 Government/Not-for-Profit sector:
-Auditors not only attest but also independently
evaluate.
-Assess whether auditees have achieved the
objectives.
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Influence of the Yellow Book
 Yellow book: Government Auditing Standards
issued by the Government Accountability Office
(GAO).
 Responsible for auditing all federal agencies.
 Responsible for prescribing accounting standards
and practices of federal agencies.
 Headed by Comptroller General of the U.S.
 GAO:
-Issued to elevate auditing practice
-No direct control over state and local governments.
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Types of Audits
Government Auditing Standards (2003) characterize
government audits into three categories:
 Financial Audits: determines if financial
statements are in accordance with GAAP.
 Attestation engagements: Examine, review,
perform agreed-upon procedures
 Performance Audits:
 Effectiveness of internal controls
 Effective usage of entity’s resources
 Verifying that organization is complying with terms of
the law, grants, and contracts.
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Generally Accepted Government Auditing
Standards (GAGAS)
Standards issued by the U.S. GAO in its “yellow book.”
 The Comptroller General of the U.S. appointed the Advisory
Council on GAS to review the standards and recommend
necessary changes.
 The Council includes experts in financial and performance
auditing drawn from all levels of government, private
enterprise, public accounting, and academia.
 FACTS: At the end of fiscal 2005, 85 % of the 1,752
recommendations made in fiscal year 2001 had been
implemented by the GAO!
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Generally Accepted Government Auditing
Standards (GAGAS)
 A total of 32 standards for both
financial and performance audits
 Required of auditors in a Single Audit
(for any organization that expends more
than $500,000 in federal sources in any
year).
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Audits
Government auditing standards are divided into:
 General standards
 Performed by a person with adequate technical training and
proficiency
 Independence
 Due professional care
 Field work standards
 Adequately planned and supervised
 Understanding internal controls
 Obtain competent evidential matter
 Reporting standards
 States whether the financial statements are in accordance
with GAAP
 Identify inconsistencies, if any
 Informative disclosures
 Expression of opinion
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Generally Accepted Government Auditing
Standards (GAGAS) are Broader than GAAS
This gives an overview of the breadth and depth of GAGAS.
Financial
Audits
Attestation
Engagements
Performance
Audits
GAAS
GAGAS
GAAS
GAGAS
GAAS
GAGAS
General
Standards
3
4
5
5
0
4
Field Work
Standards
3
7
2
7
0
4
Reporting
Standards
4
11
4
9
0
4
Totals
10
22
11
21
0
12
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GAGAS audit categories



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Financial statements audits
Financial related audits
Economy and efficiency audits
Program audits
-GAGAS standards place much more emphasis
on compliance with laws and regulations than do
GAAS
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Government Vs. Non-government Audits
General Standards:
 Independence:
-Auditors should not perform management functions
-They should not audit their own work
-Should not provide nonaudit services.
 In government sector, audit organization is
independent if:
-It is from a different branch than the units it is to
examine
-Whose auditor is elected by citizens of government’s
jurisdiction or appointed by legislative body.
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Government Vs. Non-government Audits (cont’d)
 Standard on adequacy of professional competence requires
auditors to have:
– A thorough knowledge of governmental auditing and the specific or
unique environment in which the audited entity operates
– At least 80 hours of CE (CPE) every two years, of which at least 20 hours
must be completed in each of the two years and at least 24 hours of which
must be related directly to the
audit environment
 Peer Review: has to be done at least once in 3 years.
 Compliance: reasonable assurance in detecting fraud or
misstatements.
 Working Papers
 Standards of Reporting:
-Compliance
and Internal Controls
-Public Inspection
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Single Audit Act
 Understand the characteristics of a single audit,
including:
– the purpose
– which entities must have a single audit
– what auditing work is required
– how major programs are selected for audit
– what reports must be rendered, when, and to
whom
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Single Audit Act (cont’d)
 Intended (among other purposes) to improve the
efficiency and effectiveness of governmental audit
effort
 By replacing a multitude of grant-by-grant audits
with a single, comprehensive, entity-wide audit
 All federal awarding agencies are required to
accept the single audit reports as satisfying their
program’s audit requirements
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Single Audit Act (cont’d)
 Congress enacted Single Audit Act of 1984.
 Applies to both direct and indirect recipients of
federal assistance.
 Requires organizations expending more than
$500,000 in federal assistance under more than
one program be subject to single audit.
 Recipient has to deal only with single agency.
 Single Audit be conducted in accordance with
GAO’s Auditing Standards.
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Single Audit Act (cont’d)
 1996 Single Audit Act Amendments:
– Raises the threshold for a single audit from $100,000 received to
$500,000 expended
– Extends statutory requirement for single audit coverage to not-for-profit
organizations as well as state and local governments
– Establishes a risk-based approach for audit testing, thus placing greater
audit coverage on high risk programs
– Improves the contents and timeliness of single audit reporting
– Permits the Office of Management and Budgeting (OMB) to
administratively revise Single Audit requirements without
requiring additional legislation
 OMB Circular A-133 and the related Compliance
Supplement provide implementing guidance for
conducting the single audit
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GAAS-GAGAS-Single Audit Relationships
Financial Audits
GAAS
Financial & Performance Audits
GAGAS
Single Audit
GAGAS Incorporates GAAS – and includes additional requirements
Single Audit Incorporates GAGAS – and includes additional requirements
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Single Audit Act and OMB Circular A-133
Did the nonfederal
entity expend
$500,000 or more of
federal awards?
No
No Single Audit or Program
Specific Audit required--only
GAAS and GAGAS Audit
required.
Yes
Did the nonfederal entity
1) expend federal awards under only
one federal program--which did not
require a financial statement audit,
2) meet other requirements, and
3) properly elect a program specific
audit?
Yes A program-specific
audit is required.
No
A Single Audit is required.
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Single audit objectives related to entity as whole
 Fair presentation of financial statements
 Compliance with laws/regulations
 Where noncompliance may have material effect
on financial statements
 Study and evaluation of internal controls
 To determine audit procedures necessary to opine
on statements
 Satisfies laws & regulations applicable to specific
federal award.
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Single audit objectives related to Federal
financial assistance programs
 Fair presentation of schedule of FFA in
relation to financial statements
 Adequacy of internal control systems
over Federal programs
 Ascertain compliance with
laws/regulations with material effect in
each major Federal assistance programs.
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City of Austin - Financial Assistance Programs
 The notes to the 2004 annual report for the City of
Austin include that:
– The City participates in a number of federally assisted
and State grant programs, financed primarily by the U.S.
Housing and Urban Development (HUD) Department,
U.S. Health and Human Services (HHS) Department,
and U.S. Department of Transportation (DOT). The
City’s programs are subject to program compliance
audits by the granting agencies.
– Management believes that no material liability will arise
from any such audits.
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Single Audit
 Two main components:
-Audit conducted under GAGAS
-Audit of federal financial awards
 Four types of reports
 Opinions on the financial statements and Schedule
of Expenditures of Federal Awards:
-Includes the audit work and opinion on the statements
-The schedule includes a list of total expenditures of the
organization
-Proper categorization of expenses
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Single Audit Act Requirements
 Annual audit encompassing the entity’s financial
statements and schedule of expenditures of federal awards.
 Audit must be conducted by an independent auditor.
 Auditor must determine whether financial statements
present fairly in conformity with GAAP and the schedule
of federal financial awards is presented fairly in relation to
the financial statements.
 Auditor must obtain an understanding of internal controls
pertaining to the compliance requirements for each major
program, and assess control risk and perform tests of
control.
 Federal and nonfederal “Pass-through” agencies are
assigned certain responsibilities for compliance
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Single Audit Act (cont’d)
Q: Who has to have an audit under GAGAS?
A: Any state or local government or not-for-profit
organization that expends at least $500,000 in
federal awards during a year must have an audit in
conformity with GAGAS.
– If expended only for one program or one program
cluster, the entity can have a program audit. Otherwise
the audit must be a single audit
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Single Audit Act (cont’d)
 Calculation of amount of federal awards expended
– Calculation can be complex
– Basic rule is that a federal award has
been expended when the federal agency
has become at risk and the nonfederal recipient
has a duty of accountability
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Compliance Audits (as part of single audit)
 For each major program the auditor must test
whether the program:
– was administered in conformity with the
appropriate OMB Circular (A-102 or A-110)
– complied with detailed requirements in the A133 Compliance Circular and other specified
requirements.
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Selection of Programs for Single Audit

Using a sliding scale identify “Type A” and “Type B”
programs

Identify low-risk programs (based on no audit findings in
most recent audit and absence of certain risk factors)

Assess risk of Type B programs (major programs that are
not Type A programs)

At a minimum, audit all high risk Type A programs and
either
– (1) half of the high-risk Type B programs or
– (2) one high-risk Type B program for each low-risk Type A program

Audit at least enough major programs to ensure that at
least 50% of total federal award expenditures are audited
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Risk-Based Approach
Step 1:
Identify (larger) Type A Programs
Step 2:
Identify “low-risk” Type A programs
Step 3:
Identify “high-risk” Type B programs
Step 4:
Select for audit as major programs a minimum of all
Type ‘A programs not identified as “low-risk” in Step
2, plus certain “high-risk” Type B programs.
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Reports of Single Audits
 Report on compliance and on internal controls:
-Directed towards the basic financial statements
-Based on audit requirements Governmental Auditing Standards
-Include any material weaknesses in the controls
 Report on compliance with the requirements of major
programs:
-Explain the nature of the examination
-Auditors express an opinion
-Include any “ reportable conditions”
 Schedule of findings and questioned costs:
-Most distinctive and informative
-Summary of the results
-Describe reportable conditions
-Include findings pertaining to major programs
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Key Audit Procedures

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Identify compliance requirements
Plan the engagement
Assess internal control
Obtain sufficient evidence
Consider subsequent events
Evaluate and report on noncompliance
Follow-up procedure
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Performance Audits
 Focus on organizational accomplishments
 Carried out by “internal” audit departments
 General standards are common to both financial and
performance audits
 3 sections include:
-General
-Field work
-Reporting





Auditors make independent assessments
Performance audits carried out on specific programs
Conducted irregularly
Broader range of evidence
Each performance audit is unique.
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Manner of Conducting Audit

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



Selecting audit target
Establishing scope and purpose
Discerning objectives
Scheduling disbursements
Assessing management controls
Written audit plan
Gathering evidence
Reporting the results
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Governmental Vs. Not-for-profit
 Government employees are involved with ethical
decisions different from those faced by employees
of businesses.
 Characteristics of Governments:
- Public expectations
- Guardians of public funds
- Activities carried out in open view
- Special Powers
- Conflicting loyalties
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Impact of Sarbanes-Oxley Act on
Government and NFPs
 Even though the Sarbanes-Oxley Act (Act) applies only to
publicly traded corporations, it’s impact is being felt by
government and NFP organizations.
 Key provisions of the Act that are relevant to government
and NFP organizations include:
-Section 404 which emphasizes the importance of sound internal
controls
-Responsibility of audit committees
-the Act mandates that CEO and CFO certify the financial statements
-the Act provides “whistle-blower” protection to employees.
 Perhaps most importantly the Act changed the climate of
all organizations.
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Ethical Issues
Governments and to a lesser extent not-for-profits
have characteristics that present their employees
with ethical decisions that are different from those
faced by employees of businesses. These are:





Public expectations
Guardians of public funds
Activities carried out in open view
Special powers
Conflicting loyalties
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Summary







Auditors add value to information by being independent and conforming
to professional auditing standards (GAAS or GAGAS)
GAGAS are broader than GAAS in that they include standards for
financial and performance audits established by the government through
the GAO’s Yellow book.
Performance audits differ in concept from financial audits. It makes
assessments about an entity’s programs.
Under the Single Audit Act, GAGAS has to be adhered to in all audits of
both governments and not-for-profit organizations. However, the Single
audit requires only financial audits.
Single audits comprise 2 elements: an audit of financial statements and an
audit of federal financial awards that follows the provisions of OMB
Circular A-133.
The single audit improves both the efficiency and effectiveness of audits
of nonfederal entities with significant expenditures of federal award.
The Sarbanes-Oxley Act does not apply to government and not-for-profit
organizations but has affected their culture.
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