Audit Update
Presented by:
Freddy Smith, CPA
October 2012
1
What’s up with the hand?
The hand cast is a result of:
a. carpel tunnel from my adding machine
b. striking pee-wee football players on the helmet
c. angry audit clients
d. angry audience after hearing the new audit
requirements within this presentation!
e. none of the above
2
Auditing Standards
o AICPA (GAAS)
o Government Auditing Standards (Yellow Book
or GAGAS)
o Louisiana Audit Guide
o OMB Circular A-133 (Single Audit)
3
Clarity Project
o SAS 122
o Complete re-draft of codification
o Clearly state objections and requirement
o Converge with international standards
o Addresses issues regarding Group Audits
o Effective for audits of years ending after
December 31, 2012
4
Clarity Project Goals
o Address concerns over length and complexity
of standards
o Make standards easier to read, understand and
implement
o Lead to enhancements in audit quality
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Clarity Format
o Introduction
o Objectives
o Definitions
o Requirements
o Application Material
o Appendices and Exhibits
6
Considerations for Audits of
Governmental Entities
o Most clarified standards have guidance for audits of
governmental entities
• About uniqueness of governmental entities
• About uniqueness of state audit organizations
• Opinion units
• Materiality
• Laws and regulations, e.g., “withdrawal from
engagements”
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Substantive Changes
(Non-Group Audits)
• Initial audits
- Reliance on review of prior audit work not solely
sufficient for beginning balances
• New Audit Report!!!!
• Changes for restricted use communications under
GAGAS
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Restriction on Auditor Communication
o Old Wording
This report is intended solely for the information and use of management, City Council, others within the
entity, a federal awarding agencies and pass-through entities and is not intended to be and should not be
used by anyone other than these specified parties.
The restriction on the use of the report is required. Though restricted in use, reports issued in connection
with an audit of a local government may be a matter of public record.
o New Wording
The purpose of this [report, letter,….solely to [describe the purpose of the auditor's written communication,
such as to describe the scope of our testing of internal control over financial reporting and compliance, and
the result of that testing, and not to provide an opinion on the effectiveness of the entity's internal control
over financial reporting or on compliance ]. This [report, letter,…is an integral part of an audit performed in
accordance with Government Auditing Standards in considering [describe the results that are being
assessed, such as the entity's internal control over financial reporting and compliance]. Accordingly, this
[report, letter,….is not suitable for any other purpose.
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Group Audits
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Determination of Audit Groups
When is an audit a group audit?
o Group audit – is an audit of group financial components (two or
more) that are otherwise audited separately
o Same auditor
o Different auditors
o Component – is an entity or business activity for which group or
component management prepares financial information that should
be included in the group financial statements.
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Considerations for Governments
o For governments with multiple opinion units, components will commonly
exist within:
• Aggregate discretely presented as component units
- Individual component units whether audited by same audit firm or
other auditors
• Aggregate remaining fund information
- Pension or OPEB trust funds
- Investment trust funds
o Departments within a major fund that are separately managed may also be
components
Most governments with multiple opinion units will be a group audit
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Basic Group Audit Responsibilities
Planning
Performance
Reporting
• Establish group audit strategy
and plan using top-down risk
based approach
• Understand group, its
components, and their
environment
• Determine materiality for
group and component
• Understand component
auditor and component
• Respond to assessed risks
• Understand group-wide
controls and the consolidation
process
• Perform procedures over
subsequent events
• Communicate with
component auditor
• Evaluate sufficiency and
appropriateness of audit work
of group (including
component auditors)
• Communicate with group
management and those
charged with governance
• Make reference to other
auditors
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Understanding Component Auditor
o Whether a component auditor understands and will comply with ethical
requirements
o Component auditors professional competence
o Extent to which group engagement team will be able to be involved in the
work of component auditor
o Whether component auditor operates in a regulatory environment that
actively oversees auditors
o Communications
When component auditor does not meet independence requirements or group has serious
concerns about above considerations, should not make reference to work other auditors.
Additionally, should not use or rely on the other auditor’s work.
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Making Reference
to Component Auditor
o Component’s financial statements are prepared using same financial
framework
o Component auditor performed audit of component in accordance with
GAAS and has issued report that is not restricted to use
o Reading component’s financial statements and component auditor’s report
to identify significant finding and issues, and when necessary,
communicating with component auditor in this regard
o Other additional procedures required when not making reference
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Subsequent Events Procedures
When Making Reference
o Obtaining understanding of group management’s procedures for identifying
subsequent events
o Requesting component auditor to update subsequent events procedures to the date
of the auditor’s report on the group financial statements
o Requesting written representation from component management regarding
subsequent events
o Reading available interim financial information of the component and making
inquiries of group management
o Reading minutes of meetings of the governing board, or any other administrative
board with management oversight, held since the financial statement date
o Reading subsequent year’s capital and operating budgets
o Inquiring of group management
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Take Away!!
o If you have component units or other
components, meet with auditors EARLY
(group and components) and get on the same
page.
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2011 Yellow Book
Effective for audits of years
ending on or after 12/15/2012
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Nonaudit Services
o Services that are considered nonaudit services include:
•
•
•
•
Financial Statement Preparation
Bookkeeping services
Cash to accrual conversions (a form of bookkeeping)
Other services not directly related to audit
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Steps to Evaluate and Document
Nonaudit Services Independence
1.
2.
3.
4.
5.
6.
Identify nonaudit services
Determine if a prohibited service
Management responsibilities (preconditions)
Evaluate and document SKE
Assess whether threats are significant
Identify and apply safeguards
Follows the conceptual framework decision model. Process must be done
PRIOR to performance on nonaudit services.
20
21
Threat Categories
o
o
o
o
o
o
o
Management participation
Self review
Bias
Familiarity
Undue influence
Self interest
Structural
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Routine Audit Services
o Routine audit services pertain directly to the audit and include:
• Providing advice related to an accounting matter
• Researching and responding to an audited entity’s technical questions
• Providing advice on routine business matters
• Educating the audited entity on technical matters
o Other services not directly related to the audit are considered nonaudit
services
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Prohibited Services
o Valuation Services
o Signing checks, approving vendors, custodianship of
assets
o Financial Advisory Services
o Certain internal audit activities
o Designing and developing IT Systems (1-year layoff)
o Making or changing JE’s and accts w\o management
approval
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Case Study
Facts and Circumstances
o M&M has audited Small Town, LA for the last 3 years
o Small Town is governed by a 5-member town council
o Employees
• Mike, Town Manager, worked for Small Town, LA for 15 years.
Mike is an ex-policeman that has some business training but no
formal accounting training
• Gwen, Finance Director, 5 years with Small Town, LA and
similar role at prior governmental entity. Gwen obtained as
associates degree from BRCC and studied bookkeeping
• Shelly, Account Clerk, worked for Small Town 15 years
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Case Study
Facts and Circumstances
o Small Town, LA provides a trial balance to M&M Firm but
does not make any year-end adjusting entries
o M&M provides a listing of fixed asset additions and deletions
and M&M Firm prepares the depreciation schedule
o M&M Firm prepares the town’s financial statements including
the cash-to-accrual conversion
o M&M Firm prepares the property tax roll reconciliation for
Small Town
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Case Study
Facts and Circumstances
o Finance Director reviews and approves all adjusting
entries
o Capital assets for the 12/31/2012 YE are not material
to the town’s financial statements
o Town Manager assumes all management
responsibilities related to nonaudit services
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Case Study
SKE??????
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Case Study
Threats???
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SKE Evaluation
o Auditor Preparation of F/S
• Audited entity need not have the understanding and ability to prepare
the F/S and disclosures based on GAAP
• Auditor may assist the designated individual in obtaining the necessary
understanding so that he or she is in position to review and accept
responsibility
- For example, explain certain accounting principles and disclosure
requirements that were applied in preparing the F/S so that the individual
has the necessary SKE
• Bottom line – designated individual should be able to review the F/S,
with an emphasis on significant issues and disclosures.
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Critical failures will occur when…
o Auditor fails to identify all nonaudit services
o SKE evaluation is not thoughtful assessment but is a
rationalization
o You apply safeguards to respond to lack of SKE. There are no
safeguards sufficient to mitigate when there is insufficient
SKE
o Safeguards are not adequate
o Peer Reviewers and OIG’s will be watching!!!
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Louisiana Audit Guide
o
Louisiana Revised Statute 24:513 establishes the Louisiana Governmental Audit Guide as the standard for
the reports of agencies that are required to report to LLA.
o
Substantive changes to the Louisiana Governmental Audit Guide include:
•
Section 321.03 relative to the compensation portion of routine engagements has been revised to include LLA's current
policy that all engagement agreements must include a not-to-exceed amount.
•
Section 321.04 has been revised to include LLA's current policy requiring that ICPA's provide LLA with the estimated
and actual cost of engagements.
•
Section 350.02, illustrative engagement agreements, and other related documents have been revised to include LLA's
current policy regarding the confidentiality of audit/engagement documentation.
•
Section 354.04 and the FAQ under "Findings" have been revised for additional information regarding agreed-upon
procedures engagements that may be required for agencies whose annual financial reports include unresolved findings.
•
Various legal citations throughout the audit guide have been updated for changes in legislation.
•
The new LLA policy regarding CPA firms providing their peer reviews to LLA has been added to the FAQ under
"CPA Firm Approval.”
•
The FAQ under "Reporting Questions" has been updated for the new LLA policy regarding consequences to agencies
whose audit reports have disclaimed or adverse opinions.
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OMB Circular A-133
o FFATA Reporting Requirements
•
•
•
•
Non-Recovery Act Programs
Direct recipient awards to first tier subrecipients
FAIN
Clarifying Guidance www.fsrs.gov
o Recovery Act dwindling but requirements still
exist
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OMB Circular A-133
o OMB Issued Advance Notice for potential
reform ideas, February 2012
o Current Status
• FS audit if $500K – $1M of federal funds
• Compliance Audit if > $1M; however, compliance areas to
be streamlined
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