Auditing Standards
(Changes Abound)
Joel Black, Partner
Mauldin & Jenkins, LLC
NACUBO Higher Education Accounting Forum
Savannah, GA - May 21, 2013
1
What we will cover
• Clarified Auditing Standards
• Yellow Book
• 2013 Form SF-SAC
• OMB proposed revisions to A-133
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CLARIFIED AUDITING
STANDARDS
3
Clarified Standards
• Background
– The ASB issued the following SASs; includes a total of
40 finalized clarified SASs in the following statements:
• 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
4
Clarified Standards
• Terms of Engagement (AU210)
– Preconditions for an audit
• Determine the financial reporting framework is
acceptable
• Obtain management’s acknowledgement of its
responsibility for
– Preparing financial statements
– Designing and implementing internal control
– Providing the auditor access to information and persons
5
Clarified Standards
• Audit Documentation (AU 230)
– Pretty much the same as the current standard
– One potential change in practice new paragraph
• For audit procedures related to the inspection of
significant contracts or agreements, the auditor
should include abstracts or copies of those contracts
or agreements in the audit documentation
6
Clarified Standards
• Initial Audit Engagements (AU 510)
– Testing
• Whether prior period closing balances brought forward
correctly
• Whether opening balances reflect appropriate application of
accounting principles
• Evaluating evidence about opening balances from current
period audit procedures and one or both:
– Review predecessor auditor’s work
– Perform specific procedures about opening balances
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Clarified Standards
• Group Audit Standards
– When is an audit a group audit?
• Group Audit – Is an audit of a group financial
statement
• Group – Always consists of two or more
components
• Component – An entity or business activity for
which group or component management prepares
financial information that should be included in the
group financial statements.
A group audit does not have to involve 2 firms or even 2 offices.
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Clarified Standards
Identifying Significant Components
Factors to Consider
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Governance structure
Management structure
How centralized is financial reporting
Centralized operations
Physical locations
Control environment
Nature of activity
Uniqueness to entity
Equity method investment = component
Other Indicators
• Physical location of assets
• Financial information prepared by others
• Existence of multiple general ledgers or
records
• Whether information is booked in
summary form
• If risk assessments vary
• Legal or regulatory
requirements/oversight
Judgment is Required
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Clarified Standards
Scenario
ABC Public University System has multiple campuses throughout
the State. Each campus has its own chancellor which is responsible
for the management and financial performance of the campus.
Additionally, each campus has different admissions criteria and
degree programs.
Although the University operates on a decentralized basis, some
accounting functions are performed on a centralized basis through a
shared service center. Financial information is prepared for each
campus.
At the end of each reporting period, the financial information for
each campus is included in the University’s financial statements.
Assuming you are the auditor of the University, do you have a group audit?
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Audit of Group Financial Statements (AU 600)
Acceptance and continuance - group auditor;
identify components; preconditions
Understanding - group; components; component
auditors; make reference?
Materiality decisions and responding to risks of
material misstatement
Other procedures - consolidation process; subsequent
events; evaluating evidence
Communications - with component auditors; with
group governance and management
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Clarified Standards
• Overall Group Audit Strategy is Developed Using the Top-down
Risk Based Approach
– Group engagement team must obtain sufficient understanding
of the group, its components, and their environment to:
• Identify and assess risks of material misstatements at the
group level
• Identify significant accounts and disclosures and related
assertions at the group level
• Confirm identification of significant components
• Determine the timing and type of work to be performed at
significant and non-significant components
• Determine which work will be performed by the group and
component auditor
• Determine the nature, timing, and extent of work to be
performed at the group level
• Documentation!
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Clarified Standards
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Component Auditor - An auditor who performs work on the financial
information of a component that will be used as audit evidence for the
group audit. A component auditor may be part of the group engagement
partner's firm, a network firm of the group engagement partner's firm, or
another firm.
Understanding Component Auditor
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Whether a component auditor understands and will comply with ethical requirements
Component auditor’s professional competence
Extent to which group engagement team will be able to be involved in the work of the
component auditor
Whether group engagement team will be able to obtain information affecting the
consolidation process from the component auditor
Whether component auditor operates in a regulatory environment that has an activity
overseen by auditors
When a component auditor does not meet independence requirements or group has
serious concerns about above considerations, should not make reference to other auditors.
Should not use or rely on the other auditor’s work.
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Clarified Standards
• Determining Whether to Make Reference to Component Auditor
– Component’s financial statements are prepared using same financial
framework
• note a GASB entity can encompass a FASB entity as GASB allows
this and thus is part of same framework
– Component auditor performed audit of component in accordance with
GAAS and has issued report that is not restricted to use
– 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
– Focus of this session is when reference is made to component auditor
• Other additional procedures required when not making reference
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Clarified Standards
• Materiality – Group Auditor should determine:
– Materiality, including performance materiality, for group
financial statements
– Whether specific circumstances exist for which something
less than materiality would influence users; if so, apply a
different materiality to those transactions, balances, or
disclosures
– Component materiality for components that will be audited –
component materiality s/b lower than group materiality and
component performance materiality s/b lower than group
performance materiality
– Aggregation risk is key driver of this standard
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Materiality and Tolerable Misstatement
Audit procedures
Planning and evaluation
$
or
%
Materiality
Tolerable misstatement
Component materiality
Component performance materiality
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Clarified Standards
• Evaluating Sufficiency and Appropriateness of Audit
Evidence Obtained
– Evaluate component auditor's communication including:
• Significant findings and issues
• Component management
• Group management
– Evaluate sufficiency of audit evidence obtained from audit procedures
performed by both the group and component auditors on the financial
information of the components
– Evaluate effect of any uncorrected misstatements (either identified by
group engagement team or communicated by component auditors) and
instances where there has been an inability to obtain sufficient appropriate
audit evidence
Other (additional) procedures required when not making reference
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Clarified Standards
• Consolidation/Combination Process
– Obtain understanding of group-wide controls and the consolidation/ combination
process
– Consider need to test operating effectiveness of group-wide controls
• Performed by group and/or component auditors
– Additional audit procedures to respond to assessed risks of material misstatement
of group financial statement arising from consolidation/ combination process
– Evaluate appropriateness, completeness, and accuracy of consolidation adjustments
and reclassifications
– If component financial information prepared under different accounting policies
applied to the group, evaluate whether information has been appropriately adjusted
– Determine whether information communicated by component is properly reflected
in group financial statements
– If reporting period of component is different than group, determine whether
appropriate adjustments or disclosures have been made
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Clarified Standards
• Subsequent Events Procedures (even when making reference)
– Group Auditor responsibility is to ensure subsequent events considered for the
whole group (including components) up to the group audit report date.
Procedures could include:
• Obtaining understanding of group management’s procedures for
identify subsequent events
• Requesting component auditor to update subsequent events
procedures to the date of the auditor’s report on the group financial
statements (could take care of all requirements on this slide)
• Requesting written representation from component management
regarding subsequent events
• Reading available interim financial information of the component and
making inquiries of group management
• Reading minutes of meetings of the governing board, or any other
administrative board with management oversight, held since the
financial statement date
• Reading subsequent year’s capital and operating budgets
• Inquiring of group management
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Clarified Standards
• Communication with the Component Auditor
– Request component auditor confirm that they understand we will
use their work and they will cooperate with group engagement
team
– Ethical requirements, including independence rules
– A list of related parties prepared by group management and other
parties group engagement team is aware of
• Request component auditor to identify other related parties not
on list they are aware of
– Identified significant risks of material misstatement that are
relevant to the component auditor
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Clarified Standards
• Communication with the Component Auditor (cont.)
– Request component auditor to communicate matters relevant to
group engagement team’s conclusion, with regard to the group
including:
• Whether the component auditor has complied with ethical
requirements relevant to the audit, including independence
• Identification of the financial information of the component on
which component auditor is reporting
• The component auditors overall findings, conclusions, or
opinion
– Other communication requirements when not making reference:
• Work to be performed and content and form of reporting
• Component materiality, audit misstatements thresholds
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Clarified Standards
• Communicate with Those Charged with Governance
– Group engagement team communicates to those charged with governance (in
addition to those required by AU 380):
• Type of work to be performed on the financial information of the
components
• Nature of group engagement team's planned involvement in work to be
performed by component auditors on financial information of significant
components
• Instances where group engagement team's evaluation of work of a
component auditor gave rise to a concern about quality of that auditor's
work
• Any limitations on the group audit, for example, where the group
engagement team's access to information may have been restricted
• Fraud or suspected fraud involving group management, component
management, employees who have significant roles in group-wide
controls or others where fraud resulted in a material misstatement of
group financial statements
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Forming an Opinion and Reporting (AU700)
Headings and Subheadings
- Management’s Responsibility
- Auditor’s Responsibility
Opinion
Other auditor reporting
responsibilities (Yellow Book
Report reference)
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Reporting (AU700)
Emphasis of Matter
• Going concern
• Contractual or regulatory
reporting frameworks
• Consistency
Other Matter
• Audit reports of prior
periods presented
• Materially inconsistent
“other information”
• “In relation to” opinion
• RSI
• General use regulatory F/S
• “In connection with”
compliance reporting
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Emphasis of Matter and
Other Matter Paragraphs (AU 706)
Emphasis of Matter
• Matters appropriately
presented or disclosed
Other Matter
• To understand audit matters
(Combining statements, SI,
RSI, SEFA)
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Reporting (AU700)
• Reporting
– SAS No. 125 - Government Auditing Standards
reports (including A-133 reports) will contain
purpose alert instead of restriction alert
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NEW YELLOW BOOK
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Yellow Book
• 2011 Yellow Book
– Will supersede the 2007 revision of Government Auditing
Standards
– Effective for financial audits and attestation engagements for
periods ending after December 15, 2012
– The most significant area of change relates to auditor
independence
– Early implementation is not permitted; However, new
independence rules need to be considered as of 1/1/12 when
auditor performing a nonaudit service
– Access at: http://www.gao.gov/yellowbook
– View a summary of changes at
http://www.gao.gov/govaud/somc1211.pdf
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Yellow Book
• Main Areas of Change
– Updated independence requirements
– Focused on converging where practical
• Incorporated clarified SASs
• Fewer differences between AICPA and Yellow Book
– Previous “add-on” restatement guidance removed
– CPE requirements for “specialists” clarified
– Added documentation requirements, particularly as
relates to performance of nonaudit services
– Made minor changes for performance audits
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Yellow Book
• Auditor Independence Rules a Key Emphasis Area
– Chapter 3 titled, General Standards, critical to
understand for auditors
• Defines independence of mind and in appearance
• Emphasizes the importance of considering
individual threats to independence both individually
and in aggregate
– GAO will be retiring current, Government Auditing
Standards: Questions and Answers to Independence
Standard Questions guidance
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Yellow Book
• Documentation Requirements
– Threats to independence that require the application of
safeguards, along with the safeguards applied
– Assessment of audited entity management’s ability to
effectively oversee nonaudit services, including
whether management possesses suitable skills,
knowledge, or experience (SKE);
– The understanding established with the audited entity
regarding the nonaudit services to be performed.
– Preparing financial statements is a non-audit service
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2013 FORM SF-SAC
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Federal Audit Clearinghouse
• 2013 Form SF-SAC
– Federal Register notice asking for comment on a draft of
the 2013 form was released May 9, 2013
– More significant changes this time around
• Auditor’s EIN on the Form
• Standardized Audit Finding Reference Numbers:
YYYY-###, (ex. 2013-001)
• Identify Loan/Loan Guarantee
• “Number of Findings” for each Federal award
• Federal Award Findings Summary (new “Page 4”)
– Final form not expected until late summer
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Form SF-SAC
(2013 Version)
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Identifies the compliance requirements that correspond to each finding
Gives detail of how each finding affected each Federal award
Federal Audit Clearinghouse
• New Submission Process
– New user profiles
– For 2014 audits (and 2013 audits with cognizant agency) all
reporting package uploads must be text searchable,
unlocked, and unencrypted PDF files (FAC provides
instructions when filing reports this year)
• FAC working towards making all reporting packages
transparent to the public
– Financial statements, SEFA
– Auditor reporting
– Schedule of Findings and Questioned Costs
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PDF Requirement Update
ISSUE: Over 40% of the audits uploaded in 2010 were not
text searchable
GOAL: 100% of FY 2014 audits are unencrypted to allow
copying and printing and 85% of the audit’s pages are textsearchable
• Phase 1: Began testing audit uploads in August 2012
• Phase 2: All FY 2013 audits with cognizance (@1,800)
must be text searchable
• Phase 3: All FY 2014 audits must be text searchable
OMB PROPOSED REVISIONS
TO CIRCULAR A-133
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Background
• 2012 OMB Advance Notice - Reforms to Circular A-133
– Read the AICPA’s comment letter on OMB Advance Notice of Proposed
Reforms to A-133, dated April 30, 2012.
• New Federal Register notice of proposed changes
– OMB Circular A-133
– Cost principles and administrative requirements
– Affects over $600 billion in annual federal grants provided
• Overarching purposes and impact
– Increase efficiency and effectiveness of federal programs
– Eliminate unnecessary and duplicative audit and administrative
requirements
– Focus audit efforts on areas that emphasize achieving better outcomes at a
lower cost
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Summary of Proposal
• Audit provisions, include the following
– A streamlined single audit for all above $750,000
– Other “tinkering” with major program determination process
and other areas
– No proposed effective date included in the proposal
– It states that changes to underlying Single Audit Act legislation
needed to shorten due date (from 9 months to 6 months)
• Overall, AICPA will likely be supportive of many of the
proposed changes
– Many detailed comments are likely to be provided due to
size/breadth of proposal
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Summary of Proposal
• Streamlining of Related Circulars and Guidance
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A-21, Cost Principles for Educational Institutions
A-50, Audit Follow-Up, related to Single Audit
A-87, Cost Principles for State, Local, and Indian Tribal Governments
A-89, Federal Domestic Assistance Program Information
A-102, Awards and Cooperative Agreements with State and Local
Governments
– A-110, Uniform Administrative Requirements for Awards and Other
Agreements with Institutions of Higher Education, Hospitals, and Other
Nonprofit Organizations
– A-122, Cost Principles for Non-Profit Organizations
– A-133, Audits of States, Local Governments and Non-Profit
Organizations
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Audit Revisions
• Single Audit Threshold Increase from $500K to $750K
– Less than $750,000 in federal awards = no audit requirement
– Entities that fall below the $750,000 threshold must make
records available for review or audit by appropriate officials of
the Federal agency, pass-through entity, and the Government
Accountability Office
• Initial AICPA Thoughts
– Federal government as user of the audits is in the best position
to determine appropriate threshold
– Will likely remind them of positions taken in letter on the
Advance Notice regarding considerations if they decide to go
higher after this round of due process
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Impact of Threshold
2010 FAC Total # of Audits
2010 FAC Total Dollars
6,115
14%
0.3%
<$750k
>$750k
38,704
86%
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<$750k
>$750k
99.7%
Audit Revisions
• Changes to the Major Program Determination Process
– Type A/B threshold revised from $300,000 to $500,000
– High-risk Type A program criteria changed
• Among other criteria, in the most recent period, failed to
receive an unqualified opinion; had a material weakness in
internal control; or had questioned costs exceeding five
percent of the program's expenditures
– Simplified process for identifying high-risk Type B programs
that must be tested
• Initial AICPA Thoughts
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– Some changes consistent with previous AICPA suggestions
– Still evaluating whether the result of changes will reduce burden
(probably will depend on facts and circumstances)
– Will likely ask for more clarity in certain areas
Audit Revisions
• Other Audit Requirement Changes:
– Reduction in Types of Compliance Requirements to be
tested
– Percentage of Coverage reduced from the current 50%
(normal) and 25% (low-risk auditees) to 40% (normal) and
20% (low-risk auditees).
– Criteria for Low-Risk Auditee status revised
– More detail will be required to be reported in auditor
findings
– Questioned cost threshold for reporting will be increased
from $10,000 to $25,000
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Audit Revisions
• Initial AICPA Thoughts on Other Audit Requirements
Changes
– Many changes consistent with previous AICPA suggestions
– Compliance requirement reduction dependent on agencies not moving
requirements into Special Tests and Provisions
– Still evaluating whether the Percentage of Coverage change will result
in changes that will significantly reduce burden
– Likely to have comments on findings; for example,
• Evidence that statistical sampling appropriate; Results projected?
• Accompanied by sufficient supporting documentation?
– Effective Date – They need to give enough time for new Compliance
Supplement and for auditor’s to be trained
– Other comments from our Advance Notice letter not addressed
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Other Revisions
• Will consolidate the cost principles into a single document (A87, A-21, and A122)
• Major themes in proposal
– Time and Effort reporting (proposal primarily follows concepts
in A-21 which is based on concept that a system for establishing
estimates produces a reasonable approximation of the activity)
– Indirect costs
• Initial AICPA Thoughts
– The “Other Revisions” will not be the main focus of AICPA
comments but we will provide some feedback
– Hard to follow what is applicable to each type of entity in
certain areas
– May be some audit issues with revised time and effort reporting
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Other Revisions
• Consolidates administrative requirements in A102 and A-110
– Basis appears to be A-110 except for procurement
which aligns with A-102
• Clarifies federal expectations for pass-through
entities and subrecipient monitoring
• Emphasis area for federal agencies
– Single Audit Accountable Official (separate from
coordinator)
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How to Comment on OMB Proposal
• New comment deadline is June 2, 2013.
• Comment instructions, including how to provide
comments electronically or by mail can be found
in the Federal Register notice
• You can submit comments on the entire proposal
or just specific sections
• All comments are being made publically available
• Please share your comments with the AICPA by
sending a copy to gaqc@aicpa.org
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How to Find the Proposal and Other Useful Documents
• Proposed OMB Uniform Guidance: Cost Principles,
Audit, and Administrative Requirements for Federal
Awards Proposed Guidance
• Other documents available on OMB Web site that should be
helpful to you as follows:
– Crosswalk from existing to proposed guidance
– Crosswalk from proposed guidance to predominant source
in existing guidance
– Administrative Requirements Text Comparison
– Cost Principles Text Comparison
– Audit Requirements Text Comparison
– Definitions Text Comparison
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Questions ????