The Latest on Audit Quality: Governmental and NPO Audits

1. The Latest on Audit Quality: Governmental and NPO Audits

2. What We Will Cover • Common Audit Quality Issues • Federal Statistical Sample Project on Audit Quality • Firm Audit Tools and Resources • The AICPA’s Governmental Audit Quality Center

3. Common Audit Quality Issues

4. Quality Continues to be a Concern • AICPA peer reviews and ethics investigations continue to show problems • Federal quality control reviews reaffirm that problems exist • Governmental audits have a strong public interest component

5. Common Audit Quality Issues – F/S Audit • Engagement team did not meet Yellow Book CPE requirements • Auditor used inadequate or outdated reference material • Audit documentation does not evidence the work performed in many areas • Engagement and representation letter problems

6. Common Audit Quality Issues – F/S Audit • Auditor did not update legal inquiries to the date of the audit report • Auditor did not modify report appropriately when should have • Audit report did not appropriately reference applicable auditing standards, financial statements, or opinion units • Auditor did not issue Yellow Book report when required

7. Common Audit Quality Issues – Single Audits • Not auditing major programs covered by auditor’s report • Not adequately addressing internal control • 5 elements of COSO • Identifying tests of controls versus tests of compliance • Lack of information in findings • Lack of separate audit program for SEFA

8. Common Audit Quality Issues – Single Audits • Client only listing prior year’s finding on the Summary Schedule of Prior Audit Findings • See A-133 section .315 (b) • Type A Program Determination • Two—year lookback • Clusters • Percentage of Coverage Rule

9. Common Audit Quality Issues – Single Audits • The audit documentation does not evidence the work performed • Sampling • Required findings should not be put in management letter • Data collection form problems

10. Single Audit Data Collection Form (SF-SAC) Problems • Signatures Lacking • Part III, Item 10b, "Research and Development" is invalid (either blank or more than one box is checked). • Part III, Item 10e, "Direct award", is invalid (either blank or more than one box is checked). • Part III, Item 8, "Was a Summary Schedule of Prior Audit Findings prepared?" is invalid (either blank or both checked). • Part III, Item 2, Multiple EINs in Financial Statements, none or both checked.

11. Federal Statistical Sample Project on Audit Quality

12. What is this project?  A project to accurately assess the quality of Single Audits government-wide, and provide a baseline for monitoring Single Audit quality in the future by performing quality control reviews (QCRs) of a statistical sample of single audits.

13. Sampling Project • Objectives • To determine quality of single audits being performed • Provide baseline for monitoring quality • Recommend changes where needed • Generally using 2002/2003 engagements • Using a standard checklist • Contractors will do about 50% of the reviews

14. Status • Sample of 208 audits has been drawn • About 30% of reviews completed by April 2005

15. Timetable • Award of Contracts / Task Orders September 30, 2004 • QCR Teams Trained in October 2004 • Conduct QCRs – November 2004 - October 2005 • Compile Results/ Draft Report November 2005-February 2006 • Issue Final Report by May 2006

16. Firm Audit Tools and Resources

17. Firm Audit Tools and Resources • There are a number of mechanisms to assist practitioners in enhancing audit quality: • AICPA Audit Guide Government Auditing Standards and Circular A-133 Audits (product no. 012745) • AICPA Audit Risk Alert, Government Auditing Standards and Circular A-133 Audits (product no. 022454) • AICPA A&A Guides for SLGs, NPOs, and Healthcare (HC) Organizations • AICPA Audit Risk Alerts for SLG, NPOs and HC Organizations

18. Firm Audit Tools and Resources • There are a number of mechanisms to assist practitioners in enhancing audit quality: • Practice Aid, Auditing Recipients of Federal Awards: Practical Guidance for Applying OMB Circular A-133 (product no. 006621) • Practice Aid, Auditing Governmental Financial Statements: Programs and Other Practice Aids (product no. 006602) • Practice Aid: Applying OCBOA in State and Local Government Financial Statements (product no. 006614)

19. Firm Audit Tools and Resources • Disclosure checklists • Audit programs • Governmental or NPO conferences/CPE • AICPA Governmental Audit Quality Center Web site (www.aicpa.org/GAQC) • FASB, GASB, and/or FASAB Standards • AICPA • Technical Practice Aids • Statements on Auditing Standards • Statements of Position

20. New Quality Center

21. AICPA Governmental Audit Quality Center • Council authorized in October 2003 (also established EBP Audit Quality Center) • Governmental audit practice is pervasive • > 6,300 AICPA firms involved • Thousands of single audits and other governmental audits annually • Public interest high - federal $$$

22. What is a Governmental Audit for Purposes of the Center? • All audits and attestation engagements performed under Government Auditing Standards • Yellow Book-only audits (for example, audit of local government that gets no federal funds but state requires Yellow Book audit) • Single and program-specific audits • Audits and attestation engagements performed under various federal audit guides (for example, HUD Consolidated Audit Guide, Education SFA Guide, etc.) • Audit may be of a federal, state, or local government, not-for-profit organization, or certain for-profit organizations

23. AICPA and Firm Commitment • AICPA helps firms achieve the highest standards in performing quality governmental audits • Firm demonstrates its commitment to governmental audit quality (must adhere to membership requirements which can be found in detail on the GAQC Web site)

24. GAQC Status • Center launched at end of September 2004 and membership is growing • Executive committee oversees Center and establishes membership requirements • Center provides members with Web site, tools (including monthly newsletters, regular news alerts, best practices) and ability to interact with other members) • Center undertaking outreach activities with stakeholder organizations to increase public awareness of the Center among members of the governmental audit community

25. GAQC Web Site: www.aicpa.org/GAQC • Comprehensive resource to Center members which includes: • The latest news and spotlight items regarding governmental audits • Resources regarding the performance of audits under Government Auditing Standards, Circular A-133, and other compliance audit rules • A listing of firms that belong to the Center sorted by firm name and state • Member forum so that firm members can interact with other members • Some portions of the site are available to the general public and provide useful information

26. Membership Requirements - Highlights Effective at admission date: • Designate audit partner to have firm-wide responsibility for quality of firm’s governmental audit practice • Require designated government audit quality partner to: • Meet GAS CPE requirements • Participate in an annual Center-sponsored webcast on recent developments in governmental auditing • Make publicly available information about most recently accepted peer review

27. Membership Requirements - Highlights Other Membership Requirements: • Establish annual internal inspection procedures within 3 months of admission date • Establish policies and procedures specific to the firm’s governmental audit practice to comply with professional standards and GAQC membership requirements (within 6 months of admission date) • Have governmental audits selected as part of firm’s peer review reviewed by a peer review team member who is employed by a Center member firm (Effective for 2006 peer reviews)

28. For More Information or to Join • Check out the Center Web Site at: www.aicpa.org/GAQC or E-Mail: GAQC@aicpa.org

29. Questions ?????