Chapter 15

Auditing Governments and Not-for-Profit Organizations

/(CHAPTER 15)

1. A “cognizant agency” can be an employee of either a federal agency or an independent accounting firm.
2. The Single Audit Act of 1984 was passed to eliminate the costly practice of requiring separate audits for each federal program in which an organization participated.
3. Performance audits are sometimes referred to as “operational” audits.
4. Performance audits must be conducted by independent auditors.
5. To “attest” means to confirm that something is correct, or genuine.
6. An auditor of any government or not-for-profit that receives federal monies must include a report on the entity’s internal control structure within their audit report or provide a cross-reference to that report.
7. The AICPA is the standard setting body for federal single audits.
8. Newly installed computer programs are one indicator that a government’s participation in a federal program may be at high risk of noncompliance.
9. GAO independence guidelines permit CPA firms to determine the estimated useful lives of their clients’ assets.
10. Under GAO (GAGAS) standards, independent auditors must report significant instances of fraud or illegal acts that they discover during the course of an audit.

11. Regarding the single audit process, required supplemental information is considered to be within the scope of the audit.

1. Per OMB Circular A-133, “questioned costs” are those that should not be reimbursed under a federal grant because they are in violation of laws of provisions pertaining to the grant.

13. The Yellow Book is an informal term for the compendium of all AICPA audit standards.

14. An audit of a state government, municipal government, or not-for-profit under the Single Audit Act has two main components: an audit of the financial statements under general accepted government auditing standards (GAGAS) and an audit of federal financial awards.

15. An attestation engagement might include examination of prospective or pro-forma financial statements.

ANSWERS TO /(CHAPTER 15)

MULTIPLE CHOICE (CHAPTER 15)

1. The GAO publication Government Auditing Standards (commonly known as the Yellow Book) is applicable in which of the following audit situations?
2. To independent CPAs conducting a performance audit of a government that receives no federal financial assistance.
3. To independent CPAs auditing a nongovernment entity that receives federal financial assistance.
4. To independent CPAs auditing a government that receives no federal financial assistance.
5. To state auditors auditing a local government that does not receive federal financial assistance.
6. Which of the following is an example of a financial audit?
7. An audit of financial statements to determine if they are presented fairly in accordance with generally accepted accounting principles.
8. An audit to determine whether the objectives of a new program are suitable and relevant and whether the entity has complied with laws and regulations that may have a material effect on the financial statements.
9. An audit of the financial report on the Noxious Weed Special Revenue Fund to determine whether the entity has complied with specific finance-related requirements.
10. An audit to determine whether an entity is acquiring its resources economically and efficiently.
11. A performance audit includes which of the following?

Economy and efficiency audit.

Program audits.

c) Both a) and b).

d) None of the above.

1. A program audit would include which of the following?
2. Determining if sound procurement policies are being practiced.
3. Determining if efficient operating procedures are being used.
4. Determining if resources are being used efficiently.
5. Determining the factors inhibiting satisfactory performance.
6. Which the following is not included in the GAO auditing standards for financial statement audits?

a) General standards.

b) Field work standards.

c) Reporting standards.

d) Statistical sampling standards.

1. Which of the following is not included in the general standards of GAGAS?
2. Qualifications.
3. Quality control.
4. Planning.
5. Independence.
6. What amount of continuing professional education would an auditor, who is not a CPA but who is engaged in the audit of a City that receives significant amounts of federal financial assistance, be required to complete?
7. Twenty-four hours every two years.
8. Forty hours a year.
9. Eighty hours every two years.
10. None because the auditor is not a CPA.
11. An independent CPA who conducts audits of entities that receive federal financial assistance has what responsibility related to a peer review?
12. Does not have to have one unless he/she belongs to the AICPA Private Companies Practice Section.
13. Must have one every year.
14. Must have one at least every two years.
15. Must have one at least every three years.
16. An independent CPA is conducting an audit of an entity that receives federal financial assistance and is subject to the GAO standards (GAGAS). The auditor must design the audit to provide reasonable assurance of detecting which of the following?
17. Immaterial misstatements, if they result from illegal acts.
18. Noncompliance with entity policies and procedures.
19. Noncompliance with the terms of contracts or grant agreements.
20. All of the above.
21. An auditor is engaged to audit the Eastern Planning and Development District, a not-for-profit entity that receives federal financial assistance. The auditor designed his audit to provide reasonable assurance of detecting material misstatements resulting from illegal acts. What additional requirements does the auditor have with regard to compliance?
22. None.
23. The auditor must design the audit to provide reasonable assurance of detecting noncompliance with terms of grants and contracts.
24. The auditor must design the audit to provide reasonable assurance of detecting all misstatements resulting from illegal acts.
25. The auditor must design the audit to provide reasonable assurance of detecting any fraud.
26. A CPA prepares ‘working papers’ in an audit of an entity that receives federal financial assistance. Which of the following statements is with regard to such ‘working papers’?
27. There is no specific standard requiring working papers.
28. The AICPA has no specific standard requiring working papers, but the GAO standards require working papers.
29. The AICPA and the GAO standards concerning working papers are the same.
30. The GAO standards concerning working papers are more rigorous than the AICPA standards.
31. An independent CPA is conducting an audit of an entity that is subject to the GAO audit standards, but is not subject to the OMB audit standards. While conducting the audit, the CPA found that the entity had violated a law that had a large, but not material, potential penalty associated with such violation. There was no accrual for the potential penalty or disclosure of the violation. What action(s) must the CPA take with regard to this violation?
32. Nothing, since the financial statements are not materially misstated.
33. Must issue an adverse opinion if the financial statements are not changed to reflect the violation.
34. Must issue a report that details the violation and the potential dollar effect.
35. Must report the incident to the local law enforcement agency.
36. An independent auditor has conducted an audit of the financial statements of an entity that receives federal financial assistance, but that is not subject to the OMB standards. What report(s) must the auditor issue at the completion of this engagement?
37. Only an opinion (or disclaimer of opinion) on the financial statements.
38. An opinion (or disclaimer of opinion) on the financial statements and a report on internal control.
39. An opinion (or disclaimer of opinion) on the financial statements, a report on internal control, and a report on compliance.
40. An opinion (or disclaimer of opinion) on the financial statements, a report on internal control, and an opinion (or disclaimer of opinion) on compliance.
41. Reports issued by CPAs conducting audits subject to the GAO standards must include all of the following except:
42. A description of the scope of compliance testing.
43. A description of the scope of internal control testing.
44. A description of any irregularities and illegal acts found.
45. A description of any sampling methodology and sampling plans used.
46. A CPA has conducted an audit of the financial statements of an entity that received federal financial assistance. The CPA identified one major federal program and four nonmajor federal programs. The CPA’s responsibility related to the Schedule of Expenditures of Federal Awards is to:
47. Express an opinion as to whether the Schedule is fairly presented.
48. Express an opinion as to whether the Schedule is fairly presented in relation to the financial statements taken as a whole.
49. Express negative assurance on the Schedule.
50. The CPA has no responsibility with regard to the Schedule.
51. Which of the following is an objective of audits under the Single Audit Act? To ensure that
52. The entity’s financial statements are not affected by immaterial errors or misstatements.
53. The entity has not committed fraud.
54. The entity has in place a system of internal control sufficient to ensure that financial statements are prepared in accordance with generally accepted accounting principles.
55. The entity is satisfying the laws, regulations, and provisions that apply to each specific federal award.
56. Which of the following groups is responsible for administering the Single Audit Act?
57. OMB.
58. GAO.
59. AICPA.
60. State Boards of Accountancy.
61. A CPA has conducted an audit of the financial statements of an entity that received federal financial assistance and had one program that qualified as a major program. The CPA’s responsibility related to reporting on internal control for this entity is to:
62. Issue a report on internal control relating to the financial statements.
63. Issue an opinion on internal control relating to the financial statements.
64. Issue a report on internal control relating to the financial statements and a report on internal control related to the federal program(s).
65. Issue a report on internal control relating to the financial statements and an opinion on internal control related to the major program.
66. A CPA has conducted an audit of the financial statements of an entity that received federal financial assistance and had one program that qualified as a major program. The CPA’s responsibility related to reporting on compliance for this entity is to
67. Issue a report on compliance related to the entity.
68. Issue an opinion on compliance related to the entity.
69. Issue a report on compliance related to the entity and a report on compliance related to the federal program(s).
70. Issue a report on compliance related to the entity and an opinion on compliance related to the federal program(s).
71. The Single Audit Act distinguishes between major and nonmajor federal programs. One factor that distinguishes a major from a nonmajor program is inherent risk. Which of the following is not a characteristic of “inherent risk”?
72. Significant prior audit findings.
73. Significant violation of the terms of a specific grant due to a misunderstanding of the requirements.
74. Weakness in the entity's internal controls.
75. Lack of oversight by federal agencies.
76. Which of the following is not included in the general requirements for which the auditor must test compliance with federal regulations?
77. Matching funds.
78. Drug-free workplace.
79. Political activity.
80. Prevailing wage.
81. Each federal financial assistance program has specific compliance requirements. Which of the following is not an example of the general nature of the specific compliance requirements?
82. Eligibility of individuals or groups to participate in the program.
83. Allowability of certain types of goods or services that may be acquired.
84. Maximum dollar amounts of expenditures.
85. Matching fund requirements.
86. What is the auditor’s responsibility for the Schedule of Expenditures of Federal Awards?
87. No responsibility for this Schedule.
88. Report on the Schedule without issuing an opinion.
89. Express an opinion on the fair presentation of the Schedule.
90. Express an opinion on the fair presentation of the Schedule in relation to the basic financial statements taken as a whole.
91. Under which set of auditing standards is the auditor required to test compliance with laws and regulations that could have a direct and material effect on the financial statements of the entity?
92. AICPA standards.
93. GAO standards.
94. OMB standards.
95. All of the above.
96. The particular set of auditing standards that requires auditors to express an opinion on compliance with laws and regulations applicable to each major program of a not-for-profit organization that receives federal funding is:
97. AICPA standards.
98. GAO standards.
99. OMB standards.
100. GASB Standards
101. The Schedule of Findings and Questioned Costs should include the following except
102. Repayment plan for disallowed costs
103. Information on significant weaknesses in internal control.
104. List of material noncompliance.
105. Known questioned costs.
106. Which of the following is not a necessary condition for a performance audit?
107. The auditor must delineate specifically the activities and outcomes to be addressed.
108. Entity management must have clearly defined operational objectives.
109. The auditor must obtain an understanding of management controls relevant to the audit.
110. There must be a schedule of disbursements related to the program.
111. GAO performance audit standards do not include which of the following?
112. The auditor should be from a different government body than the entity being audited.
113. The work should be adequately planned.
114. The auditor should prepare written work papers.
115. The auditor should obtain an understanding of management controls relevant to the audit.
116. Which of the following is not a key difference between financial and performance audits?
117. Financial statement audits focus on the entity as a whole whereas performance audits generally focus on a specific program or activity.
118. Financial statement audits generally are conducted annually whereas performance audits generally are conducted irregularly.
119. Financial statement audits are conducted using very well defined standards whereas performance audits are conducted without reference to any standards.
120. Specialists in accounting generally conduct financial statement audits whereas performance audits may require more program-specific knowledge and fewer accounting skills.
121. If a program to be subjected to a performance audit lacks clearly defined objectives, what can the auditor do?
122. Decline the audit until the entity defines its objectives.
123. Personally discern the objectives based on the auditor’s opinion.
124. Examine the legislation to see if the legislation articulated the goals and objectives of the program.
125. Create a list of goals and objectives.
126. Which of the following is not a technique used by an auditor in a performance audit engagement to gain an understanding of the controls in place to ensure that a program meets its objective?
127. Reading the legislation.
128. Making inquiries of employees.
129. Flow-charting appropriate systems.
130. Preparing and administering questionnaires.
131. GAO standards specify that performance audit reports should be timely and include several items. Which of the following items is not required under the GAO standards?
132. Significant audit findings.
133. Recommendation as to how to correct problems.
134. Explanation of the audit's objectives and of its scope and methodology.
135. Details about the number of items tested and the sampling techniques used.
136. Which of the following is about the public availability of audit reports prepared under GAGAS?
137. Only financial statements should be publicly available.
138. Only performance audits should be publicly available.
139. Neither financial statement audits nor performance audits should be publicly available.
140. Both financial statement audits and performance audits should be publicly available.
141. Which of the following is not a unique characteristic that distinguishes ethical decisions made by employees of governments from those made by employees of for-profit entities?
142. The public holds employees of governments to a higher standard of conduct than those of businesses.
143. Governments are guardians of public funds and are accountable to the public as to how they use them.
144. Government employees must safeguard assets.
145. Government activities are carried out in open view.
146. Which of the following is not a consideration in resolving an ethical dilemma?
147. What are the facts?
148. Who is affected?
149. Who will know about this action?
150. What are the alternative courses of action?
151. An elected state auditor, employed by the state, would not be considered independent when auditing which of the following entities?
152. A component unit of the state.
153. An agency of the state.
154. The office of the state auditor.
155. All of the above.
156. An independent CPA is engaged to audit the financial statements of Holland City . The city has a variety of revenue sources including a $350,000 grant from the U.S. Department of Housing and Urban Development. Which of the following audit standards must the CPA use when conducting the audit?
157. The AICPA audit standards.
158. The GAO audit standards.
159. The OMB audit standards.
160. All of the above.

38. Circular A-133, issued by the Office of Management and Budget,

• 1. Applies only to state and local governments
  2. Applies only to not-for-profit organizations
  3. Applies to both
  4. Applies to neither

39. Which of the following is not of an attestation engagement?

a) It should not be performed if the reliability of the entity’s performance measures is questionable.

b) An important part of the engagement scope is to examine compliance with rules, regulations, or terms of contracts.

c) It should examine management’s assertions in relation to the entity’s administrative controls.

d) It may include examination of prospective or pro-forma financial statements.

40. The three categories of government auditing standards are

a) General, field work, and control standards.

b) General, independence, and reporting standards.

c) General, field work, and reporting standards.

d) General, compliance, and documentation standards.

41. Which of the following statements about the GAO is not ?

a) It is an agency within the executive branch of the federal government.

b) It is the author of Government Auditing Standards (GAGAS).

c) It is responsible for auditing all federal agencies and programs.

d) Its head, the Comptroller General of the United States, is appointed by the President.

42. Under the Single Audit Act, the required report on compliance and on internal control over financial reporting

a) Is based on the audit requirements of the GAO’s Government Auditing Standards.

b) Need not be issued if the auditors do not identify internal control deficiencies or instances of noncompliance.

c) Must be countersigned by the inspector general of the cognizant agency.

d) Should describe the scope of the auditors’ testing.

43. Financial audits generally are conducted annually. Performance audits generally are conducted

a) Every year.

b) Every two years.

c) Every five years.

d) On an irregular basis.

44. In a performance audit of a not-for-profit organization, procedures that auditors would follow to gain an understanding of management controls would not include

a) Reviewing policy manuals.

b) Sending questionnaires to clients.

c) Discussing controls with employees.

d) Flowcharting appropriate systems.

PROBLEMS (CHAPTER 15)

1. The following descriptions relate to an independent public accounting firm that has as clients some governments and not-for-profit entities that receive federal financial assistance.

REQUIRED:

For each of the following independent situations, describe the possible violations of GAO standards (Government Auditing Standards) and conclude whether or not the situation is a violation.

1. A college graduate who is not a CPA is assigned by her firm to the audit of Gordonia County. Because she is not a CPA, the firm did not send her to any continuing education courses this year or last year.
2. An auditor has prepared working papers using a new computer software package. The financial statements and audit reports generated by the software are well designed and incorporate all required accounting and auditing standards. Because the program is so powerful, it is also quite complex. Printouts of the financial statements and supporting schedules do not include much of the information necessary to determine that the auditor was justified in his/her conclusion. Most of that information is part of the computer program, however.
3. While auditing a not-for-profit entity, the auditor discovered that a secretary had been embezzling money from the petty cash fund. In relation to the financial statements taken as a whole, the amount stolen was not material. The auditor discussed the issue with the entity’s management. The theft was reported to the appropriate law enforcement personnel and the bonding company reimbursed the not-for-profit entity for the full amount of its loss. Since there was no effect on the financial statements, the theft was not mentioned in the auditor's report.
4. The internal auditor of Scilla City reports to the city’s chief financial officer. The internal auditor audited the city’s health and welfare division for purposes of expressing an opinion on the financial statements prepared by that division and submitted to a federal agency.
5. As a staff member of the internal audit department of Guzmania City, you have been asked to write an audit program for a performance audit of the Neighborhood Housing Authority, a not-for-profit entity that is included in the city's financial reporting entity. Critics of the authority have been relentless in their opposition to the authority and its executive director.

REQUIRD:

Prepare a list of questions to which you would want answers before beginning the evidence-gathering phase of the audit.

1. In a highly controversial move, the mayor and city council approved the purchase of the Swim and Gym, a local private facility that was facing bankruptcy. The mayor promised the public that the facility would be operated on a business-like basis and would be fully supported by user fees. No city money was to be spent on the Swim and Gym. Critics of the purchase complain that city laborers are frequently seen at the facility, the facility was re-roofed during the first year, and employees at the facility are considered city employees and earn the same benefits as other city employees. To quiet the vocal opponents to the operation of the Swim and Gym, the mayor asked the internal audit department to conduct an audit of the operation. You are assigned to the task.

REQUIRED:

What are the issues you want to address in this audit?

1. Your audit firm has been asked to perform a Single Audit of the Clover Public Transportation Authority. The authority receives well over half of its $25 million in revenues from federal transportation grants and other federal programs. The authority has a new controller, whose last position was in private industry. You have been asked to brief the new controller on the criteria for determining major programs for purposes of your audit.

REQUIRED:

Include in your response an explanation of what is meant by “major programs” and the criteria that should be used in selecting them for audit.

1. The federal government (and other governments) is known for an affinity for “alphabet soup”-- a proliferation of acronyms to refer to agencies, departments, legislation, programs, and even lawsuits.

REQUIRED:

What do the following acronyms stand for? Briefly, what is each organization responsible for in relation to auditing?

a) OMB

b) GAO

c) AICPA

d) PCAOB

e) GASB

f) FASB

g) FASAB

ANSWERS TO PROBLEMS (CHAPTER 15)

Problem 1

1. The GAO standards state that ALL auditors who participate in government audits, not just CPAs, must take continuing professional education classes. The current requirement is 80 hours every two years. Because this auditor has had no training, the firm is in violation of the GAO standards.
2. The GAO standards require that working papers must contain sufficient information to convince an auditor having no previous connection with the audit that the evidence supports the auditor's conclusions and judgments. It is not clear whether the 'paper' copies must contain the required evidence, or whether it would be acceptable for the program to contain the evidence. However, the firm is probably in violation of the existing standards because the standards deal specifically with working papers.
3. The GAO standards require that ANY irregularities, illegal acts, or other instances of material noncompliance be reported. The firm is in violation of the standard.
4. Audit organizations are considered independent, even if employed by the same employer as the auditee, if one of the two following conditions exists:
5. The audit organization is from a different branch of the government than it is examining. (Branches are legislative, executive, and judicial.)
6. The audit organization is headed by an auditor who is elected by the citizens or is accountable to the legislative body.

Because the city’s CFO is in the same branch of government as the health and welfare division, the internal audit would not be considered independent.

Problem 2

The questions to which the internal auditor would want answers before beginning the evidence-gathering phase of the audit of the Neighborhood Housing Authority relate primarily to the scope and purpose of the program:

1. What is the authority’s mission, as expressed by its executives?
2. What is the authority’s mission, as expressed in the legislation that created the authority?
3. What are the authority’s goals, as expressed by its executives?
4. What are the authority’s goals, as expressed in the legislation that created the authority or in the minutes of legislative hearings on the legislation?
5. What operating objectives did the authority adopt?
6. How does the authority measure accomplishment of its objectives?
7. What management controls are in place to ensure that the authority goals and objectives are accomplished?
8. What controls are in place to ensure that the program meets its objectives?
9. What controls are in place to ensure that the data produced by the information system is valid and reliable?
10. What controls are in place to ensure that the authority has complied with all applicable laws, regulations, and contractual provisions?
11. What controls are in place to ensure that the authority’s assets are safeguarded?
12. What are the authority’s primary revenue sources?
13. What are the authority’s primary expenditures?
14. What is the role of the budget in the operation of the authority?

Problem 3

The primary objective of the audit would be to determine that the Swim and Gym (S&G) is fully supported by user fees. Because the intent is to account for all costs of operations, the S&G should be accounted for in an enterprise fund.

The auditor would want to look at the financial reports to determine that, indeed, revenues were equal to or exceeded operating expenses. In a government it is easy to charge operating expenditures of one operation to another fund. The auditor would want to find out if all of the costs of operating the S&G are charged to the S&G. There should be no problem with the S&G employees being considered city employees. What is important is that the S&G be charged with the appropriate costs.

1. Are the salaries of all personnel who are actively involved in the operation of the S&G charged to the S&G operations?
2. If other city employees are providing services to the S&G, is the S&G charged for the time spent on S&G activities?
3. How was the new roof paid for?
4. Is depreciation charged to the S&G?
5. If the city has a blanket insurance policy, is a portion of that cost allocated to the S&G?

The auditor also should be concerned with performance. The S&G should use good cost accounting controls such as a flexible budget and variance analysis.

Problem 4

Major programs are those that make up a “relatively large” proportion of the total federal awards received and for which there is a high risk of noncompliance. “Relatively large” is assessed by a sliding scale based on the percentage that federal funds received by each program bears to the total of federal funds received by the authority. Awards for which there is a high risk of noncompliance include:

1. Those that have weaknesses in related internal accounting controls.
2. Those for which a significant portion passed through to subrecipients without effective systems of monitoring whether subrecipients are complying with award requirements.
3. Programs operated with newly installed computer systems that have not been adequately tested.
4. Those for which there have been no recent audits.
5. Programs with complex compliance requirements.
6. Programs which are relatively new to the organization.

Problem 5

[Note: Students may include a variety of detail about each of the organizations listed. Responses should include the following points at a minimum.]

a) OMB: Office of Management and Budget--an agency of the executive branch of government. Promoted the Single Audit Act passed by the Congress in 1984, amended in 1996, and is the agency with primary responsibility for administering the Act. Issuer of Circular A-133 with guidance on compliance with the Single Audit Act.

b) GAO: Government Accountability Office--an agency of the legislative branch of government. Issued Government Auditing Standards (“The Yellow Book”) in 1972, with several revisions since that time. When federal departments make awards to state or local governments or to not-for-profit organizations, that organization’s auditors, even if an independent CPA firm, must adhere to GAO standards—also known as GAGAS (generally accepted government auditing standards). Government Auditing Standards incorporate AICPA auditing standards (see below) but are broader in concept and application.

c) PCAOB: Public Company Accounting Oversight Board has authority under the Sarbanes-Oxley legislation to establish auditing standards for public corporations (those whose shares are publicly traded).

d) AICPA: American Institute of Certified Public Accountants—an organization of the accounting profession independent of governments. Issues Statements of Auditing Standards (SAS) and other publications for the guidance of CPAs engaged in audits.

Under Rule 203 of the AICPA’s Code of Professional Conduct, an auditor should not express an unqualified opinion on financial statements that are in violation of the standards established by the designated authorities for each of three sectors:

e) The GASB: Governmental Accounting Standards Board, which is the authorized standard-setting authority for state and local governments,

1. The FASB: Financial Accounting Standards Board, which is the authorized standard-setting authority for business and nongovernment not-for-profit organizations, and

g) The FASAB: Federal Accounting Standards Advisory Board, which is authorized to set standards for most federal government agencies.

ESSAYS (CHAPTER 15)

1. What is the Single Audit Act? Your answer should address at least the following questions. What is its purpose? How does it affect audits of entities that receive federal financial assistance? How do its requirements differ from AICPA audit requirements?
2. What are performance audits and how do they differ from financial statement audits? Your answer should address the role of performance audits in government financial management, the purpose of performance audits, and significant differences between performance audits and financial statement audits.
3. A certain state government accounts for the operations of its airplanes in a special revenue fund. The airplanes are reported in the government-wide statement of net position, but not in the fund statements. GAAP allow an entity relative flexibility in accounting for this type of activity in either a special revenue fund or an internal service fund. Departments and agencies of the state government are charged for the use of the airplanes on a schedule that allows the special revenue fund to break even each year. When criticized for allowing state employees to fly, rather than drive, to various sites around the state, the governor responded that department use of the airplanes doesn't cost the state anything because the departments and agencies reimburse the special revenue fund for the full cost of operating the airplanes. When criticized by some outspoken citizens, the governor referred them to the state accountant for a further explanation. The governor and the accountant are members of different political parties. What are the practical issues in this situation and what are the ethical issues?
4. You are assigned to head up a financial audit of the Rose of Sharon City Public Housing Authority, which receives nearly all of its operating resources from participating in federal grant programs. The authority’s controller calls to complain that your audit staff is asking questions about cost reimbursements made to the authority’s administrators for attending a fundraiser for Rose of Sharon City’s incumbent mayor. The controller explains that the mayor’s office had requested the administrators’ attendance. He also comments that you have been asked to perform a financial audit, not a grants audit. How do you reply?
5. The Single Audit Act of 1984 is a piece of federal legislation that, as amended in 1996, and supplemented by regulations of the federal Office of Management and Budget (OMB), applies to both direct and indirect recipients of federal assistance. The Act as amended requires that organizations expending more than $500,000 in federal financial assistance in a given year under more than one program be subject to a single audit, rather than separate audits by potentially several grantor agencies. The objectives of the Single Audit Act are to ensure that:
6. The financial statements of the entity as a whole can be relied upon
7. The entity is adhering to the common set of federal laws and regulations that apply to all recipients of federal aid
8. The entity is satisfying the laws, regulations, and provisions that apply to each specific federal award.
9. The attention given to the federal financial awards.
10. The additional reports required to be issued.
11. The focus on understanding and testing internal control.
12. Performance audits focus on organizational accomplishments. They differ significantly from financial statement audits, which focus on inputs--how much did we spend on specific activities or objects? Performance audits focus on outputs or outcomes--how well did we accomplish our goals? Because governments and not-for-profit entities rarely focus on maximizing net income, performance audits may be the best way to assess organizational performance.
13. The governor either purposefully or out of ignorance misstated the facts. When a government’s special revenue fund expends resources and is reimbursed by another fund of the same government, the government (the state in this instance) has still incurred costs. One could argue that even if the employees had traveled by car, costs also would have been incurred. However, the costs of operating the aircraft would probably differ in amount from the amount spent on cars.
14. Audit requirements for a financial audit of a government or not-for-profit that receives over $500,000 in federal funds in more than one program differ from those for an organization that receives less than that amount or no federal funds. In addition to AICPA standards, auditors must also be governed by the Single Audit Act and OMB Circular A-133.