(Objective 26-2) In what ways is the Yellow Book consistent with generally accepted auditing…
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(Objective 26-2) In what ways is the Yellow Book consistent with generally accepted auditing standards, and what are some additions and modifications?
GOVERNMENTAL FINANCIAL AUDITING
Federal and state governments employ their own auditing staffs to perform audits in much the same way as internal auditors. Chapter 1 briefly discussed the United States Government Accountability Office (GAO). All states have their own audit agencies, similar to but smaller than the GAO. In addition, CPA firms do considerable financial auditing of governmental units. For example, some states require that all city and school district financial statements be audited by CPA firms. The primary source of authoritative literature for doing government audits is Government Auditing Standards, which is issued by the GAO. Because of the color of the cover, it is usually referred to as the “Yellow Book” rather than by its more formal name. The initial Yellow Book standards were similar to the GAAS standards but have been expanded in subsequent revisions to provide guidance standards for performance audits. These standards are often called generally accepted government auditing standards (GAGAS). Financial auditing under the Yellow Book includes several categories of informa – tion to audit, including financial statements of governmental units, government contracts and grants, internal control, fraud, and other noncompliance with laws and regulations. Because governmental units are as concerned with compliance with laws and regulations as they are with the reliability of financial statements, these categories of information are broader than audits under auditing standards and encompass the types of attestation work outlined in Table 25-1 on page 797. The financial auditing standards of the Yellow Book are consistent with the 10 generally accepted auditing standards of the AICPA, and also contain extensive additional guidance, including the following additions and modifications:
• Materiality and significance. The Yellow Book recognizes that in government audits the thresholds of acceptable audit risk and materiality may be lower than in an audit of a commercial enterprise. This is because of the sensitivity of govern – ment activities and their public accountability
• Quality control. CPA firms and other organizations that audit government entities in compliance with the Yellow Book must have an appropriate system of internal quality control and participate in an external quality control review program. The latter requirement exists for some CPAs, but only as a require – ment for membership in the AICPA, and for the audit of public companies. Auditors involved in planning, performing, or reporting on audits under GAGAS must complete 80 hours of continuing professional education in each two-year period. At least 24 of these 80 hours of training must be in subjects related to the government environment and government auditing.
• Compliance auditing. The audit should be designed to provide reasonable assurance of detecting material misstatements resulting from noncompliance with provisions of contracts or grant agreements that have a material and direct effect on the financial statements.
• Reporting. The audit report must state that the audit was made in accordance with generally accepted government auditing standards (GAGAS). In addition, the report on financial statements must describe the scope of the auditors’ tests of compliance with laws and regulations and internal controls and present the results of those tests or refer to a separate report that includes the information.
The Single Audit Act of 1984 provides for a single coordinated audit to meet the audit requirements of all federal agencies. Entities that receive more than $500,000 in federal funds are subject to a single audit even if more than one agency provided funds. The Single Audit Act applied only to audits of state and local governments, but it was ex – tended in 1990 to higher-education institutions and other not-for-profit organizations by the Office of Management and Budget (OMB) through the issuance of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Audit Requirements The Single Audit Act as amended and OMB Circular A-133 (hereafter referred to collectively as the Act) contain requirements for the scope of the audit, including:
• The audit should be in accordance with GAGAS.
• The auditor must obtain an understanding of internal control over federal pro – grams sufficient to support a low assessed level of control risk for major programs.
• The auditor should determine whether the client has complied with laws, regula tions, and the provisions of contracts or grant agreements that may have a direct and material effect on each of its major programs. A-133 Compliance Supplement identifies 14 compliance requirements along with suggested audit procedures that should be considered in every audit. In addition, it lists
specific requirements for individual federal programs. The following are examples of specific compliance objectives:
• Whether the amounts reported as expenditures were for allowable services.
• Whether the records show that those who received services or benefits were eligible to receive them. • Whether matching requirements (where the government unit matches federal funds), levels of effort, and earmarking limitations were met.
Reporting Requirements The following reports are required under OMB Circular A-133:
• An opinion on whether the financial statements are in accordance with GAAP.
• An opinion as to whether the schedule of federal awards is presented fairly in all material respects in relation to the financial statements as a whole.
• A report on internal control related to the financial statements and major programs.
• A report on compliance with laws, regulations, and the provisions of contracts or grant agreements, where noncompliance could have a material effect on the finan – cial statements. This report can be combined with the report on internal control.
• A schedule of findings and questioned costs.
Auditors doing government auditing often find it complex. The auditor must be familiar with both GAAS and a series of government audit documents, laws, and regulations. Thus, the first step in preparing for such an engagement is extensive professional development. Sources of AICPA guidance include:
• The audit guide Government Auditing Standards and Circular A-133 Audits
• AU 801, Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance.