NAHRO. Objectives. The Audit Process. Understand the audit process

Transcription

1 NAHRO Understanding the Audit Process Presented by: Scott Farnes Objectives Understand the audit process For profit vs not-for-profit Understand your role as the auditee versus that of the auditor Be better prepared for your audit The Audit Process Substantive testing Testing of internal controls Testing of compliance

2 Determine independence Gain understanding of internal control and compliance requirements Determine materiality Perform risk assessment procedures Consider risk of fraud Analytical procedures Determine major programs Non-profit (Single Audit?) Develop audit programs Determine Independence Financial interest in client Firm personnel associated with client as employee, manager, or member of governing body Unpaid audit fees Non-attest services (maybe maybe not) Bookkeeping (too many audit adjustments?) Preparation of financial statements (OK if safeguards are implemented) Gain Understanding of Internal Control Structure and Compliance Requirements What is internal control? A process designed to provide reasonable assurance that: Transactions are properly recorded and accounted for Transactions are executed in compliance with laws and regulations Funds, property, and other assets are safeguarded against loss from unauthorized us or disposition

3 Gain Understanding of Internal Control Structure and Compliance Requirements (continued) Five Components of Internal Control Control Environment Entity s Risk Assessment Control Activities Information and Communication Monitoring Gain Understanding of Internal Control Structure and Compliance Requirements (continued) How is this understanding obtained? Inquiries Checklists Walk-throughs Reviewing contracts, grant agreements, etc OMB A-133 Compliance Supplements (Single Audit) HUD Audit Guide Determine Materiality The auditor s consideration of materiality is a matter of professional judgment and is influenced by the auditor s perception of the needs of users of financial statements. (What influences or makes a difference to a decision maker?) The auditor must perform the audit to obtain reasonable assurance of detecting misstatements that the auditor believes could be large enough, individually or in the aggregate, to be quantitatively material to the financial statements.

4 Materiality Chart Table 1 Benchmark is Total Assets or Total Revenue If the Base Amount (total assets or total revenue) is: Materiality is: Over But Not Over Amount + (Percent x Base) $0 $100 thousand % $100 thousand $500 thousand 2, % $500 thousand $1 million 7, % $1 million $5 million 8, % $5 million $10 million 13, % $10 million $50 million 23, % $50 million $100 million 73, % $100 million $500 million 153, % $500 million 503, % Determine Materiality (continued) Materiality for some items may be lesser amounts than the materiality level determined for the financial statements as a whole Property tax Insurance Bookkeeping Others as the auditor determines Perform Risk Assessment Procedures When testing account balances, classes of transactions, or disclosures, the auditor considers audit risk in terms of its following three components: Inherent risk the susceptibility of an account to misstatement. For example, complex calculations are more susceptible to error than simple ones. Estimates are generally more susceptible to misstatement than routine factual data. Cash is more susceptible to theft than is a building. Control risk the risk that a misstatement that can occur will not be prevented or detected on a timely basis through the entity s internal control. Detection risk the risk that a misstatement that occurs and is not detected through the client s internal control will not be detected by the auditor s procedures.

5 Consider Risk of Fraud The auditor is required by auditing standards to consider the risks of fraud and to design the audit to provide reasonable assurance of detecting fraud that results in the financial statements being materially misstated. Consider the Risk of Fraud (continued) Fraud is a broad legal concept, but from an audit perspective is an intentional act that results in a material misstatement in the financial statements. There are three conditions that are generally present when fraud occurs: Incentive/Pressure management or other employees have a reason to commit fraud. Opportunity circumstances, such as ineffective controls, the absence of controls, or the ability to override controls, enable management or other employees to commit fraud. Rationalization/Attitude management or other employees are able to justify the acceptability of committing fraud. Consider the Risk of Fraud (continued) There are two types of misstatements that are relevant to the auditor s consideration of fraud in a financial statement audit: Misstatements resulting from fraudulent financial reporting Misstatements resulting from misappropriation of assets

6 Analytical Procedures Analytical procedures need to be designed to identify: The absence of an expected relationship, or The presence of an unexpected relationship Can you think of come examples of key relationships or ratios you would expect to see in your financial statements? Determination of Major Programs Obtain list of federal awards Major program(s) > $300,000 Single Audit (non-profit) Total federal awards >$500,000 Revenue Loans Develop Audit Program After all other planning steps, the auditor develops the specific substantive and compliance procedures and tests to be performed. After all this planning, you would think the audit should be done!!!

7 Substantive Testing Procedures used to obtain audit evidence: Inspection of records and documents Inspection of tangible assets Observation Inquiry Confirmation Recalculation Reperformance Analytical procedures Testing of Internal Controls For Profit Non-profit (no Single Audit) Limited to necessity for expressing an opinion on financial statements and compliance No opinion expressed on effectiveness of internal controls over financial reporting and internal control over compliance GAGAS (Yellowbook) Non-profit (Single Audit) OMB Circular A-133 requires low control risk Document understanding of controls Test design and implementation Test control effectiveness No opinion expressed on effectiveness of internal controls over financial reporting Common Internal Control Issues Lack of segregation of accounting duties Inadequate review or supervision of tenant file compliance areas Failure to properly segregate restricted cash Failure to post approved journal entries Inadequate petty cash controls

8 Testing of Compliance For Profit HUD Audit Guide Other required compliance Non-profit OMB Circular A-133 (Single Audit) Compliance programs for major programs Independent Auditor s Report Report on Internal Control over Financial and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards (Yellowbook). Independent Auditor s Report on Compliance with Requirements that could have a Direct and Material Effect on each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A- 133 (Single Audit). SAS 114 Letter Management Representation Letter Compliance reporting Independent Auditor s Report Financial statements are the responsibility of management Reasonable assurance that the financial statements are free of material misstatements Expression of opinion Other supplementary information (i.e REAC, USDA-RD, etc)

9 INDEPENDENT AUDITOR S REPORT To the Partners of ABC Partnership We have audited the accompanying balance sheet of ABC Partnership as of June 30, 20X1, and the related statements of income, changes in partners capital, and cash flows for the year then ended. These financial statements are the responsibility of the Partnership s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Partnership as of June 30, 20X1, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued a report dated August 15, 20X1, on our consideration of ABC Partnership s internal control over financial reporting. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and the results of that testing and not to provide an opinion on internal control over financial reporting. In accordance with Government Auditing Standards, we have also issued an opinion dated August 15, 20X1, on ABC Partnership s compliance with certain provisions of laws, regulations, contracts, and grant agreements, and other matters that could have a direct and material effect on a major HUD-assisted program. Those reports are an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying supplementary information shown on pages XX to YY is presented for purposes of additional analysis as required by the Consolidated Audit Guide for Audits of HUD Programs issued by the U.S. Department of Housing and Urban Development, Office of the Inspector General, and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Firm s Signature City, State August 15, 20X1 Example Independent Auditor s Report Yellow Book Report (Relates to Financial Statements) Opinion is not expressed on the effectiveness of the entity s internal control over financial reporting Auditor s consideration of internal controls is simply used as a basis for designing auditing procedures Auditor reports any identified control deficiencies considered to be material weaknesses or significant deficiencies Opinion is not expressed on compliance with laws, regulations, contracts, etc Discovered instances of non-compliance and questioned costs are reported as findings REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Trustees of ABC Organization We have audited the financial statements of ABC Organization (a nonprofit organization) as of and for the year ended June 30, 20X1, and have issued our report thereon dated August 15, 20X1. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control over Financial In planning and performing our audit, we considered ABC Organization s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of ABC Organization s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Compliance and Other Matters As part of obtaining reasonable assurance about whether ABC Organization s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We noted certain matters that we reported to management of ABC Organization in a separate letter dated August 15, 20X1. This report is intended solely for the information and use of management, others within the entity, the Board of Trustees, and 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. Firm s signature City, State August 15, 20X1 Example Yellow Book Report

10 Single Audit Report (Relates to Major Programs) Opinion is expressed on the types of compliance requirements that could have a direct and material effect on each of the major programs Opinion is based on compliance in all material respects Material instances of non-compliance are reported as findings Opinion is not expressed on the effectiveness of the entity s internal control over compliance Auditor s consideration of internal controls is for the limited purpose of designing auditing procedures Auditor reports any identified control deficiencies considered to be material weaknesses or significant deficiencies INDEPENDENT AUDITOR S REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 To the Board of Directors of XYZ Corporation Compliance We have audited XYZ Corporation s compliance with the types of compliance requirements described in the OMB Circular A- 133 Compliance Supplement that could have a direct and material effect on each of XYZ Company s major federal programs for the year ended June 30, 20X1. XYZ Corporation s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to each of its major federal programs is the responsibility of XYZ Corporation s management. Our responsibility is to express an opinion on XYZ Corporation s compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about XYZ Corporation s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of XYZ Corporation s compliance with those requirements. In our opinion, XYZ Corporation complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, 20X1. However, the results of our auditing procedures disclosed instances of noncompliance with those requirements, which are required to be reported in accordance with OMB Circular A-133 and which are described in the accompanying schedule of findings and questioned costs as items 20X1-1 and 20X1-2. Internal Control Over Compliance Example Single Audit Report Management of XYZ Corporation is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered XYZ Corporation s internal control over compliance with the requirements that could have a direct and material effect on a major federal program to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of XYZ Corporation s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. XYZ Corporation s responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. We did not audit XYZ Corporation s responses and, accordingly, we express no opinion on the responses. This report is intended solely for the information and use of management, Board of Directors, others within the entity, the U.S. Department of Housing and Urban Development, 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. Firm s Signature City, State August 15, 20X1 SAS 114 Letter Auditor responsibility Significant audit findings Qualitative Aspects of Accounting Practices (i.e. new accounting policies, significant accounting estimates, etc) Difficulties Encountered in Performing the Audit Correct and Uncorrected Misstatements Disagreements with Management Management Representations Management Consultations with Other Independent Accountants Other Audit Findings or Issues

11 To the Board of Commissioners ABC Organization We have audited the financial statements of ABC Organization (the Company) as of and for the year ended June 30, 20X1, and have issued our report thereon dated August 15, 20X1. Under generally accepted auditing standards, we are providing you with the attached information related to the conduct of our audit. OUR RESPONSIBILITY UNDER U.S. GENERALLY ACCEPTED AUDITING STANDARDS As stated in our engagement letter, our responsibility, as described by professional standards, is to plan and perform the audit to obtain reasonable, but not absolute, assurance about whether the financial statements are free of material misstatement and are fairly presented in accordance with U.S. generally accepted accounting standards. Because an audit is designed to provide reasonable, but not absolute assurance and because we did not perform a detailed examination of all transactions, there is a risk that material misstatements may exist and not be detected by us. compliance with requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance. statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit. While our audit provides a reasonable basis for our opinion, it does not provide a legal determination on all Company compliance with those requirements. SIGNIFICANT ACCOUNTING PRACTICES The significant accounting practices used by the Project are described in the notes to the financial statements. No new accounting policies were adopted during the year ended June 30, 20X1. We noted no transactions entered into by the Project during the year that were both significant and unusual, and of which, under professional standards, we are required to inform you, or transactions for which there is a lack of authoritative guidance or consensus. MANAGEMENT JUDGMENTS AND ACCOUNTING ESTIMATES Accounting estimates are an integral part of the financial statements prepared by management and are based on management s current judgments. Certain accounting estimates are particularly sensitive because of their significance to the general purpose financial statements and because of the possibility that future events affecting them may differ markedly from management s current judgments. We evaluated the key factors and assumptions used to ascertain that they are reasonable in relation to the financial statements of the Project taken as a whole. SIGNIFICANT AUDIT ADJUSTMENTS In connection with our audit of the financial statements, we did not find any significant financial statement misstatements in the Company s books and records as of and for the year ended June 30, 20X1; thus, it was not necessary to discuss with the Company. An adjustment to accrued management fees was booked at the request of management. DISAGREEMENTS WITH MANAGEMENT There were no disagreements with management on financial accounting and reporting matters that, if not satisfactorily resolved, would have caused a modification of our report on all Company financial statements as of and for the year ended June 30, 20X1. CONSULTATION WITH OTHER ACCOUNTANTS In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a second opinion on certain situations. If a consultation involves application of an accounting principle to the Company s consolidated financial statements or a determination of the type of auditor s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. We are not aware of any consultations management had with other accountant about accounting or auditing matters in the past year. MAJOR ISSUES DISCUSSED WITH MANAGEMENT PRIOR TO RETENTION We generally discuss a variety of matters, including the application of accounting principles, and auditing standards, with management each year prior to retention as all Company auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Our firm is independent of the Company and this independence has been communicated to management. DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT We encountered no difficulties in dealing with management in performing our audit. AUDITOR SUGGESTIONS FOR MANAGEMENT As auditors, we feel it is beneficial to our clients to offer suggestions for improvement with regards to their financial recording systems and internal controls. This letter to the management is a summary of suggestions we noted for the audit of Company for the year ended June 30, 20X1. Suggestion 1 Suggestion 2 Firm s signature Management Letter Used to communicate other recommendations to management that are not deemed material weaknesses or significant deficiencies May be combined with SAS 114 Letter In planning and performing our audit, we considered all Company internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting. We also considered internal control over As part of obtaining reasonable assurance about whether all Company financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters, noncompliance with which could have a direct and material effect on the determination of financial Example SAS 114 Letter and Management Letter This report is intended solely for the information and use of the Board of Commissioners and is not intended to be and should not be used by anyone other than these specified parties. Compliance For Profit Independent Auditors Report on Internal Control Independent Auditors Report on Compliance with Specific Requirements Applicable to Major Programs Independent Auditors Report on Compliance with Specific Requirements Applicable to Nonmajor Programs Independent Auditors Report on Compliance with Laws and Regulations Required by Government Auditing Standards Independent Auditors Report on Compliance with Specific Requirements Applicable to Fair Housing and Non-Discrimination Non-profit Schedule of Expenditures of Federal Awards Report on Internal Control over Financial and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Report on Compliance with Requirements Applicable to Each Major Program and Internal Control over Compliance in Accordance with OMB Circular A-133

12 Surplus Cash For Profit Amount available for distribution Limited/unlimited distributions Not-for-profit Amount to be deposited in residual receipts Questions