Accounting Government and Non-

Profit Organization
Week 10
Auditing Government and Not for Profit
Organization
 Learning Objectives
• Auditing Government & Not-for-Profit vs. Business
• Types of audits that governments conduct
• Standards of government audits
• Role of “Yellow-Book” in governmental auditing
• Single Audit Act (A-133)
• Auditor reports
• Characteristics and key elements of performance audits
• Ethical issues facing governmental and not-for-profit accountants
and auditors.
 FACT
U.S. Government Accountability Office (GAO) Audit of the U.S. Government

For the past 17 YEARS, from 1997 to 2014, the GAO has Disclaimed an Opinion on the
U.S. Government’s Financial Statements

http://www.gao.gov/press/financial_report_2013jan17.htm
https://www.fiscal.treasury.gov/fsreports/rpt/finrep/fr/14frusg/FR_02252015_Final.pdf
(page 225)
• “While significant progress has been made in improving federal
financial management since the federal government began preparing
consolidated financial statements 17 years ago, three major
impediments continued to prevent us from rendering an opinion on
the federal government's accrual-based consolidated financial
statements over this period: (1) serious financial management
problems at DOD that have prevented its financial statements from
being auditable, (2) the federal government's inability to adequately
account for and reconcile intra-governmental activity and balances
between federal entities, and (3) the federal government's ineffective
process for preparing the consolidated financial statements.”
http://www.gao.gov/assets/670/661639.txt
 Three major impediments
(1) SERIOUS financial management problems at the Department of
Defense
(2) the federal government's INABILITY to adequately account for
and reconcile intra-governmental activity and balances between
federal agencies
(3) the federal government's INEFFECTIVE process for preparing the
consolidated financial statements.
 State and local governments
are a substantial part of the
U.S. economy
• Based on the 2012 census there are 90,106 local governments in
the U.S.
• In 2013, federal and state governments account for 31% of 2013
U. S. GDP (2011, U.S. Bureau of Economic Analysis)
• In May 2013, federal and state governments account for 16.07%
of paid employment (May 2013, U.S. Bureau of Economic
Analysis)
• In 2013, expenditures of state and local governments were over
$9.4 trillion (2014, U.S. Bureau of Economic Analysis) – 14.1% of
the 2013 U.S. GDP ($ 67.072 trillion)
 Important Concepts
Understand very clearly what is meant by
– generally accepted government auditing standards (GAGAS),
– the source of GAGAS, and
– why GAGAS are much broader than GAAS, in particular for
financial audits and performance audits
 Audits of Governments & NFPs
Vs. Business
• Audit:
• “examination of records or accounts for accuracy.”
• Business sector audits:
• characterized by attest function (i.e. “to affirm to be correct, true, or
genuine.”)
• Attest function adds credibility to the assertions of others
• Government/Not-for-Profit sector audits:
• Auditors not only “attest” BUT also independently evaluate.
• Auditors assess whether auditees have achieved the objectives.
 Types of Audits
Government Auditing Standards (2011) characterize government audits into three
categories:
• Financial Audits: determine if financial statements are in accordance with GAAP.
• Attestation engagements: Examine, review, perform agreed-upon procedures
• Performance Audits:
o Effective usage of entity’s resources (Efficiency)
o Effectiveness of internal controls
o Verifying that organization is complying with the terms of laws, grants, and contracts.
o Provide guidance on how the organization can improve

GAGAS standards place much more emphasis on compliance with laws and regulations
than do GAAS
 GAGAS --Yellow Book
Generally Accepted Government Auditing Standards (GAGAS)
Issued by the Government Accountability Office (GAO).
• Prescribes accounting standards and practices for ALL federal agencies (as required by
law, regulation, agreement, contract, or policy)
• Mirror GAAS in discussion of:
– Auditor’s professional qualifications
– Quality of audit effort,
– Characteristics of
– professional/meaningful
– audit reports
 Generally Accepted
Government Auditing
Standards (GAGAS)
• Contains a total of 32 standards for both financial and performance audits
• Required of auditors in a Single Audit
• Government auditing standards are divided into:
 General standards

 Field work standards

 Reporting standards
 Levels of Reporting in
Governmental Single Audits
 Generally Accepted Government
Auditing Standards (GAGAS)
Broader than GAAS:
This gives an overview of the breadth and depth of GAGAS.
Financial Attestation Performance
Audits Engagements Audits

GAAS GAGA GAAS GAGAS GAAS GAGAS

S
General 3 4 5 5 0 4
Standard
s
Field 3 5 2 7 0 4
Work
Standard
s
Reportin 4 11 4 9 0 4
g
Standard
s
Totals 10 20 11 21 0 12
© 2016 John Wiley & Sons, Inc.
All rights reserved.

• General
-Training and Proficiency
GAAS v/s GAGAS
• General
-Qualifications:
• Professional Proficiency
• Knowledge of government programs
• CPE requirements

• Independence
• Independence • Due Professional Care
• Due Care • Quality Control
 Generally Accepted
Government Auditing
Standards (GAGAS)
 Professional competence requires auditors to have:
o A thorough knowledge of governmental auditing and the specific or unique
environment in which the audited entity operates
o At least 80 hours of CE (CPE) every two years, of which at least 20 hours must be
completed in each of the two years and at least 24 hours of which must be related
directly to the government environment and government audit
 Peer Review: has to be done at least once in 3 years.
 Compliance and Internal Controls: reasonable assurance in detecting fraud
or misstatements (required by AICPA and GAO)
 Public Availability: audit reports are available for public inspection

Field Work
• Adequate planning and
supervision
• Evaluate internal control
• Obtain competent evidence
GAAS v/s GAGAS
Field Work
• Adequate planning and
supervision
• Evaluate internal control
• Obtain competent evidence
• Supplemental Standards:
• Planning – consideration of
government programs
• Compliance testing
 GAAS v/s GAGAS
Reporting Reporting
• Adherence to GAAP • Adherence to GAAP
• Consistent application • Consistent application
• • Adequate disclosure
Adequate disclosure
• Expression of opinion
• Expression of opinion
• Report distribution not restricted
• “In accordance with GAAS and
GAGAS”
• Report on compliance and internal
control
 Reporting
Requirements
• Must state compliance with GAGAS in the report when required
to follow GAGAS, or representing to others that the audit
followed GAGAS requirements.
• “We conducted this performance audit in accordance with
generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We
believe that the evidence obtained provides a reasonable basis for
our finding and conclusions based on our audit objectives.”
 Single Audit Act of 1984
• Administered by the Office of Management and Budget (OMB).
• Replaces a multitude of grant-by-grant audits with a single, comprehensive,
entity-wide audit.
• Intended (among other purposes) to improve the efficiency and effectiveness
of governmental audit effort
• Federal agencies must agree to this process.
• Applies to both direct and indirect recipients of federal money
• $750,000 (1996 amendment) initiation threshold (multiple awards).
• Higher education, state/local governments, and other not-for-profit entities
(1996 amendment)

• OMB Circular A-133 and the related Compliance Supplement provide

implementing guidance.
 Single Audit (Cont’d)
• Two main components:
• Audit conducted under GAGAS
• Compliance Audit of federal financial awards/major programs (Single Audit
component)
• Understand the characteristics of a single audit, including:
• the purpose
• which entities must have a single audit
• what auditing work is required
• how major programs are selected for audit
• what reports must be rendered, when, and to whom
 Single Audit: Key
Requirements
 Annual audit of financial statements conducted by an independent auditor
encompassing the entity’s financial statements and schedule of expenditures of federal
awards.
 Fair presentation of financial statements and the schedule of federal financial awards is
presented fairly in relation to the financial statements.
 Study and evaluation of internal controls --understanding of compliance requirements
by major program.
 Assess control risk and structure control tests accordingly.
 Federal and nonfederal “Pass-through” agencies are assigned certain responsibilities for
compliance
 Federal Single Audit
 Entity receives funding under a federal grant or allocation (CDBG, Student Financial Aid,
etc.)
 Greater than $750,000 must have “single audit” or program-specific audit.
 Implemented in 1984 – “Single Audit Act” ; OMB Circular A-133 contains requirements.
 Standardized audit requirements pertaining to the federal assistance.
 Organization-wide financial and compliance audit.
• Financial component of audit - basically the same as non-federal audit;
includes the financial statements and accompanying notes.
• Compliance component – tests of compliance with applicable laws and
regulations.
 Federal Programs:
Compliance Requirements
Fourteen compliance requirements: 9. Procurement, suspension and
1. Activities allowed or unallowed debarment
2. Allowable costs/cost principles 10. Program income
3. Cash management 11. Real property acquisition and
4. Davis-Bacon Act relocation assistance
5. Eligibility 12. Reporting
6. Equipment and real property 13. Subrecipient monitoring
management 14. Special tests and provisions
Source: Adapted from OMB Circular A-133 Compliance
7. Matching level of effort earmarking Supplement, 2014.
8. Period of availability of funds
 GAAS - GAGAS
Single Audit Relationships

-Financial Audits
GAAS

-General Internal Control Audit

-General Compliance Audit with Laws and Regulations
GAGAS

FOR “MAJOR PROGRAMS”

-Internal Control Audit
-Compliance Audit with Laws and Regulations
-Schedule of Questioned Costs
Single Audit

GAGAS Incorporates GAAS – and includes additional

requirements
Single Audit Incorporates GAGAS – and includes additional
requirements
 Single Audit Act –
“Expended”
• Requires organizations expending more than $750,000 in
federal assistance under more than one program be subject to
single audit.
• Key task is determining when funds were expended.
 Federal award is expended
 When the federal agency has become at risk, and
 The nonfederal recipient has a duty of accountability.

• Recipient of funds has to deal only with a single agency (referred

to as Cognizant Agency).
• All federal awarding agencies are required to accept the single audit reports as satisfying their program’s audit requirements
 Single Audit Act and OMB
Circular A-133
Did the No No Single Audit or
nonfederal entity Program Specific Audit
expend $750,000 required--only GAAS and
or more of federal GAGAS Audit required.
awards?
Yes

Did the nonfederal entity

1) expend federal awards under Yes A program-specific
only one federal program--which audit is required.
did not require a financial
statement audit,
2) meet other requirements, and
3) properly elect a program
specific audit?

No

A Single Audit is required.

 Single Audits: Four Reports
Produced
1) Opinion on the Financial Statements and on the Schedule of Expenditures of Federal Awards
– The schedule includes a list of total expenditures of the organization
– Proper categorization of expenses
2) Report on Compliance and on Internal Control over Financial Reporting
– Directed towards the basic financial statements
– Based on audit requirements of Governmental Auditing Standards
– Include any material weaknesses in the controls
3) Report on Compliance with Requirements of “Major Programs”
– Explain the nature of the examination
– Auditors express an opinion
– Include any “ reportable conditions”
4) Schedule of Findings and Questionable Costs
– Most distinctive and informative
– Summary of the results
– Describe reportable conditions
– Include findings pertaining to major programs
 Types of Audits: Financial
 The purpose is to perform an independent assessment of and to provide
reasonable assurance about whether an entity’s reported financial condition,
results, and use of resources are presented fairly (in accordance with
recognized criteria)
 GAGAS financial reports include reports on:
• internal control
• compliance with laws and regulations, and the terms and provisions of
contracts/grants
 Internal Control Audit
• Assess internal control system components for adequacy and effectiveness –
can it provide reasonable assurance of:
• Achieving effective and efficient operations;
• Reliable financial and performance reporting; and
• Compliance with laws and regulations.
• Extremely relevant to government procurement officials for determining
organizational capability for successful performance of government contract
effort.
 Compliance Audits
• Assess compliance with
– established laws
– regulations
– contract provisions
– grant agreements
– other requirements
• To assess the direct or indirect impact on the
– acquisition;
– protection;
– use; and
– disposition of the entity’s resources or
– quantity;
– quality;
– timeliness; and
– cost of services that the entity produces and delivers.
© 2016 John Wiley & Sons, Inc. All rights
reserved.
 Compliance Audits of Federal
Financial Awards/Major Programs

For each “Major Program” the auditor must test whether the program:
– was administered in conformity with the appropriate OMB Circular (A-102 or A-
110)
– complied with detailed requirements in the A-133 Compliance Circular and other
specified requirements.
© 2016 John Wiley & Sons, Inc. All rights
reserved.
 Selection of “Major
Programs”
• Using a sliding scale identify “Type A” and “Type B” programs
• Identify low-risk programs (based on no audit findings in most
recent audit and absence of certain risk factors)
• Assess risk of Type B programs (major programs that are not Type
A programs)
• At a minimum, audit all high risk Type A programs and either
(1) half of the high-risk Type B programs or
(2) one high-risk Type B program for each low-risk Type A program

• Audit at least enough major programs to ensure that at least 50%

of total federal award expenditures are audited
 Risk-Based Approach
Step 1:
Identify (larger) Type A Programs

Step 2:
Identify “low-risk” Type A programs

Step 3:
Identify “high-risk” Type B programs

Step 4:
Select for audit as major programs a minimum of
all Type ‘A programs not identified as “low-risk” in
Step 2, plus certain “high-risk” Type B programs.
 Key Audit Procedures
 Identify compliance requirements
 Plan the engagement
 Assess internal control

 Obtain sufficient evidence

 Consider subsequent events
 Evaluate and report on noncompliance

 Follow-up procedure
 Performance Audits
 NOT required by Single Audit
 Performance audits carried out on specific programs
 Carried out by “internal” audit departments
 Focus on organizational accomplishments
 General standards are common to both financial and performance
audits
 Auditors make independent assessments
 Conducted irregularly
 Broader range of evidence
 Each performance audit is unique
 Requires more program-specific knowledge
 Steps in Conducting
Performance Audit
 Selecting the audit target
 Establishing scope and purpose
 Discerning the objectives
 Scheduling disbursements or other population
 Assessing management controls
 Preparing a written audit plan
 Gathering evidence
 Reporting the results of the audit
 Additional Topics: Ethical
Issues
Governments and to a lesser extent not-for-profits have characteristics that
present their employees with ethical decisions that are different from those
faced by employees of businesses. These are:
 Public expectations
 Guardians of public funds (OPM)
 Activities carried out in open view
 Special powers
 Conflicting loyalties
 Summary
• Auditors add value to information by being independent and conforming to professional auditing
standards (GAAS or GAGAS)
• GAGAS are broader than GAAS in that they include standards for financial and performance audits
established by the government through the GAO’s Yellow book.
• Under the Single Audit Act, GAGAS has to be adhered to in all audits of both governments and not-
for-profit organizations. However, the Single audit requires only financial audits.
• Single audits comprise of 2 elements: an audit of financial statements and an audit of federal
financial awards that follows the provisions of OMB Circular A-133.
• The single audit improves both the efficiency and effectiveness of audits of nonfederal entities
with significant expenditures of federal award.
• Performance audits differ in concept from financial audits. It makes assessments about an entity’s
programs. They are an important supplement to conventional financial audits.
• Government accountants and auditors face ethical dilemmas similar to those in the private sector
which they must resolve in the face of public expectations and as guardians of public funds.
 References
• Prof Andreas Bergmann and Robin Braun (2008). The Value Added of
IPSAS, PEMPAL Workshop Istanbul; February 25
• Caroline Aggestam Pontoppi and Isabelle Andernack (2016).
Intrepretation and Application of IPSAS. Wiley.
• Michael H. Granof, Saleha B. Khumawala. (2016). Government and
Not-for-Profit Accounting. 07. John Wiley & Sons. New Jersey. ISBN:
978-1-118-98327-0.
•  Direktorat Penyusunan APBN, Direktorat Jenderal Anggaran,
Kementerian Keuangan. (2014). Pokok-Pokok Siklus APBN Di
Indonesia Penyusunan Konsep Kebijakan dan Kapasitas Fiskal
Sebagai Langkah Awal. 01. Kementerian Keuangan. Jakarta. ISBN:
978-602-17675-2-8.
Thank You