The Latest on Audit Quality
Governmental and Not-for-Profit Organization Audits
If you audit governmental or not-for-profit organizations there are several developments on the audit quality front that you should be aware of. If you are not an auditor, but are an official with a governmental or not-for-profit organization associated with the procurement of audit services, audit quality is important to you because you have a vital fiduciary responsibility to ensure that your audit is of the highest quality. This article outlines these developments, the importance of audit quality and gives you several audit quality resources.
Pervasiveness of Governmental and Not-for-Profit Organization Audits
Each year more than 6,300 CPA firms perform thousands of governmental and not-for-profit organization audits. These organizations receive billions of dollars in governmental financial assistance each year and, as a result, are subject to a myriad of unique and complex audit requirements. You have likely heard these audits referred to as Yellow Book audits (performed under Government Auditing Standards) or single audits. To give you an idea of the pervasiveness of these audits in our state, there were 474 single audits submitted to the federal government for 2003 (the most recent year with complete submission information) from Arizona which covered $2,239,243,099 of federal dollars expended.
Audit Quality Continues to Be a Concern
Based on the AICPA peer review process and ethics investigations, improvements are still needed in both Yellow Book and single audits. These indications are further supported by results of quality control reviews performed by federal agencies. Audit deficiencies noted in reviews of these engagements relate to almost every aspect of these audits including planning, fieldwork, and reporting. A few of the more common deficiencies are:
• Audit documentation does not evidence the work performed. Particular problems have been noted with documentation relating to the auditor’s responsibilities for internal control.
• Errors are being made with regard to major program determination, particularly regarding application of the “two-year lookback” rule, clustering, and percentage of coverage.
• Audit findings do not include the required detail or are included in a management letter instead of the required Schedule of Findings and Questioned Costs.
• Mistakes are being made in completing the required Data Collection Form.
•The auditor’s report is not supported by the work that was performed.
Based on the federal government’s concern about audit quality, an interagency, interdisciplinary task force led by the U.S. Department of Education has been established to provide an overall assessment of single audit quality. The task force has selected a statistical sample of 208 single audits and is currently overseeing a review of those audits. The task force expects to issue a report on the results of their reviews sometime during the first half of 2006.
What Can You Do To Help Ensure Your Firm’s Quality?
Between the Arizona Society of CPAs and the AICPA, there are a number of resources available to help you perform these audits including, technical guidance, practice aids, educational courses, and industry conferences.
Also, to help CPAs meet the challenges of this unique and complex area, the AICPA recently launched its new Governmental Audit Quality Center (GAQC). This Center is primarily designed for CPA firms that perform Yellow Book or single audits of governmental, not-for-profit, and certain for-profit organizations. Firms that join demonstrate their commitment to audit quality by agreeing to adhere to certain membership requirements. The Center’s focus is to promote the highest quality audits.
The GAQC provides a single access point via a Center Web site — www.aicpa.org/GAQC — where members can learn about the latest developments in Yellow Book and single audits and communicate with other member firms. The Center also provides timely alerts and newsletters to keep its members informed about important developments. The GAQC Web site includes membership information and instructions on how to join.
While only CPA firms are able to join the Center at this time, a portion of the GAQC Web site is available to the public so that employees of governmental and not-for-profit organizations can benefit, too. The AICPA’s goal is to enhance audit quality by asking firms to adhere to the Center’s membership requirements and, in return, providing them with resources, tools and the latest developments.
What Can You Do As A Purchaser of Audit Services?
If you work for a government or not-for-profit organization and are involved in procuring audit services, there are several things to keep in mind as you go through the selection process. You have a vital fiduciary responsibility and it is in your organization’s best interest to hire a firm that is well-qualified. Having an auditor familiar with the complex requirements surrounding Yellow Book and single audits will assist you in obtaining assurance relating to the financial integrity of funded programs and uncovering any possible noncompliance or other issues early. While the proposed audit fees are a consideration when selecting an audit firm, there are many other factors that you should consider, including:
• Demonstration of the firm’s qualifications in response to your request for proposal;
• The availability of experienced, qualified staff with appropriate technical abilities, particularly with Yellow Book and single audits;
• Extent of the firm’s practice with organizations like yours;
• Results of the firm’s external peer review; and
• Participation by the firm in quality improvement programs (for example, the AICPA’s GovernmentalAuditQualityCenter).
To find a firm that has demonstrated its commitment to audit quality by joining the GAQC, visit the Center’s Web site (www.aicpa.org/GAQC) to view member firms sorted both by firm name and by state.
Quality is Critical
Audits of governmental and not-for-profit organizations have a strong public interest component. The independent audits of these organizations provide assurance to the recipients of governmental financial assistance, regulators and taxpayers that the laws and regulations associated with the assistance or programs are being complied with. Therefore, the quality of governmental audits is of utmost importance.
If you perform these audits, you should make it a high priority to ensure that you are meeting all of the standards and requirements. If you procure audit services for these audits, you should ensure that your selection process focuses heavily on the experience and qualifications of the firm.
