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2008 Governmental Audit

Quality Center Annual Update Webcast

April 29, 2008

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Program ObjectivesThis program is designed to help you: Get an update on Center activities and membership Learn about the latest technical matters relating to your

2008 audits Get the latest news on audit quality including an update

on the federal study on single audit quality (PCIE report) and the GAQC and agency response

Learn about resources to help you maintain or improve audit quality

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Today’s Speakers

Amanda Nelson, CPA Partner

KPMG LLP___

Mary Foelster, CPADirector

AICPA Governmental Auditing and Accounting

Bliss Jones, CPAShareholder

Jones and Kolb___

John F. Hudson, CPAModerator & President

Hudson Consulting Group, LLC

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What We Will CoverWebcast Rules and ProtocolsGAQC Update Technical Update (including practice

tips)• OMB, GAO, FAC, Single Audit Quality,

HUD, DOE, AICPA, FASAB, FASB, and GASB

Resources Available to You

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Webcast Rules and Protocol Membership requirement for GAQC designated audit quality partner

Executive Committee believes that it is important to get leaders of governmental audit practices together at least once a year

Ask questions…even if we cannot address them all today, we will summarize and post to GAQC Member Discussion Forum Web site (http://gaqc.aicpa.org/Community/Member+Discussion+Forum.htm)

Webcast will be archived – encourage staff to view

CPE available for live viewing of Webcast only

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GAQC Update

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GAQC UpdateCurrent Membership Statistics

• Over 980 member firms representing 50 states, Puerto Rico, and US Virgin Islands

• 81% of 2006 federal $$$ audited in Clearinghouse by firms

• 42% of number of 2006 single audits performed by firms in the Clearinghouse

• New stats will be generated using 2008 information when FAC database complete

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GAQC Update Recap Activities Since the Last Webcast

• Significant increase in membership• Increased recognition as a valuable resource by regulators• Timely GAQC Alerts and GAQC Updates• More conference calls and CPE available for the first time• Member Discussion Forum growing• Technical guidance• Web site improvements (including resources such as dedicated HUD

Information page)• Updated resources such as illustrative reports, peer review checklists,

links, etc.• Continuing to market Center to non-member firms• Interacting with regulators and other stakeholders (Single audit

Roundtable and PCIE Task Forces)• Membership compliance verification questionnaire

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GAQC UpdateFuture Initiatives

• Completion of Task Force activities relating to PCIE report

• Continued advocacy efforts with federal agencies• Tools to help members address deficiencies noted in

PCIE Report• Additional member-only conference calls on audit

quality topics • Continued CPE for member calls• Improve audit quality!

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GAQC Update – Membership Requirements

For questions about or more details on the GAQC membership requirements, check the membership Q&A document at: http://gaqc.aicpa.org/Memberships/Q+and+A+Membership+Requirements.htm

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GAQC Update - Providing GAQC Web Site Access to Staff

Designated audit quality partner decides who to give access to within firm

Welcome letter received at joining provides instructions

GAQC membership Q&A document also includes instructions at: http://gaqc.aicpa.org/Memberships/Q+and+A+Membership+Requirements.htm

Any questions? E-mail gaqc@aicpa.org

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Technical Update

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Technical Update

OMBFederal Audit

Clearinghouse GAOSingle Audit Quality

UpdateHUD

Department of Education

AICPA UpdateFASABFASBGASB

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Technical Update - OMB 2008 Compliance Supplement (CS) will be available at

http://www.omb.gov/grants • Appendix V will list changes – You should review in detail• Proposed changes include:

– 178 programs including 5 new programs– 43 programs with significant changes– 2 clusters with major changes

▪ Research & Development Programs▪ Student Financial Assistance Programs

• Release of 2008 CS expected within next few weeks• Watch for GAQC Alert when CS is released

Bigger changes expected for 2009 CS

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Technical Update - OMB 2008 Compliance Supplement - Practice Tips

• Bookmark the OMB site that catalogs the various years’ Compliance Supplements

– http://www.whitehouse.gov/omb/circulars/index.html• Understand your entity to make the proper modifications to the

generic steps presented within the CS• Refrain from using the CS as a checklist• Use Part 2, Matrix of Compliance Requirements, appropriately• Understand the various federal programs to determine whether

modifications to the audit approach are necessary• Part 4 cannot be used without Parts 2 and 3 and should not be

your defacto audit program

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Technical Update - OMBTransparency Act Update

• FFATA (Federal Funding Accountability and Transparency Act)

• www.federalspending.gov

TF on Leveraging Single Audits• Improper Payments• Circular A-87

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Technical Update – Federal Audit Clearinghouse

New Data Collection Form to be issued soon• Intended to be used for audit periods ending in 2008, 2009, and 2010 • Comments were due February 4, 2008 • To view the AICPA comment letter on proposed form changes visit

GAQC Website • Future GAQC communications will inform you when the revised DCF is

issued• Required electronic submission of reporting package starting with 2008• The current form is being used for audit periods ending in 2004, 2005,

2006 and 2007• Reporting package submission change for 2007 (only 1 hard copy)

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Technical Update – Federal Audit Clearinghouse

Data Collection Form – Practice Tips• Obtain DUNS/EIN numbers early• Cross reference to final reports and schedules• GAQC member-call, Avoiding Data Collection Form Problems, in GAQC

archives on www.aicpa.org/GAQC under “Resource” tab• Should be reviewed by manager or partner with the same scrutiny as

other single audit reporting• Importance of correct CFDA for “cross cutting” issues • DCF should have same level of detail as SEFA• Importance of non-cash reconciling items from SEFA footnotes• Independent review of findings detail

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Technical Update - GAO July 2007 Revisions to Yellow Book

• July 2007 revision supersedes the Jan. 2007 and 2003 revisions• For performance audits, the standards to become effective for

audits beginning on or after January 1, 2008 • For financial audits and attestation engagements, the standards

will become effective for audits of periods beginning on or after January 1, 2008

• Adopted new terminology (e.g., SAS Nos. 102 and 112)• AICPA Governmental Audit Quality Center (GAQC) has issued

updated illustrative Yellow Book audit reports that reflect the new terminology on its Web site at: http://www.aicpa.org/GAQC under the Resources tab

Potential Future revisions relating to independence and corresponding Q&A guidance

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Technical Update – Single Audit Quality

PCIE Report Update – Senate Hearing• GAQC Testified on October 25, 2007• Senate Homeland Security and Governmental Affairs

Committee's Subcommittee on Federal Financial Management, Government Information, Federal Services, and International Security

• Topic of hearing: Single Audits: Are They Helping to Safeguard Federal Funds?

• Focus of hearing was on PCIE report• Witnesses: PCIE, GAO, OMB, and AICPA• Written testimony can be found at http://hsgac.senate.gov/

under hearings (scroll to October 25, 2007) • Another follow-up hearing in 18 months a possibility

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Technical Update – Single Audit Quality PCIE Report Update – AICPA Response

• Archived Center call, An Overview of the Results of the National Single Audit Sampling Project, can be found on GAQC Web site under the Resources tab

• Task Forces formed to examine the study's detailed findings and recommendations for the AICPA as follows:

– Sampling/Materiality Issues In A Single Audit Environment – Internal Control And Compliance Responsibilities In A Single

Audit Environment – Schedule Of Expenditures Federal Awards Reporting Issues – Reporting Audit Findings In A Single Audit– Single Audit Training Needs And Continuing Professional

Education Evaluation– Peer Review– SAS 74

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Technical Update – Single Audit QualityPCIE Report Update – AICPA Response

• Sampling/Materiality TF - Activities:– Assessed members' sampling policies to determine the

diversity in sampling practices pertaining to testing internal controls and compliance

– Assessment of sampling by compliance requirement▪ Population definition; exceptions; risks; etc.

– Decision to pursue attribute sampling for internal control testing and compliance testing

– Working to determine minimal sample sizes for low and high risk populations

– Ultimate outcome a new chapter in AICPA Audit Guide, Government Auditing Standards and Circular A-133 (GAS/A133 Guide) (perhaps in 2009)

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Technical Update – Single Audit Quality

Sampling Materiality TF – Practice Tips • AICPA Sampling Guide• Document rationale• Properly identify the population• Sampling is NOT a default

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Technical Update – Single Audit QualityPCIE Report Update – AICPA Response

• Internal Control & Compliance TF - Activities:– Evaluated PCIE findings Reviewed risk assessment suite

of auditing standards in the context of compliance auditing– Suggested revisions to the 2008 GAS/A133 Guide to

incorporate more discussion of auditor responsibility over internal control

▪ Understand of each of the five elements of COSO for each direct and material compliance requirement for each major program

▪ Test controls noted as key (not required to test all elements of COSO)

– Documentation for assessment and testing – Working on workpaper templates to address the issues

noted in the PCIE report

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Technical Update – Single Audit Quality Internal Control and Compliance TF – Practice Tips

– Testing compliance gives indirect evidence on controls, but cannot serve as the basis for assessing controls as operating effectively

▪ Controls: What did entity do to ensure compliance?▪ Compliance: Did entity comply?

– Ensure dual-purpose testing is properly documented ▪ Properly identify compliance tests & controls tests

– Preliminary assessment of control risk– Evaluate ineffective control

▪ Use SAS 112 criteria & evaluation guidance– Internal control must be continually reevaluated

throughout the audit process– Testing Internal Control – Tickmark/Procedure Description for an Allowability Test

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Technical Update – Single Audit QualityPCIE Report Update – AICPA Response

• Schedule of Expenditures of Federal Awards (SEFA) TF - Activities:

– Evaluated the procedures required to issue an “in relation to” report under AU 551

▪ Determined that while many of the matters cited in the PCIE report were valid concerns, they could not be attributed to the ‘in relation to’ procedures

▪ The procedures required to mitigate the findings noted in the PCIE report would justified by the Circular A-133 requirements

– Reviewed the PCIE findings to determine the appropriate practice aids to assist auditors in avoiding such findings

– Clarifying guidance in 2008 GAS/A133 Guide

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Technical Update – Single Audit QualitySEFA Practice Tips

– Communicate with the clients who have difficulty in preparing the SEFA early in the planning process to try to avoid control deficiencies

– Document any control deficiencies identified during the audit and conclude whether they are required to be reported

– Document your procedures– Make sure SEFA includes required elements– Listen to the recent Center call on the SEFA

which can be found on the GAQC Web site under the Resources tab

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Technical Update – Single Audit QualityPCIE Report Update – AICPA Response

• Findings TF - Activities:– Discussed when audit findings must be reported

▪ Determined that an audit tool in the form of a findings worksheet would help auditors document all elements of a finding and help evaluate finding to determine what is reportable

▪ Decided to include in the audit tool SAS 112 considerations and to develop two worksheets (that is, one for single audit findings and one for Yellow Book financial statement findings)

▪ Determined that illustrative findings of common deficiencies using the new audit tool would help auditors determine when and how to report findings

– Discussed current guidance on how to determine "likely questioned costs"

– Preparing illustrative findings

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Technical Update – Single Audit QualityFindings TF – Practice Tips

– Decision not to report documented exceptions▪ Disclose reasons & basis for that decision

▪ Specifically address why it does not meet the reporting requirements

– Emphasis on questioned costs– Development of illustrative examples & tools for “how to”– Educate staff and partners about the importance of the

Schedule of Findings and Questioned Costs (SFQC)– Include a “cold” review as part of the reporting procedures

to review the SFQC and major program work– Start with a blank “pro forma” of the SFQC

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Technical Update – Single Audit QualityPCIE Report Update – AICPA Response

• Training & CPE TF - Activities:– Discussed the PCIE recommendation for prerequisite

single audit training to determine best practice training▪ Surveyed TF members about current firm single audit

training practices▪ Surveyed TF members about what topics and hours the

ideal single audit curriculum should include▪ Determined a proposed best practice Single Audit curriculum

structured for 3 staff levels (basic, intermediate, advanced) that includes specific topics and suggestions for annual updates was needed

▪ Obtained feedback from various AICPA committees, expert panels, and senior leadership

– Developing a proposed "grandfathering" provision, delivery guidance, Q&A implementation guidance, and introductory narrative

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Technical Update – Single Audit QualityPCIE Report Update – AICPA Response

• Training & CPE TF - Practice Tips– Ensure your single audit staff gets appropriate level single

audit and Yellow Book training– Review the PCIE report with special emphasis on the

deficiencies noted– As a team, review the compliance supplement– Review any archived events on the GAQC website that

are applicable to your audit engagements– Ensure that Managers, Partners and “cold” reviewers on

single audit engagements view the 2008 Webcast– Share the GAQC alerts and newsletters with single audit

staff

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Technical Update – Single Audit Quality

PCIE Report Update – AICPA Response• Peer Review TF • SAS No. 74 TF

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Technical Update – Single Audit Quality

Other Practice Tip• GAQC Alert # 64 addresses material reporting

errors (MRE) noted in PCIE report• MRE occurs when list wrong major programs

in the SFQC• Alert provides ideas to avoid making MREs• Can find GAQC Alerts on the GAQC Web site

under the Resources tab

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Technical Update – Single Audit QualityPCIE Report Update – OMB/Federal Update

• Formed 8 TFs– Determining likely questioned costs (example approaches

for calculating them)– Coverage of compliance requirements (clarification that

have to test if applicable)– Sampling– Developing CPE curriculum (planning to draft rules for

potential revisions to Circular A-133 – 6/30/08 is the OMB deadline for drafting amendments)

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Technical Update – Single Audit Quality

PCIE Report Update – OMB/Federal Update• Formed 8 TFs (Continued)

– Suspension and debarment– Dialog with AICPA and NASBA (ethics and peer

review)– Approach for Federal Quality Control Reviews– Ideas for redesign of single audit

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Technical Update – Single Audit Quality

PCIE Report Update – GAO Study• Senate request for GAO to study single

audit issues• Focus on single audit process• Interviews with key stakeholders• Single Audit Expert Panel with key

stakeholders this summer• Report to Senate in the Fall

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Technical Update - HUD Consolidated Audit Guide Revisions in Process

• Chapter 1 – General Audit Guidance • Chapter 2 – Reporting requirements and sample reports • Chapter 3 – Multi-family Housing Programs • Chapter 4 –Nursing Homes

Effective Dates? All other chapters revised, reissued, and effective See GAQC HUD Information page (under the Resources

tab on GAQC Web site) for details on previously revised chapters, including effective dates

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Technical Update - HUDProposed IPA Roster

• HUD proposal would create an Independent Public Accountant (IPA) roster of auditors that are allowed to perform HUD audits

– Firms would have to register with HUD and agree to adhere to eligibility requirements

– HUD would have the ability to remove auditors from the roster for various reasons including failing to maintain compliance with eligibility requirements

– Once removed, a firm would no longer be allowed to perform HUD audits

• GAQC Comment Letter on the proposal can be accessed on the GAQC Web site home page

• 70+ comment letters submitted to HUD New HUD page on GAQC Website

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Technical Update - DOE Recent Dear CPA Letter 08-1

• Amends December 1996 Audit Guide, Compliance Audits (Attestation Engagements) for Lenders and Lender Servicers Participating in the FFEL Program (Lender Guide), to provide for an agreed-upon procedures engagement relating to prohibited inducements paid by lenders to postsecondary institutions or other parties

Recent Dear CPA Letter 07-03 • Amends January 2000 Audit Guide, Audits of Federal Student

Financial Assistance Programs at Participating Institutions and Institution Servicers, to provide inducement guidance

Status of Audit Guide Revisions (Lender and SFA)• Delayed

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Technical Update - AICPAAuditing Standards

• Clarity Project• Risk Assessment Standards• SAS No. 112• SLG and GAS/A-133 Guides• NPO Guide

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Technical Update - AICPAAuditing Standards

• Clarity Project– Address concerns over length and complexity of

standards– Make standards easier to read, understand and

implement– Will lead to enhancements in audit quality

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Technical Update - AICPAAuditing Standards

• Risk Assessment Standards– Objective is to guide auditors to areas of greatest risk

whether caused by error or fraud – Issued in March 2006.– Effective for periods beginning after 12/15/06– Archived Center call, An Overview of the New AICPA Risk

Assessment Standards, providing general overall guidance on the risk assessment standards can be accessed via the GAQC Web site under the Resources tab

– Upcoming Center call on May 14, 2008, to be held on implementing the risk assessment standards in a state and local government financial statement audit; CPE to be offered

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Technical Update - AICPA Auditing Standards

• The risk assessment standards consist of:– SAS No. 104, Amendment to Statement on Auditing Standards No. 1– SAS No. 105, Amendment to Statement on Auditing Standards No. 95,

Generally Accepted Auditing Standards– SAS No. 106, Audit Evidence– SAS No. 107, Audit Risk and Materiality in Conducting an Audit (Audit

Risk and Materiality)– SAS, No. 108, Planning and Supervision– SAS No. 109, Understanding the Entity and Its Environment and

Assessing the Risks of Material Misstatement (Assessing Risks)– SAS No. 110, Performing Audit Procedures in Response to Assessed

Risks and Evaluating the Audit Evidence Obtained (Performing Procedures)

– SAS No. 111, Amendment to Statement on Auditing Standards No. 39, Audit Sampling

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Perform risk assessment procedures

Gain an understanding of the entity

Assess the risks of material misstatement

Overall financial statement Level

Assertion Level

Overall Responses

Further audit procedures

Evaluate Sufficiency of Audit

Evidence

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Technical Update - AICPA Auditing Standards

• SAS No. 112– In June 2007, OMB issued a Notice in the Federal Register that

revises Circular A-133 to adopt internal control terminology consistent with SAS No. 112

– Concurrently, Auditing Standards Board issued an auditing interpretation which defines the terms control deficiency, significant deficiency, and material weakness from the perspective of reporting on internal control over compliance in a Circular A-133 audit

– At the same time, GAQC issued revised illustrative single audit reports

– All illulstrative reports can be accessed at: http://gaqc.aicpa.org/Resources/Illustrative+Auditors+Reports/

– Listen also to archived Center call, Application of SAS 112 in a Single Audit, which can be found on the GAQC Web site under the Resources tab

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Technical Update - AICPAAuditing Standards

• SAS No. 112– PCAOB AS5 changed definitions– Conforming changes to SAS 112 will also likely be

made– Any definitional changes will be effective most likely in

2009 (early implementation may be allowed?)– Other changes will be made through the clarity project– Archived center call, Impact of SAS 112 on

Governmental Financial Audits, available on GAQC Web site under the Resources tab

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Technical Update - AICPAStatus of A&A Guides

• GAS/A133 Guide– Being drafted– July 2007 Yellow Book being incorporated– Risk Assessment Standards– SAS 102 “must and shoulds”– Some guidance on avoiding PCIE Report

deficiencies– Expected released date of summer 2008

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Technical Update - AICPAStatus of A&A Guides

• State and Local A&A Guide– In production and available in early Summer 2008– SAS 102 “must and shoulds”– Other new SAS guidance– New GASB standards that become effective this

year– Footnotes to identify places where GASB

standards issued but not yet effective

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Technical Update - AICPAStatus of A&A Guides

• NPO A&A Guide– In production and available in early Summer 2008– SAS 102 “must and shoulds”– Other new SAS guidance

• Task force working on complete overhaul to the Guide to address many issues that have accumulated

▪ 2-4 year timeframe

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Technical Update – FASB

NPO Update• Proposed FSP on Endowment (UPMIFA)

– Review recent Center call on this exposure draft (ED) available on the GAQC Web site under the Resources tab

– Proposed effective date of June 30, 2008, year-ends• Omnibus FSP• Fair Value Measurements• Consolidation and Equity Method Guidance• Upcoming NPO Webcast on June 5, 2008, will

provide good information to assist you with your NPO financial statement audits

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Technical Update – FASABMay affect your audits this year: Technical Release 7, Clarification of Standards Relating to

the National Aeronautics and Space Administration's Space Exploration Equipment

Statement of Federal Financial Accounting Technical Release 8: Clarification of Standard Relating to Inter-Entity Costs

Technical Release 9: Implementation Guide for Statement of FASAB 29: Heritage Assets and Stewardship Land

May affect your future audits: ED on Accounting for Federal Oil and Gas Resources;

comments were due 1/11/2008

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Technical Update – GASBMay affect your audits for the first time this year:Statement 43—OPEB PlansStatement 45—OPEB Employers Statement 49—Pollution RemediationStatement 50—Pension DisclosuresMay affect your audits in future years:Statement 51—Intangible AssetsStatement 52—Land and Other Real Estate

Held as Investments by Endowments

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Technical Update – GASB Service Efforts and Accomplishments Reporting—an

amendment of GASB Concepts Statement No. 2• ED issued on April 4, 2008 with comments due July 3, 2008

Reporting of Fund Balance• ED released February 2008 with comments due June 30, 2008

Derivatives• ED issued in June 2007• Statement expected Summer 2008

Upcoming SLG Webcast to be held June 11, 2008, will provide good information to assist you with you state and local government financial statement audits

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AICPA and GAQC Audit Resources

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AICPA Audit Resources AICPA Conferences

• NPO Industry Conference (June 18-20, 2008 in Washington, DC.)• Government A&A Update Conference (August 18-20, 2008 in

Washington, DC and again on September 21-23, 2008 in Denver, CO)• Government and NPO Training Program (October 26-29, 2008 in Las

Vegas, NV) 8 hours of Single Audit Training developed by GAQC to be held at

each National Conference as follows:• NPO Industry Conference on June 18, 2008 (add-on day)• Government A&A Update Conference on August 20, 2008 in DC and

September 21, 2008 in CO (add-on day)• Government and NPO Training Program (part of main program – will be

its own individual concurrent session track for one full day)

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AICPA and Other Resources

Upcoming AICPA Webcasts• NPO Strategic Briefing (June 5, 2008)• SLG Strategic Briefing (June 11, 2008)

AICPA CPExpressOther CPE courses, including State Society

courses

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AICPA Audit ResourcesA&A Guides

• GAS/A133 • SLG • NPO• HC

Audit Risk Alerts• GAS/A133• SLG • NPO • HC

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GAQC Audit Resources

GAQC Web site (www.aicpa.org/GAQC) Archived Alerts and Update NewslettersArchived Conference Calls (findings, data

collection form, SEFA, etc.)Archived Webcast (have your staff view)FlowchartsIllustrative Report ExamplesNonauthoritative practice aids

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GAQC Audit ResourcesMember discussion forumLinks to other key organizations, news items,

and documentsArticlesU.S. Standard Activities SummaryMember listingMembership Q&AUpdated and expanded marketing toolkitGovernmental event and conferences summary

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Summary & Questions

2008

Governmental

Audit Quality CenterAnnual Update Webcast

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Thank You For Participating!

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For a complete listing of all AICPA Webcasts, please look at our 2008 calendar at www.cpa2biz.com/webcasts

Upcoming AICPA Webcasts