Text Box: Avoid Common Deficiencies in Yellow Book Audits     Text Box: Padilla, a CPA, is managing partner of Padilla & Company LLP and currently is an adjunct lecturer of accounting and auditing at CUNY York College. Previously, Padilla served on the New York State Board for Public Accountancy. Padilla addressed the Society’s audience on the subject of “Improving the Quality of OMB A-133 Audits and GAO Audits,” often referred to as “Yellow Book” audits. He zeroed in on some serious common deficiencies relating to four major areas: quality-control assurance; engagement documentation; the conduct of audits themselves, and audit reports. The most common OMB A-133 and GAO audit deficiencies in the quality-control assurance area include having quality-control policies and procedures that are not documented, having monitoring procedures to determine compliance with quality-control policies and procedures that are not documented and having inspection procedures that are not documented or have not been performed. Likewise, common audit deficiencies abound in the engagement documentation area. Often, the fraud risk factors, their disposition and the procedures planned to address the risk factors are not documented. Further, there is no documentation on the understanding of the internal control system and the basis for reliance thereon. The analytical procedures used in planning the nature, timing and extent of the audit are not documented either. The deficiencies found in the audit itself are many and tend to relate to fairly common tenets unique to governments, such as the failure to audit Type A programs not qualifying as low risk as “major programs” or the failure to audit Type A programs as major programs due to an error made in determining the Type A/Type B program dollar threshold. “It is not uncommon to find a failure to audit all programs included in a cluster of programs or a failure to meet the percentage-of-coverage requirement in Circular A-133 section 520 (f),” Padilla said. Padilla added that poor documentation and reporting are often to blame for audit deficiencies. According to Padilla, the 10 most common audit deficiencies that occur in reporting are: Text Box: Page 2 Text Box: Volume 1, Issue 1 Text Box: · Not issuing the required reports for internal control and compliance; · Failure to include appropriate OMB A-133 reports such as Schedule of Expenditures of Federal Awards and Schedule of Finding and Questioned Costs; · Reports on financial statements do not refer to reports on internal control and compliance; · The required Governmental Standards Reports on Internal Control and Compliance do not refer to the reports on financial statements; · Failure to include follow-up on prior audit reports; · The auditor’s report was not qualified for GAAP departures; · GAAP requirements for the classification of and accounting for particular net assets and for disclosures were not followed (FAS 117); · The reports on the financial statements do not indicate the responsibility taken for required supplemental information; · Failure to submit (or errors in the preparation of) the Data Collection Form for Reporting on Audits of States, Local Governments, and Non-Profit Organizations; and · Missing disclosures (use of estimates, nature of the governmental program and revenue recognition). The cause of these many, varied deficiencies has been identified, in general, as some CPA firms not taking the quality-control policies and procedures seriously, Padilla said. Not-for-Profit Organizations Committee Chair Allen L. Fetterman reminded the group that, regardless of the amount of compensation for a governmental audit, a practitioner’s professional responsibility is the same. Padilla articulated other, more specific causes of deficiencies, including: the Text Box: auditor’s using inadequate or outdated reference material; government auditing standards continuing professional education requirements not met; failure to implement new professional standards and pronouncements on a timely basis, and audit programs that fail to address all requirements of OMB Circular A-133 and of Yellow Book audits. The identification of these deficiencies and their root causes is an educational exercise for practitioners. The key, Padilla said, is to be aware of them and to design and perform audits in such a manner as to avoid them entirely. In the wake of unprecedented corporate and public school audit failures, failures in internal-control systems and CPA misconduct, it is critical for practitioners providing services, especially to the public sector, to know the common pitfalls.       Text Box: The key is to be consciously aware of these deficiencies and to design and perform audits in such a manner as to avoid them.

Text Box: By William R. Lalli, Tax Policy Manager  of New York State Society of CPAs