Common attributes of quality audits.Some audits of federal financial assistance recipients do not meet established standards, and the accounting profession and government officials want to know why. Federal inspectors general (IGs) reviews suggest audit quality has improved for large single audits conducted in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with Office of Management and Budget The Office of Management and Budget (OMB), formerly the Bureau of the Budget, is an agency of the federal government that evaluates, formulates, and coordinates management procedures and program objectives within and among departments and agencies of the Executive Branch. (OMB OMB abbr. Office of Management and Budget Noun 1. OMB - the executive agency that advises the President on the federal budget Office of Management and Budget ) Circular A-128, Audits of State and Local Governments. However, the quality of audits of small school districts, audits conducted in accordance with OMB Circular A-133, Audits of Institutions of Higher Education higher education Study beyond the level of secondary education. Institutions of higher education include not only colleges and universities but also professional schools in such fields as law, theology, medicine, business, music, and art. and Other Nonprofit A corporation or an association that conducts business for the benefit of the general public without shareholders and without a profit motive. Nonprofits are also called not-for-profit corporations. Nonprofit corporations are created according to state law. Institutions, and audits of individual federal financial assistance programs still need improvement. Practitioners must understand better what makes an audit substandard substandard, adj below an acceptable level of performance. . A 1992 survey of 93 government audits by the American Institute of CPAs federal assistance audit quality task force identified common attributes associated with quality federal financial assistance audits. The study results reported in this article establish a strong link between quality audits and 11 specific audit characteristics. Federal financial assistance recipients and their auditors AUDITORS, practice. Persons lawfully appointed to examine and digest accounts referred to them, take down the evidence in writing, which may be lawfully offered in relation to such accounts, and prepare materials on which a decree or judgment may be made; and to report the whole, together can use this information as a basis for improving audit quality. IMPROVING AUDIT QUALITY The AICPA AICPA See American Institute of Certified Public Accountants (AICPA). established the federal assistance audit quality task force in 1991 to 1. Determine the attributes affecting the quality of federal financial assistance audits and compare them to the recommendations in Report of the Task Force on the Quality of Audits of Governmental Units (the 1987 Steinberg report, so-called after the task force's chairman, Harold I Harold I or Harold Fairhair, Norse Harald Haarfager, c.850–c.933, first king of Norway, son of Halfdan the Black, king of Vestfold (SE Norway). . Steinberg). 2. Ascertain the underlying nature of substandard work noted by the IGs. 3. Evaluate the approach the IGs use to review, classify clas·si·fy tr.v. clas·si·fied, clas·si·fy·ing, clas·si·fies 1. To arrange or organize according to class or category. 2. To designate (a document, for example) as confidential, secret, or top secret. and summarize sum·ma·rize intr. & tr.v. sum·ma·rized, sum·ma·riz·ing, sum·ma·riz·es To make a summary or make a summary of. sum the quality of federal financial assistance audits. 4. Develop recommendations, if any, to improve audit quality and the IGs' method of reporting the results. The task force developed a survey for IGs to complete when performing quality control reviews (QCRs). (Unlike desk reviews, which involve only a review of auditors! reports, QCRs also review workpapers.) A total of 93 surveys were completed from January to June 1992. Exhibit 1, page 63, summarizes the types of audits included. EXHIBIT 1 Types of audits surveyed Types of audits A-128 single audits 32 A-133 single audits 5 Federal program-specific audits 56 93 Types of federal program-specific audits Department of Education 29 (student financial assistance) Department of Agriculture, Farmers Home Administration, Rural Rental Housing 20 Small Business Investment Corp. 4 Housing and Urban Development 3 Based on survey responses, 21 attributes were found to be strongly associated with audit quality; 2 related to recipient attributes while 19 related to auditor attributes. The 2 recipient attributes pertained to whether recipients used competitive bidding Competitive bidding A securities offering process in which securities firms submit competing bids to the issuer for the securities the issuer wishes to sell. competitive bidding 1. to select auditors and had audit the likelihood of getting a quality audit assessment from the IGs. The 19 auditor attributes were grouped in the categories shown in exhibit 2, page 64. EXHIBIT 2 Nineteen important auditor attributes (including two recipient contributes) Strongest attributes are presented in boldface See boldface font. . * KnowLedge of the industry * Average hours of biennial biennial, plant requiring two years to complete its life cycle, as distinguished from an annual or a perennial. In the first year a biennial usually produces a rosette of leaves (e.g., the cabbage) and a fleshy root, which acts as a food reserve over the winter. government auditing continuing professional education earned by the audit team * Average percentage of time the partner spent on federal financial assistance audits in the current year * Average percentage of time spent on federal financial assistance audits by the audit team in the current year (partner, manager and in-charge auditor) * Average percentage of time spent on federal financial assistance audits by the audit team in the last three years * Percentage of firm business relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc federal financial assistance audits * Familiarity with industry authoritative literature * Audit hours and audit fees * Manager time as a percentage of total audit hours * Hours spent by the audit team on the audit * Total audit fees * Whether the in-charge auditor was a CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. * General audit knowledge and experience * Hours of accounting anti auditing CPE (Customer Premises Equipment) Communications equipment that resides on the customer's premises. CPE - Customer Premises Equipment by the in-charge auditor * Percentage of total time spent doing audits by the audit team * Whether the audit firm derived at least 10% of its business from audits not related to federal financial assistance * Average hours of accounting and auditing CPE earned by the audit team * Firm quality control commitment * Whether the audit report and workpapers received a second partner review * Whether the firm received an unqualified or qualified peer or quality review * Whether the audit firm had a peer or quality review in the last three years * Whether responsibility for monitoring CPE for staff auditors (below the in-charge level) was independent of the audit team and centralized cen·tral·ize v. cen·tral·ized, cen·tral·iz·ing, cen·tral·iz·es v.tr. 1. To draw into or toward a center; consolidate. 2. * The time needed to complete the audit (from beginning of fieldwork field·work n. 1. A temporary military fortification erected in the field. 2. Work done or firsthand observations made in the field as opposed to that done or observed in a controlled environment. 3. to the audit report date! The IGs were asked to assess audit quality based on two measures established by the President's Council on Integrity and Efficiency (PCIE See PCI Express. ). One measure identifies three standard levels of audit quality: * Level one (no or minor changes). * Level two (major changes). * Level three (significant inadequacies). Level one suggests acceptable audit quality; levels two and three suggest substandard audit quality. Level-three audits may be considered so substandard they are referred to the AICPA professional ethics professional ethics, n the rules governing the conduct, transactions, and relationships within a profession and among its publics. professional ethics liability, n 1. division or the appropriate state board of accountancy for corrective action A corrective action is a change implemented to address a weakness identified in a management system. Normally corrective actions are instigated in response to a customer complaint, abnormal levels if internal nonconformity, nonconformities identified during an internal audit or . (See JofA, Apr.94, pages 14 and 16, for an ethics ethics, in philosophy, the study and evaluation of human conduct in the light of moral principles. Moral principles may be viewed either as the standard of conduct that individuals have constructed for themselves or as the body of obligations and duties that a division listing of common financial assistance audit deficiencies.) The second PCIE measure includes a 16-category checklist divided into the five general standards, six audit fieldwork and workpaper standards and five audit report standards described below. The greater the number of categories checked off by the IGs, the lower the assessed audit quality. General standards. Deficiencies might relate to an auditor's lack of appropriate qualifications, violation of the due professional care standard or the lack of quality control. Audit fieldwork and workpaper standards. Deficiencies might include a lack of adequate planning and supervision, inadequate workpaper documentation, a lack of understanding and tests of the internal control structure and insufficient financial and compliance substantive testing. Audit report standards. Deficiencies might include insufficient reporting of audit findings and inadequate report formats or the lack of a report on internal controls or on the general and specific compliance requirements Compliance requirements are a series of directives established by United States Federal government agencies that summarize hundreds of Federal laws and regulations applicable to Federal assistance (also known as Federal aid or Federal funds). . WHAT THE SURVEY REVEALED The survey findings addressed the task force's first objective--to determine the primary attributes affecting the quality of federal financial assistance audits. An analysis of the survey data showed 11 of the 21 auditor and recipient attributes were those most strongly associated with at least one of the two PCIE measures. An IG's assessment of acceptable audit quality appeared to be positively associated with 1. An audit team that obtained a large amount of biennial continuing professional education related to federal financial assistance audits. 2. A CPA firm partner who spent a large percentage of his or her current-year time on federal financial assistance audits. 3. An auditor who had copies of or otherwise referred to all authoritative literature. 4. A manager whose time on the engagement represented a large percentage of the total audit hours. 5. An in-charge auditor who was a CPA. 6. An in-charge auditor who obtained a large amount of biennial accounting and auditing CPE. 7. An audit team that spent a large percentage of its total time doing audits. 8. An audit firm that derived at least 10% of its business from audits not related to federal financial assistance. 9. An audit subject to a second partner review. 10. An audit firm that received an unqualified peer or quality review. 11. Federal financial assistance recipients who engaged in competitive bidding to select an auditor. IMPLICATIONS OF SURVEY FINDINGS Audit team characteristics appear to be atleast as important to audit quality as audit firm characteristics. The first 7 attributes above apply to the audit team, the next 3 to the audit firm and the last to federal financial assistance recipients. Many of the 11 attributes relate to recommendations made in the Steinberg report. The task force that developed that report identified the five Es of quality government audits: education, evaluation, engagement, exchange of information and enforcement. The first three Es relate directly to 5 of the 11 attributes. Education. Since the Steinberg report was released in 1987, government auditing standards require 24 of the 80 biennial CPE hours to be directly related to government auditing. The report also recommended that additional standards and professional guidance be developed. In response, the OMB updated its Compliance Supplement for Single Audits of State and Local Governments in 1990. In 1992, the AICPA auditing standards board In the United States, the Auditing Standards Board (ASB) is the senior technical committee designated by the American Institute of Certified Public Accountants (AICPA) to issue auditing, attestation, and quality control statements, standards and guidance to certified public issued Statement on Auditing Standards no. 68, Compliance Auditing Applicable to Governmental Entities and Other Recipients of Governmental Financial Assistance, and issued Statement of Position no. 92-7, Audits of State and Local Governmental Entities Receiving Federal Financial Assistance. A revised audit and accounting guide, Audits of State and Local Governmental Units, was issued in August 1994. These actions relate directly to attributes 1 and 3. Specifically, the IGs checked off tN`ice as many of the 16 categories if the auditor had less than 24 hours of biennial government auditing CPE. In addition, the survey found an audit was more than twice as likely to be assessed substandard if the auditor did not refer to all industry authoritative standards. Evaluation. Government Auditing Standards (the yellow book) and the AICPA bylaws The rules and regulations enacted by an association or a corporation to provide a framework for its operation and management. Bylaws may specify the qualifications, rights, and liabilities of membership, and the powers, duties, and grounds for the dissolution of an now require a triennial tri·en·ni·al adj. 1. Occurring every third year. 2. Lasting three years. n. 1. A third anniversary. 2. A ceremony or celebration occurring every three years. peer or quality review for firms that perform audits (attribute 10). Auditors receiving other than unqualified peer or quality reviews (qualified, adverse or disclaimer (networking) disclaimer - Statement ritually appended to many Usenet postings (sometimes automatically, by the posting software) reiterating the fact (which should be obvious, but is easily forgotten) that the article reflects its author's opinions and not necessarily those of the ) within the previous three years were more than twice as likely to receive a substandard audit assessment. Engagement. To help ensure high audit quality, the General Accounting Office and the National Intergovernmental in·ter·gov·ern·men·tal adj. Being or occurring between two or more governments or divisions of a government. in Audit Forum have emphasized the importance of the auditor selection process (attributes 2 and 11). Federal financial assistance recipients should consider technical attributes such as government auditing experience when selecting an auditor. For example, a partner who spent less than 25% of his or her current-year time on federal financial assistance audits was three times more likely to obtain a substandard audit assessment. Competitive bidding was an important component of an effective auditor procurement The fancy word for "purchasing." The procurement department within an organization manages all the major purchases. process--in the survey the IGs checked off twice as many of the 16 categories if federal financial assistance recipients did not engage in competitive bidding. In addition to the 5 attributes directly related to the Steinberg report recommendations, 6 other attributes also were strongly associated with the IGs' assessment of audit quality--attributes 4 through 9. Three attributes related to general audit knowledge and experience. Specifically, the IGs checked off twice as many of the 16 categories if the in-charge auditor had not obtained at least 80 hours of biennial accounting and auditing CPE (attribute 6) and the audit firm derived at least 10% of its business from audits not related to federal financial assistance (attribute S). An audit team that spent less than 60% of its total time doing audits was more than three times as likely to obtain a substandard audit assessment (attribute 7). The remaining 3 attributes related to the extent of manager involvement in the audit (attribute 4), whether the in-charge auditor was a CPA (attribute 5) and whether the audit was subject to a second partner review (attribute 9). In general, lack of manager involvement in the audit process appeared to be negatively associated with audit quality. In-charge auditors who were not CPAs were almost twice as likely to obtain a substandard audit assessment. The IGs checked off twice as many of the 16 categories if the audit was not subject to a second partner review--only 56% of the sample audits used such a review. FEDERAL IG FINDINGS The federal IGs' findings relate to the AICPA task force's second objective--to determine the underlying cause of substandard audits. Exhibit 3, above, suggests there is a strong positive association between substandard audit quality assessments (levels two and three) and the 16-category checklist. (The exhibit focuses on only 5 of the 16 categories because they explain over 50% of the substandard audit quality assessments.) For example, audits assessed as needing major changes were in violation of the due professional care standard 11.9% of the time; audits assessed as significantly inadequate violated vi·o·late tr.v. vi·o·lat·ed, vi·o·lat·ing, vi·o·lates 1. To break or disregard (a law or promise, for example). 2. To assault (a person) sexually. 3. the workpaper standards 14.5% of the time. IGs' APPROACH TO EVALUATING AUDIT QUALITY Exhibit 4, page 68, addressee (communications) addressee - One to whom something is addressed. E.g. "The To, CC, and BCC headers list the addressees of the e-mail message". Normally an addressee will eventually be a recipient, unless there is a failure at some point (an e-mail "bounces") or the message is the task force's third objective--to review the IGs' approach to classifying and summarizing the quality of federal financial assistance audits. The exhibit supports the view that the quality of large A-128 single audits is substantially better than the quality of small school district audits in accordance with OMB Circular A-128, audits in accordance with OMB Circular A-133 and individual federal financial assistance program audits. Only 5.3% of large A-128 single audits were classified as substandard. However, 75% of school district audits, 50% of A133 audits and 50.9% of individual federal financial assistance program audits were classified substandard. This is consistent with the PCIE fiscal year 1992 QCR QCR Quality Control Review QCR Quality Control Report QCR Quartz Crystal Resonator QCR Question Concerning Representation (labor law) QCR Quality Control Representative QCR Quality Control Reviewer results. The IGs were asked to identify whether the sample audit was chosen judgmentally or randomly. Some of the reasons cited for judgmental judg·men·tal adj. 1. Of, relating to, or dependent on judgment: a judgmental error. 2. Inclined to make judgments, especially moral or personal ones: selection included the auditor's most recent desk review results, the recipient's amount of federal financial assistance and the auditor's low number of federal assistance audits performed and the auditor's prior history of audit problems. Overall, the IGs classified 42 out of 93 audits (45.2%) as substandard. The substandard audit percentage was almost identical for randomly selected versus judgmentally selected audits (44.8% versus 44.1%). However, the 12 small school district audits greatly influenced these percentages. If these audits were excluded, the substandard percentage for randomly selected audits declined to 21.1% and the substandard percentage for judgmentally selected audits increased to 45.6%. RECOMMENDATIONS The task force's final objective was to provide recommendations to improve the quality of federal assistance audits and the IGs' reporting methods. Improving audit quality. Many of the significant attributes identified by the AICPA task force relate to the Steinberg report recommendations. Auditors who complied with these recommendations appeared to have much higher assessed levels of audit quality. In the future, the CPA profession should put greater emphasis on these attributes. Two Steinberg report recommendations still have not been implemented. Membership in the national and regional Intergovernmental Audit Forums should be open to CPAs in public practice and the federal government's numerous rules governing gov·ern v. gov·erned, gov·ern·ing, gov·erns v.tr. 1. To make and administer the public policy and affairs of; exercise sovereign authority in. 2. the conduct of a single audit should be consolidated. Inadequate audit training appeared to be a contributing factor, especially for audits of individual federal financial assistance programs. The AICPA CPE division and others provide government auditing courses. The U.S. Department of Education offers low-cost courses for student financial assistance programs. However, greater emphasis needs to be placed on training for individual federal financial assistance program and small school district audits. IGs' reporting method. The current reporting process provides a critical means for identifying and correcting substandard audit quality. Yet, because a combination of random and judgmental selection was used, the sample percentage of substandard audits should not be projected to the entire population. Judgmental selection and the small number of audits limited our ability to conclude the same 11 attributes would be strongly associated with audit quality if all federal financial assistance audits were subject to QCRs. GUIDELINES guidelines, n.pl a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks. FOR IMPROVING QUALITY For practitioners, the strong association between 11 specific attributes and audit quality identified in the study translate into guidelines for improving audit quality. If auditors and federal financial assistance recipients focus on these key attributes, the quality of federal financial assistance audits should improve in the future. RELATED ARTICLE: EXECUTIVE SUMMARY * SOME AUDITS OF FEDERAL financial assistance recipients do not meet established standards. An American Institute of CPAs study of 93 government audits identified common attributes associated with quality audits that practitioners and recipients can use as a basis for improving audit quality. * AN AICPA AUDIT QUALITY TASK force was established in 1991 to determine attributes of quality federal financial assistance audits, ascertain the factors underlying substandard work, evaluate the approach federal inspectors general (IGs) use to evaluate these audits and make recommendations to improve audit quality. * AN IG's ASSESSMENT OF acceptable audit quality appears to be positively associated with 11 factors, including the audit team's experience, expertise and training, certain audit firm characteristics and how the recipient selected the auditor. * HOW THE IGs SELECTED AUDITS for evaluation is important. Because some audits were selected judgmentally instead of randomly, it may not be possible to project the results of the AICPA study to all federal financial assistance audits. * TO IMPROVE AUDIT QUALITY, the task force suggests auditors comply with the recommendations in Report of the Task Force on the Quality of Audits of Governmental Units (the 1987 Steinberg report). GEORGE R. ALDHIZER III, CPA, PhD, is assistant professor of accounting, Northern Kentucky University Northern Kentucky University is a public, co-educational university located in Highland Heights, Kentucky, seven miles (11 km) southeast of Cincinnati, Ohio. Enrollment is currently about 14,200 students. , Highland Heights Highland Heights is the name of several places in the United States of America:
Established in 1941, The Institute of Internal Auditors (IIA) is an international professional association of more than 128,000 members with global headquarters in and the American Accounting Association. JOHN R. MILLER, CPA, is partner in charge of KPMG KPMG Klynveld Peat Marwick Goerdeler (accounting firm) KPMG Kaiser Permanente Medical Group KPMG Keiner Prüft Mehr Genau (German) KPMG Kommen Prüfen Meckern Gehen Peat Marwick's metro New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of public services Public services is a term usually used to mean services provided by government to its citizens, either directly (through the public sector) or by financing private provision of services. practice and a member of the firm's board of directors. He is chairman of the AICPA federal assistance audit quality task force and a former chairman of the AICPA government accounting and auditing committee. JOSEPH E. MORAGLIO, CPA, is vice-president-federal government of the AICPA in Washington, D.C. |
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