So you want to audit government grants?
Are you looking for a new specialty to add to your repertoire? Have you heard that the government is close to eclipsing the spending of proprietary entities? Government is where the money is, right?
Well, before you get too excited about this opportunity, I think you should know a few things about auditing in the government environment.
So in a series of articles, I will do my best to lay out the pros and cons of doing this sort of work. We will begin by covering the nature of the work, then move on to the nature of the client, and then talk about the special requirements for performing audits of government programs.
First, the nature of the work.
A Single Audit (audits conducted under Circular A-133 audit requirements) has three components.
1. An opinion on the financial statements
2. an ‘in-relation-to’ opinion on the schedule of federal financial assistance
3. an opinion on compliance with grant terms.
The first piece - the financial audit - can be complex if you are auditing governmental financial statements created in accordancewith GASB rules. If you are auditing not-for-profits, the financial statements are presented using FASB rules and are much simpler!
The GASB requires that governmental financial statements be presented using two accrual methods – the modified accrual method (which is a very conservative accounting method - close to the cash method of accounting) and the full accrual method (which is what most auditors are used to in proprietary accounting).
The full accrual method is used in the front layer of the financial statements and the modified accrual is used for some, but not all, fund categories in the back layer of the financial statements. Yes, the governmental financial statements have layers. And these layers must be reconciled. If you are already turned off, stop reading now and go back to your taxes.
Governments also keep track of their resources using funds – special revenue funds, capital project funds, pension trust funds, etc. In 2011, Texas City had over 100 discreet funds! Yow.
Both of these GASB requirements - two accounting methods and plenty of discreet funds - make determining materiality for purposes of the audit challenging. It also makes creating and verifying the financial statements fun. (Yes, I am acknowledging here that many CPA firms create the financial statements that they turn around and bless. More about that bad habit later when we talk about the GAO’s yellow book independence requirements.)
The second component of the audit – the SEFA (schedule of expenditures of federal awards) – is more straightforward. It lists the grants that the auditee received and their identifying numbers. Unless the grantee is clueless about where their grants come from and what they are called, this is a pretty easy schedule to audit.
The third piece – an opinion on compliance with federal grant terms is likely the most granular work you will ever encounter. Have you ever read this nursery rhyme?
As I was going to St. Ives
As I was going to St. Ives
I met a man with seven wives
And every wife had seven sacks
And every sack had seven kits
Kits, cats, sacks, wives
How many were going to St. Ives?
This is the way government grants work, too!
Your auditee may have 10 grants. Using a multi-step process prescribed by OMB Circular A-133, you select a handful of major grants to work on – let’s say you choose 4.
Each of these 4 grants could have up to 14 compliance requirements! For example, one compliance requirement is that all expenditures are allowable and for the purposes of the program. A tutoring program for homeless high school kids (yes, that program exists) can spend the grant only on items that contribute to the accomplishment of the program. Athletic equipment, food, and clothing are not allowed.
But that’s not all. If your order now you also get something else in your bag! These 14 compliance requirements get more specific. So the tutoring program may limit expenditures only to tutors who meet very specific criteria such as certification or education requirements.
And don’t forget the kittens! Internal controls are uber important to the federal government. The feds are interested in whether the auditee complieswith their rules, but they are also very interested in knowing that controls are in place to ensure continued compliance in the future.
The federal government lays out expectations for controls for each of the fourteen compliance requirements using the five elements of the COSO model.
So our audit nursery rhyme becomes:
How many procedures must the auditor perform?
The client’s 10 grants are narrowed to 4
And these 4 have 14 compliance requirements a piece
And each of the 14 gets more specific
And must be evaluated for the 5 components of internal controls.
How many procedures must the auditor perform to ensure compliance?
OK, not much of a rhyme. But, ignoring the poor craftsmanship of my literary attempt, you have to appreciate the overwhelming nature of the work.
It usually isn’t feasible to plan and perform the audit for the financial statements and compliance simulataneously. The controls over and management of financial reports and the controls and management of compliance are not the same. You are often dealing with two different sets of professionals and two different control systems.
As you can imagine, the documentation for your choices on this engagement is very involved. Plenty of spreadsheets, questionnaires, memos. Luckily we auditors are a pretty organized bunch – on this audit you accidently let some kits out of the bag.
Next month, more on the nature of the client.