Leita Hart-Fanta

Essential Audit Skills and Audit Report Writing in Austin this Fall

2011-08-30T14:46:00.000-07:00

Essential Audit Skills and Audit Report Writing in Austin this Fall

Two courses designed specifically for auditors - REGISTER TODAY!

Essential Audit Skills (2-Day Course)
– October 24 & 25, 2011
The Art of the Finding
– November 14, 2011

Courses will be held at the Thompson Center on the University of Texas campus in Austin, Texas*

Qualifies for Yellow Book CPE hours!

*Austin – a fun destination

The best time to visit Austin is between October and April; the weather is mild and activities abound. Our training location is on the UT Campus adjacent to the Capital complex and convenient to music and cultural hotspots.
Want to learn more about Austin? Visit www.austin360.com/this-is-austin/
For DIRECTIONS and HOTELS, click here.

Essential Audit Skills – 2-Day Course

$290 for 16 hours of Governmental CPE

After several projects, the new auditor begins to piece together his or her role in the auditing process. Without an understanding of key audit skills, new auditors can easily spend valuable audit hours doing the wrong thing.

New auditors will feel more comfortable doing their work once they understand the essentials of each phase of the audit - planning, risk assessment, audit program design, fieldwork, working paper development, and issue development. This course covers the latest standards and concepts regarding risk assessment and internal control assessments and covers the basics of the auditor’s responsibilities for fraud detection.

Objectives:

How to develop a finding or audit issue
How to gather evidence for audit conclusions and opinions
How to document what you’ve done in the working papers
What the steps of the audit are and how your work fits in
Which standards you must follow
How to document and consider the risk of fraud
How to evaluate the strength of internal controls
When to discuss progress and issues with your supervisor
How to distinguish between over-auditing and under-auditing

Program level: Beginning

Instructional method: Group live instruction

NASBA Category of Study: Auditing (Governmental)

Advance Preparation: None

Who should attend: Auditors with less than one year of government audit experience. Auditors and monitors of governmental funds and programs who need to understand how to apply governmental auditing standards to their work and recipients of governmental funds who undergo auditing or monitoring from an oversight or granting agency. This course is applicable to both internal auditors and external auditors and monitors.

Recommended CPE credit: 16 hours of NASBA qualified hours that counts toward the 24 hour Yellowbook CPE requirements

Location: Thompson Center on the University of Texas Campus in Austin, Texas

Date: October 24 & 25, 2011

TO REGISTER FOR THIS COURSE:

1. Download and complete registration form
2. Fax or mail as directed on form (include payment if not paying online)

To pay online, click the register button below:

SCHEDULE:
Registration: 8 a.m.
Course begins: 8:30 a.m.
Lunch: 11:30 a.m.
Day ends: 5:00 p.m.

The Art of the Finding

$180 for 8 hours of Yellow Book Qualified CPE

A logically organized finding is a gift to the reader and to the tax-paying public. By using a few key guidelines on content and organization, the team can create an audit report masterpiece! This course is centered on the Yellow Book and IIA requirements regarding audit findings and reports.

Objectives:

Generate concise and logical findings in an hour or less
Choose the strongest content for your finding
Justify how much detail to share in the report
Quantify findings
Edit findings and provide meaningful feedback

Program level: Intermediate

Delivery method: Group live

Recommended CPE credit: 8 hours

Who should attend: Auditors who write or review audit reports

Location: Thompson Center on the University of Texas Campus in Austin, Texas

Hours: 8:30 am - 5:00 pm

Date: November 14, 2011

TO REGISTER FOR THIS COURSE:

1. Download and complete registration form
2. Fax or mail as directed on form (include payment if not paying online)

To pay online, click the register button below:

SCHEDULE:
Registration: 8 a.m.
Course begins: 8:30 a.m.
Lunch: 11:30 a.m.
Day ends: 5:00 p.m.

Leita Hart-Fanta, CPA, CGFM, CGAP makes auditing fun and easy. Leita is the author of numerous self-study courses on governmental auditing including The Yellow Book Interpreted and The Risk Assessment SASs. She is the creator and owner of Yellowbook-CPE.com and has led over 900 seminars and workshops for state societies of CPAs, Western CPE, CPA firms, and federal and local government audit shops. She is a monthly columnist for Single Audit Magazine.www.auditskills.com

Yellow Book 2011 Internet Version Issued

2011-08-30T14:44:00.000-07:00

final publication stalled until the AICPA finishes its clarification project later this year.

But this is good to go. More analysis as I take a closer look at it later this week...

http://www.gao.gov/yellowbook

Peace of mind

2011-08-30T14:42:00.000-07:00

I get around as I work - I've been to every state except Oregon and West Virginia - yes, I keep track. And as I travel I see that many, many Americans are hurting. The economic news seems even worse in Europe. I am blessed to be in Texas - where our economy is robust. (And Governor Perry - who is running for President - will be more than glad to take credit for it! )

And as you can tell from my previous blog posts, I have been keeping an eye on the federal debt and the whacky behaviors of local governments.

Not long ago, I created a blog post that concerned some of my readers. I was stepping off of the American traditional upward path and simplifying my life. I liquidated all of my investments and sold my house and moved into a similar rental. I had a strong sinking feeling about our economy back in January of this year and my husband and I acted on it. (It kind of reminded me of John Lennon's song 'Watching the Wheels" about stepping off the 'success' merry go round.)

And as I did this - friends and family (and because I was trying to share!) my readers assumed that my business wasn't going well and that I was broke. Quite to contrary. Business is better than ever. Knock knock. And I am still ambitious and plan on owning a home on the lake someday...but that doesn't mean I want to see all of my resources dashed by another downturn on Wall Street or in real estate.

These last few days we have all watched the stock market run up and down. We have heard about poor employment numbers and weak consumer confidence.

I think 'weak consumer confidence' describes my mental attitude quite well.

And I want you to know that being highly liquid and debt feels absolutely FABULOUS! Yes, I realize that the dollar is getting weaker, but until I can figure out where to put my money next, I am surely not going to put it where I know it will take a hit.

Was selling the house and moving hard? Oh yes - very. Excruciating - actually. Did I have to tolerate the skeptical looks of my friends, neighbors, and family? Oh, yes. Did I doubt myself? Yes. Am I happy about it now - 8 months later? Heck yes! I have peace of mind for the first time in a long time. I recommend stepping off the upwardly-mobile-facade-fueled-merry-go-round to anyone.

I'll keep you advised - in case you feel like stepping off with me.

the inevitable downgrade

2011-08-30T08:16:00.001-07:00

Standard & Poor’s took the unprecedented step of downgrading the U.S. government’s “AAA” sovereign credit rating Friday in a move that could send shock waves through global. The following is a press release from Standard & Poor’s:

– We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.

– We have also removed both the short- and long-term ratings from CreditWatch negative.

– The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.

– More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

– Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

– The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

TORONTO (Standard & Poor’s) Aug. 5, 2011–Standard & Poor’s Ratings Services said today that it lowered its long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’. Standard & Poor’s also said that the outlook on the long-term rating is negative. At the same time, Standard & Poor’s affirmed its ‘A-1+’ short-term rating on the U.S. In addition, Standard & Poor’s removed both ratings from CreditWatch, where they were placed on July 14, 2011, with negative implications.

The transfer and convertibility (T&C) assessment of the U.S.–our assessment of the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service–remains ‘AAA’.

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria (see “Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41). Nevertheless, we view the U.S. federal government’s other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.

We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government’s debt ceiling. In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years.

The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand (see “Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now,” June 21, 2011).

Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.’s finances on a sustainable footing.

The act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the newly formed Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011. The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them.

The act further provides that if Congress does not enact the committee’s recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.

We note that in a letter to Congress on Aug. 1, 2011, the Congressional Budget Office (CBO) estimated total budgetary savings under the act to be at least $2.1 trillion over the next 10 years relative to its baseline assumptions. In updating our own fiscal projections, with certain modifications outlined below, we have relied on the CBO’s latest “Alternate Fiscal Scenario” of June 2011, updated to include the CBO assumptions contained in its Aug. 1 letter to Congress. In general, the CBO’s “Alternate Fiscal Scenario” assumes a continuation of recent Congressional action overriding existing law.

We view the act’s measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow. Under our revised base case fiscal scenario–which we consider to be consistent with a ‘AA+’ long-term rating and a negative outlook–we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act’s revised policy settings.

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.

Our revised upside scenario–which, other things being equal, we view as consistent with the outlook on the ‘AA+’ long-term rating being revised to stable–retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.

Our revised downside scenario–which, other things being equal, we view as being consistent with a possible further downgrade to a ‘AA’ long-term rating–features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries. We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening. Nonetheless, it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021.

Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced on July 29. From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand. As a result, our downside case scenario assumes relatively modest real trend GDP growth of 2.5% and inflation of near 1.5% annually going forward.

When comparing the U.S. to sovereigns with ‘AAA’ long-term ratings that we view as relevant peers–Canada, France, Germany, and the U.K.–we also observe, based on our base case scenarios for each, that the trajectory of the U.S.’s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.

Standard & Poor’s transfer T&C assessment of the U.S. remains ‘AAA’. Our T&C assessment reflects our view of the likelihood of the sovereign restricting other public and private issuers’ access to foreign exchange needed to meet debt service. Although in our view the credit standing of the U.S. government has deteriorated modestly, we see little indication that official interference of this kind is entering onto the policy agenda of either Congress or the Administration. Consequently, we continue to view this risk as being highly remote.

The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’.

On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.

Online Federal Budget "HERO" Game

2011-08-30T08:14:00.000-07:00

http://marketplace.publicradio.org/features/budget_hero/

Fun, in a nerdy, accountant sort of way!

Rhode Island City files chapter 9 because of pensions

2011-08-30T08:09:00.000-07:00

Bankrupt Rhode Island city may default: S&P

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Analysis & Opinion

Internal Auditor Independence

2011-08-29T18:41:00.002-07:00

Internal Audit Independence

July 29, 2011

I run into more than a few internal auditors who struggle with independence. The people who pay their salaries and keep their team funded and staffed don’t understand what auditors do and therefore set the internal audit shops up for audit failure.

Sometimes I wonder if executives would actually prefer an ineffective, impotent audit function. If internal audit can actually say what is so, these executives might actually have to change their behavior or alter their choices –and who wants that kind of scrutiny and feedback?

Executives and managers commonly put up two hurdles to effective audit shops:

Asking internal auditors to report to those who they audit
Asking internal auditors to take part in managing the entity

One audit shop I evaluated in the 90’s was required by the executives to do both. I reviewed a retirement system’s compliance with the Texas Internal Audit Act a year after the Act was passed. The internal auditor of this retirement system – we’ll call her Bonnie - reported to the executive director of the retirement system –not to the board. He directed Bonnie’s every move and kept her busy doing special projects.

Because Bonnie wanted to keep her job, she did as he instructed. She came up with an “audit plan” every year – but never completed any of the audits!

This retirement system had $24 billion in investments at the time and employed ONE ineffective internal auditor. The Texas law requires that the retirement system report to the governing board, employ a qualified director, and follow the red book and yellow book simultaneously.

Bonnie lasted in her role as internal auditor for only a few more years because she was/did none of those things. The retirement system eventually changed its ways only because they were forced to do so by state law.

Bonnie did keep her job – but her position was retitled to "executive in charge of special projects"’ and a real internal audit shop was founded. Now the retirement system employs a more appropriate number of auditors - seven.

Independence means you report to those in charge of governance

What are auditors good for? Their objective, independent take on a subject matter. The governing body is supposed to be able to rely on them to uncover and report on risks to the organization. Then the board can make an informed decision on what to do about the risks. The governing board should be able to ask the internal auditor give them a true picture of what is going on inside their entity.

But if the internal auditor is afraid to tell the truth because they are afraid of losing their jobs, what good are they?

How do you keep an internal auditor from being afraid of losing their jobs? You make sure they are structurally independent. A picture is worth a thousand words:

LIKE THIS:

NOT LIKE THIS:

If the internal auditor has to report to the people it is auditing – then these powerful people might squelch the auditors results. In the first diagram, the internal auditor (renamed the Chief Audit Executive or CAE by the Institute of Internal Auditors) reports directly to the board and doesn’t fear reprimand if they say what is so.

This is just one of the many ways an internal auditor can be shielded from political ramifications when they tell the truth. For other ideas, you can check out chapter 3 of the Yellow Book (the GAO’s Government Auditing Standards).

Here is an excerpt from the GAO’s Government Auditing Standards that discusses internal auditor independence:

Organizational Independence for Internal Audit Functions:

3.16 Certain federal, state, or local government entities employ auditors to work for management of the audited entities. These auditors may be subject to administrative direction from persons involved in the entity management process. Such audit organizations are internal audit functions and are encouraged to use the Institute of Internal Auditors (IIA) International Standards for the Professional Practice of Internal Auditing in conjunction with GAGAS. Under GAGAS, a government internal audit function can be presumed to be free from organizational impairments to independence for reporting internally if the head of the audit organization meets all of the following criteria:
a. is accountable to the head or deputy head of the government entity or to those charged with governance;
b. reports the audit results both to the head or deputy head of the government entity and to those charged with governance;
c. is located organizationally outside the staff or line-management function of the unit under audit;
d. has access to those charged with governance; and:
e. is sufficiently removed from political pressures to conduct audits and report findings, opinions, and conclusions objectively without fear of political reprisal.
3.17 The internal audit organization should report regularly to those charged with governance.

 

Independence means you don’t help create the subject matter of the audit

Do you have kids/dogs/cats? Aren’t they brilliant little geniuses? A gift to the world and everyone who encounters them? Look, I’ve seen your kids/dog/cat, and you have a serious problem with objectivity!

You see, when you make the baby or adopt the pet, you have a hard time calling the baby ugly or badly behaved. This is why internal auditors have to be careful to stay clear of helping management create the subject matter they will later be asked to tell the truth about.

For instance, when the Obama Administration sent billions to the states in order to help stimulate the economy, every state’s leadership was overwhelmed. They knew they had to properly account for the monies and provide performance measures for the programs lickity split! And some of them asked for help setting up proper systems from their state auditors. Wise state auditors (who act as internal auditors for state functions) told the state agencies that they were on their own. No, the state auditor wouldn’t help create policies, procedures, and tracking systems because later they needed to be able to come in and say whether these management structures were working. They needed to be able to call the baby ugly and not feel any personal embarrassment. Who wants to admit that their kid talks back to adults or that their dog steals food off the kitchen counter? No, it isn’t adorable.

The Institute of Internal Auditors and the Government Accountability Office feel differently about this subject. The IIA acknowledges that internal auditors provide two main services – assurance services (telling the truth about the subject matter) and consulting services (making a baby).

Assurance services look like this:

Consulting services look like this:

Internal auditors do know lots of stuff about a broad range of subjects and are very helpful and process oriented. They are a great addition to a management team. But, when they are part of management, they lose their objectivity about the subject matter.

A GAO employee (the GAO authors the yellow book) once told me that internal audit is an oxymoron. No, he wasn’t calling internal auditors morons! He was saying that the terms don’t jive. Internal means you lose your objectivity and can’t audit – in his mind. That because internal auditors are part of management, so giving an completely objective view of the subject matter is impossible.

The GAO has a different term for what the IIA calls consulting services – they call them non-audit services and cautions auditors about taking non-audit services on:

3.20 Audit organizations at times may perform other professional services (nonaudit services) that are not performed in accordance with GAGAS. Audit organizations that provide nonaudit services must evaluate whether providing the services creates an independence impairment either in fact or appearance with respect to entities they audit.[Footnote 27] Based on the facts and circumstances, professional judgment is used in determining whether a nonaudit service would impair an audit organization's independence with respect to entities it audits.

But in case you can’t seem to help yourself in performing non-audit/consulting services, the GAO provides a little more guidance:

22 The following two overarching principles apply to auditor independence when assessing the impact of performing a nonaudit service for an audited program or entity: (1) audit organizations must not provide nonaudit services that involve performing management functions or making management decisions and (2) audit organizations must not audit their own work or provide nonaudit services in situations in which the nonaudit services are significant or material to the subject matter of the audits.
23 In considering whether audits performed by the audit organization could be significantly or materially affected by the nonaudit service, audit organizations should evaluate (1) ongoing audits; (2) planned audits; (3) requirements and commitments for providing audits, which includes laws, regulations, rules, contracts, and other agreements; and (4) policies placing responsibilities on the audit organization for providing audit services.
24 If requested to perform nonaudit services that would impair the audit organization's ability to meet either or both of the overarching independence principles for certain types of audit work, the audit organization should inform the requestor and the audited entity that performing the nonaudit service would impair the auditors' independence with regard to subsequent audit or attestation engagements.

Why am I telling you these things? Because it is time for some internal auditors to have a heart-to-heart with the leaders in their organizations.

Organization leaders shouldn’t push the internal auditor to do work that will ruin their independence and should shield them from political backlash when they tell the truth. That way, the resources that are dedicated to internal auditing will yield the greatest results.

helpful checklists from the AICPA

2011-08-29T18:41:00.001-07:00

ever wonder what a peer reviewer is looking for when they review your government engagements? Beat them to the punch, and self review using these checklists:

http://www.aicpa.org/InterestAreas/GovernmentalAuditQuality/Resources/Au...

CPA firms who don't want to write findings re: grants are missing the point

2011-08-29T18:39:00.000-07:00

Quite frequently, I hear CPAs in my yellow book and Single Audit classes saying "You don't really write that up do you? We don't write that sort of thing up." That is because their mind is still in commercial audit mode. The owner of a corporation doesn't want you to write up every little finding - it is no one's business but hers. But in the government environment - we aren't serving the auditee - we are serving those who benefit from the grant. When we keep those folks in mind - the elderly, the poor, the CHILDREN! (yes, I get emotional about those the programs are serving) - we do write up findings. We don't care whether the auditee is happy with the results. They aren't our ultimate customer.

Here is an email conversation I had with one of my colleagues. I think my colleague does a nice job of describing why one of his client's won't write findings:

Hi, Leita:

I just finished the session with X&X. It went well,
although there were some disagreements when I talked about what the feds
expected to see in a finding....

My reply:

Hm. Many CPAs avoid writing findings like the plague. Costs too much time and time is MONEY. They miss the big picture of what they are up to – enhancing accountability and transparency in government. Was that what the disagreement was about?

Thanks for keeping me updated.

:)
Leita

Hi Leita: You got it! I used one of their findings that the entity had not kept time records, and was required to. The effect they had was that it had violated the rules, which was the condition again. The real impact was that hundreds of thousands of $ was unsupported. But they couldn't say that -- and keep the client.
One of the senior members insisted that I was expecting them to go beyond their professional responsibilities. I explained that I wasn't a federal rep. I just wanted to let them know what the fed auditors expected, so they would not be surprised if the issue came up. There was a disagreement, but it stayed friendly.
I thought of pointing out that if they were hired by the HUD OIG to do the same audits, using the same engagement letter and the same GAAS and GAGAS standards, they would report the effect if HUD had told them that's what it wanted and expected. So the professional responsibilities would have been the same (engagement letter, audit standards, A-133), but the findings would have been different because of what the client wanted to disclose in the findings. But, I decided to let that one go.

I have to do what ?*#$@ to audit government grants!?!

2011-08-29T18:37:00.000-07:00

So you are still hanging in with this idea, eh? Even after I described how granular the audit work can be and who you will be working with in government, you are still game? Good for you. You might be made for this gig.

But before you take on a new client, I want to warn you of a few more things in this last of three articles on the subject. They might not be deal breakers – but I guess that depends on how sensitive you are to regulation.

I regularly teach full day seminars on YellowBook standards (which by the way, you are going to have to follow!) and at about 1 o’clock, the attendees start thinking about getting out of government auditing. At that point, some of them are saturated with bad news. I even had one woman in San Francisco stand up and offer her sole government client to anyone who was interested – she was done. Sort of a live e-bay auction. By the end of the day, she was back to her regular gigs - free of the constraints of government standards.

What is the Yellow Book anyway? It is also known as Generally Accepted Government Auditing Standards or GAGAS. (How is that for an attractive acronym?!?) The Yellow Book is written by the Government Accountability Office, the federal audit agency. And it regularly exceeds the standards set forth by the AICPA in the SASs (Statements on Auditing Standards for Financial Audits). Actually it is an additional governmental specific standard designed to layer on top of the AICPA standards.

Here is how the standards stack up: The Single Audit Act/OMB Circular A-133 requires that Single Audits be conducted in accordance with GAGAS. Inside GAGAS, the Single Audit is classified as a financial audit. Financial auditors must follow the edicts of chapters 1-5 (2007 version) of the Yellow Book plus the AICPA SASs.

So, did you catch that? In order to do the Single Audit, you follow three layers of directions. 1. The Single Audit requirements 2. GAGAS and 3. The AICPA’s SASs. Whew, I am tired just thinking about it!

This wasn’t that big a deal a decade ago. All three standard setting bodies were pretty quiet before the Enron debacle. Since then, the AICPA and GAO standards have been in constant state of flux. It is great for my business, as a teacher. But not so great as a practitioner.

Here are a few things that trigger a “You’ve got to be kidding!?!” response from the participants in my Yellow Book seminars.

1. Specific training. GAGAS requires auditors to get 80 hours of training that enhances their ability to conduct audits every two years. Out of this 80 hours, 24 of it must be in government topics or topics relevant to your audit environment. This means that your tax update classes won’t count! Here is the specific relevant paragraph from GAGAS:

GAGAS 2007 3.46 Auditors performing work under GAGAS, including planning, directing, performing field work, or reporting on an audit or attestation engagement under GAGAS, should maintain their professional competence through continuing professional education (CPE). Therefore, each auditor performing work under GAGAS should complete, every 2 years, at least 24 hours of CPE that directly relates to government auditing, the government environment, or the specific or unique environment in which the audited entity operates. For auditors who are involved in any amount of planning, directing, or reporting on GAGAS assignments and those auditors who are not involved in those activities but charge 20 percent or more of their time annually to GAGAS assignments should also obtain at least an additional 56 hours of CPE (for a total of 80 hours of CPE in every 2-year period) that enhances the auditor's professional proficiency to perform audits or attestation engagements. Auditors required to take the total 80 hours of CPE should complete at least 20 hours of CPE in each year of the 2-year period.

2. Extra nagging regarding independence: As of this writing, GAGAS is in the middle of revision. The 2011 version of the Yellow Book should be out… well hopefully in 2011. The exposure draft continues on a theme that the GAO has always emphasized; while the GAO doesn’t specifically prohibit auditors from creating financial statements for their audit clients, they definitely don’t like it. Here is an excerpt from the 2010 proposed revision:

GAGAS 2010 Proposed 3.44. Bookkeeping is the systematic recording of an entity's transactions. Auditors performing bookkeeping services for an audited entity they audit should determine that the audited entity's management is providing sufficient oversight of those services. Auditors should determine that the audited entity's management
responsible for oversight possesses suitable skill, knowledge, and/or experience to evaluate the adequacy of the bookkeeping services provided, and accepts responsibility for the results of the services.

3.45. Bookkeeping services that would impair an auditor's independence include:

a. determining or changing journal entries, account codings or classifications for transactions, or other accounting records for an entity without obtaining the entity's approval,

b. authorizing or approving transactions,

c. preparing source documents, and,

d. making changes to source documents without client approval.

Preparing Financial Statements:

GAGAS 2010 Proposed 3.46. Management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework. Consequently an auditor's acceptance of responsibility for the preparation and fair presentation of financial statements that the auditor will subsequently audit would impair the auditor's independence. Auditors should determine that audited entity management taking responsibility for the preparation and fair presentation of the financial statements possesses suitable skill, knowledge, and/or experience to evaluate the adequacy of any services in this area provided by the auditor.

When I read that, I am discouraged from coming up with journal entries and preparing the financial statements. But it doesn’t expressly prohibit it, does it? Very much like a nagging - but ultimately powerless - parent.

This causes lots of angst during my seminars because auditors believe three things: 1. Their tiny client can’t create the financials or won’t pay for a third party to prepare them 2. The client expects the auditor to do it and 3. The auditor’s life is easier if they create the financials they end up auditing.

Unfortunately, the GAO isn’t exactly sympathetic to any of those views. But just like a nagging but ineffective parent, they are always talking but never putting their foot down or taking the keys to the car. This is something to keep your eye on when the next revision comes out.

3. The GAO isn’t happy just hearing about symptoms – they want a diagnosis of the root cause. In order to enhance transparency and accountability in government, GAGAS asks that auditors don’t stop at simply pointing out flaws in the client’s operations or in compliance. The GAO wants to know why the flaw occurred, whether it is a big deal, and what should be done about it. The GAO asks auditors to describe the elements of a finding (condition, effect, cause, criteria, recommendation) and this makes the auditor perform extra work, because the effect and root cause don’t necessarily present themselves to the auditor on a silver platter. For more on this topic, please see the newsletter archive athttp://www.yellowbook-cpe.com .

4. Additional reportable conditions – under GAGAS auditors have two additional triggers of a finding in addition to those laid out in the SASs. Under the SASs, internal control weaknesses and fraud are reportable.

The GAO adds non-compliance and abuse to the mix. First, government auditors must design their audits to uncover significant non-compliance with grants and contracts. That isn’t that big a deal to most folks, because that is one of the subject matters for the Single Audit anyway.

But the second additional responsibility, abuse, does cause auditors pause:

4.12 Abuse involves behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable and necessary business practice given the facts and circumstances. Abuse also includes misuse of authority or position for personal financial interests or those of an immediate or close family member or business associate. Abuse does not necessarily involve fraud, violation of laws, regulations, or provisions of a contract or grant agreement.

4.13 If during the course of the audit, auditors become aware of abuse that could be quantitatively or qualitatively material to the financial statements, auditors should apply audit procedures specifically directed to ascertain the potential effect on the financial statements or other financial data significant to the audit objectives. After performing additional work, auditors may discover that the abuse represents potential fraud or illegal acts. Because the determination of abuse is subjective, auditors are not required to provide reasonable assurance of detecting abuse.

Abuse is a criteria-less complaint about bad behavior in government.

An audit is the evaluation of a subject matter against criteria. For non-compliance, the criteria is the law or regulation the subject matter should meet. For internal controls, the criteria is COSO. For fraud, the criteria is the elements of a crime per statute. But who is to say if everyone in the government agency, including the janitor, needs a i-Pad and i-Phone or not? Is that wasteful and abusive? Some would say yes, others might say no. And because there is no objective criteria to go on, they are both right.

What about a tribal council traveling monthly to the Bellagio in Vegas to do research on how to operate a good casino? What if they took friends and family with them and partied down (presumably to replicate the customer experience)? What if other members of the tribe were living in trailers and the sewer system was in serious need of repair? Is that abuse? The tribal council thought that luxury travel was a perk of their job.

The auditor thought otherwise. Because they weren’t breaking any particular law, the auditor and the tribal council fought. The auditor put the abuse in their audit report and was promptly fired. But did he do the right thing? I think so.

Why does the government want us to report waste and abuse? Because we are on the front lines and see this stuff. The feds may never visit. And if we don’t say anything, who will? 60 Minutes only has so many shows a year; they can’t cover every wasteful scandal!

So to sum it all up – auditing in the government environment is trippy, different, sometimes flat out annoying. Most practitioners find it easiest to either embrace government accounting or walk away from it all together. Playing the middle and just dabbling in this environment can be a dangerous headache because of the intense expectations and scrutiny. Don’t say I didn’t tell you.

-----

Leita Hart-Fanta, CPA, CGFM

Resides in Austin, Texas and can be reached at www.auditskills.com.

Unfunded Obligations Amount to $534K per Household

2011-08-28T19:07:00.000-07:00

Did you catch the front page headline in USA Today on June 7?

US owes $62 trillion

http://www.usatoday.com/news/washington/2011-06-06-us-owes-62-trillion-i...

I can't get to the actual paper without a subscription. But if you can get to the paper - and can read the last paragraph...

The government has promised pension and health benefits worth more than $700,000 per retired civil servant. The pension fund's key asset: federal IOU's

Can You Take Low Inherent Risk Compliance Items Off of Your Audit Plate?

2011-08-28T19:05:00.000-07:00

I started an online conversation regarding the Single Audit a few weeks ago - and it still isn't completely resolved. Here is the email I sent to my referencial gurus:

Hi Smart People -

Please take a minute to ponder this question and give me your opinion on it.

Last week, I was teaching Single Audit stuff at a CPA firm and argued that SAS 117 gave the auditor the ability to use the risk assessment formula (especially IR!) to get compliance items off their plate. If it the item wasn't inherently risky, then there was no need to worry about controls over the item.

An audit manager agreed that would be great and that would reduce his efforts significantly. But upon further research, he wasn't sure that the standards would let him get away with it. As you guys know, the standards can be vague and contradictory and I am constantly trying to reduce the scope of the audit.

Here is my thinking and find relevant quotes from SAS 117 and OMB Circular A-133 below:

You have 14 compliance items per major grant

You can take a few off your plate right off the bat, because they aren't relevant to the program

Then you assess inherent risk of the remaining requirements

If they are inherently risky – moderately or highly risky – then you would determine whether the entity has controls in place to mitigate these risks and test these controls (because of that phrase above in OMB Circular A-133 that says "plan for a low assessed level of control risk")

But if the compliance item doesn't generate a very big 'who cares' or inherent risk – then you don't have to evaluate the controls. ? And what if you went one step further and didn't even evaluate compliance? (OK – that might be taking things too far!) But it would be nice to blow off the evaluation of controls.

SAS 117:

The auditor should design and perform further audit procedures in response to the assessed risks of material non-compliance. These procedures should include performing tests of controls over compliance if:

The auditor's risk assessment includes an expectation of the operating effectiveness of controls over compliance related to the applicable compliance requirements;
Substantive procedures alone do not provide sufficient appropriate audit evidence; or
Such tests of controls over compliance are required by government audit requirements

If an of the conditions in this paragraph are met, the auditor should test the operating effectiveness of controls over each applicable compliance requirement to which the conditions apply in each compliance audit.

OMB Circular A-133

(1) In addition to the requirements of GAGAS, the auditor shall perform procedures to obtain an understanding of internal control over Federal programs sufficient to plan the audit to support a low assessed level of control risk for major programs.

(2) Except as provided in paragraph (c)(3) of thissection, the auditor shall:

(i) Plan the testing of internal control over major programs to support a low assessed level of control risk for the assertions relevant to the compliance requirements for each major program; and

(ii) Perform testing of internal control as planned in paragraph (c)(2)(i) of this section.

(3) When internal control over some or all of the compliance requirements for a major program are likely to be ineffective in preventing or detecting noncompliance, the planning and performing of testing described in paragraph (c)(2) of this section are not required for those compliance requirements. However, the auditor shall report a reportable condition (including whether any such condition is a material weakness) in accordance with §___.510, assess the related control risk at the maximum, and consider whether additional compliance tests are required because of ineffective internal control.

(d) Compliance.

(1) In addition to the requirements of GAGAS, the auditor shall determine whether the auditee has complied with laws, regulations, and the provisions of contracts or grant agreements that may have a direct and material effect on each of its major programs.

(2) The principal compliance requirements applicable to most Federal programs and the compliance requirements of the largest Federal programs are included in the compliance supplement.

(3) For the compliance requirements related to Federal programs contained in the compliance supplement, an audit of these compliance requirements will meet the requirements of this part. Where there have beenchanges to the compliance requirements and the changes are not reflected in the compliance supplement, the auditor shall determine the current compliance requirements and modify the audit procedures accordingly. For those Federal programs not covered in the compliance supplement, the auditor should use the types of compliance requirements contained in the compliance supplement as guidance for identifying the types of compliance requirements to test, and determine therequirements governing the Federal program by reviewing the provisions of contracts and grant agreements and the laws and regulations referred to in such contracts and grant agreements.

(4) The compliance testing shall include tests of transactions and such other auditing procedures necessary to provide the auditor sufficient evidence to support an opinion on compliance.

What do you think of that approach?

Thanks mucho!

Leita

And here are their responses:

response #1:

Hi Leita,

Here are my thoughts:

A-133 indicates that the auditor shall perform procedures to obtain an understanding of controls sufficient to plan the audit to support a low assessed level of “control risk” (not a low combined inherent and control risk). In addition, it is my understanding that SAS 117 requires controls over “each applicable compliance requirement” to be understood and tested in planning to support a low assessed control risk (unless deemed ineffective to begin with) when such tests are required by government audit requirements (such as A-133 requires). If my understanding is accurate, it would seem that an “applicable compliance requirement” should not be eliminated from this control understanding and testing merely because it is considered to have a low inherent risk of noncompliance. While it seems logical that low inherent risk of noncompliance should drive the level of control understanding and testing for an applicable compliance requirement, the A-133 audit requirement is unique (and maybe illogical) and differs from a financial statement audit where a low inherent risk can have a direct impact whether controls are tested.

These are my initial thoughts, but I am always open to new ideas.

Response #2:

Your thoughts are good, but they are not quite correct.

First, while there are 14 requirement, they do not all apply to every program.

1. You only have to deal with the ones that do apply to a specific major program.

2. Some of those may not have a direct or material effect on the program and those you can eliminate from audit testing, but YOU MUST EXPLAIN WHY!

3. All the others must be tested:

a. Here is where inherent risk comes into play, the lower the inherent risk the lower the risk of material misstatement and therefore the less testing you have to do.

In summary, every requirement that applies to a major program must either be tested or explained away as not have a direct and material effect.

Response #3:

Leita,

I don't have enough experience with OMB A-133 to be able to answer this with any kind of confidence. I think that is the key. Because if a compliance requirement is material according to OMB A-133 then I think that makes it material to the audit, regardless of whether it meets the "usual" materiality standards. That's because of the section (can't remember the cite) that requires you to include qualitative risks.

A-133, bolded below, says "assertions relevant to the compliance requirements" NOT assertion relevant to the MATERIAL compliance requirements.

I could certainly be wrong, but that's my gut feel at present. What you are saying certainly makes logical and even economic sense though.

Linda

A-133

(i) Plan the testing of internal control over major programs to support a low assessed level of control risk for the assertions relevant to the compliance requirements for each major program

After I sent these to the very smart and thorough auditor at the CPA firm, he responded with the following:

I will be working on setting up our single audit templates soon based on CCH’s practice aids. I was reading up on the AICPA guide for single audits. Here are some interesting paragraphs from the guide that I think supports your methodology and will allow us to remove any low risk areas……

6.25 SAS No. 117 defines applicable compliance requirements as compliance requirements that are subject to a compliance audit. SAS No. 117 also states that some governmental audit requirements provide a framework for the auditor to determine the applicable compliance requirements and cites the OMB Circular A-133 Compliance Supplement (Compliance Supplement) as such a framework in a Circular A-133 compliance audit. Therefore, in a Circular A-133 compliance audit, the applicable compliance requirements are those that may have a direct and material effect on each major program (direct and material compliance requirements). Further, the Compliance Supplement is the primary source for identifying compliance requirements for federal programs, and the auditor, using professional judgment, determines which of the 14 types of compliance requirements may have a direct and material effect on each major program. These direct and material compliance requirements are tested as part of the compliance audit. A program specific audit guide issued by a grantor agency may be another source for identifying applicable compliance requirements. For programs not included in the Compliance Supplement, Part 7 of that document instructs auditors to, among other things, review the federal award document and referenced laws and regulations applicable to the program and the Catalog of Federal Domestic Assistance. Chapter 10 of this guide further discusses the use of the Compliance Supplement to identify direct and material compliance requirements.

6.38 SAS No. 117 states that the auditor should assess the risks of material noncompliance whether due to fraud or error for each applicable compliance requirement (PER 6.25 ABOVE, THESE ARE ONLY THE DIRECT AND MATERIAL REQUIREMENTS)¹⁴ and should consider whether any of those risks are pervasive to the entity’s compliance.

10.15 In a Circular A-133 compliance audit, the auditor should perform the following, as discussed in paragraphs 10.16–.69:

a. Identify the auditee’s major programs to be tested and reported on for compliance

b. Identify the compliance requirements applicable to each major program

c. Determine which of the compliance requirements identified in step (b) could have a direct and material effect on each major program (ASSESS RISK IR – Eliminate low IR areas)

d. Plan the engagement

e. Consider relevant portions of the entity’s internal control over compliance for each direct and material compliance requirement for each major program

f. Obtain sufficient appropriate audit evidence, which involves testing internal control over compliance and compliance with direct and material compliance requirements for each major program

g. Consider indications of abuse

h. Consider subsequent events

i. Form an opinion about whether the auditee complied with the direct and material compliance requirements

j. Perform follow-up procedures on previously identified findings

10.17 As discussed in this section, the auditor should determine, after identifying the compliance requirements applicable to each major program, the direct and material compliance requirements to be tested and reported on in a Circular A-133 compliance audit. As further described in paragraph 10.19, Part 2 of the Compliance Supplement provides a matrix that is useful to the auditor in identifying whether particular types of compliance requirements may apply to federal programs. The auditor then assesses, based on the nature of the program and the transactions for the period under audit, those types of compliance requirements that may have a direct and material effect on each major program. The auditor should use professional judgment in making this determination.

10.19………..In making a determination not to test a type of compliance requirement identified as applicable to a particular program, the auditor should conclude, and document such conclusion, either that the requirement does not apply to the particular auditee or that noncompliance with the requirements could not have a direct and material effect on a major program.

10.33 In planning the audit, the auditor should use knowledge gained in the inherent risk of noncompliance assessment process (as described in chapter 6 of this guide) to (a) identify types of potential noncompliance, (b) to consider other factors that affect the risks of material noncompliance, and (c) to design appropriate tests of compliance to reduce the risk of significant noncompliance to a sufficiently low level.

Thus, it appears that, although this is not the official “risk assessment,” a sifting of the compliance requirements that may have a direct and material effect should occur (your “high likely and magnitude”). By doing this, we eliminate any of the 14 compliance areas that do not have a direct and material effect (which to me, would include those that would be low risk) from even being considered in the overall risk assessment (since they would not be considered “applicable”). Any of these that are eliminated, we would need to document why (which could be accomplished in a similar manner as when we document a low inherent risk).

Thus, I think we are more/less accomplishing the same goal. We should “sift out” our low risk compliance areas and end up only with those high risk areas to further assess and perform substantive/control tests. So, maybe the intent is to only test controls on areas with high inherent risk and NOT test low risk areas (no controls or substantive testing).

What do you think?

Well, I think I want to get stuff of of my audit plate - because every chosen compliance item creates a whole little world of work. It is risky. The federal government would prefer that you cover every little item - but that is not a reasonable expectation.

Now the question is - what do you think? Let me know.

Cost Accounting: Can Less be More?

2011-08-28T18:56:00.000-07:00

This is a fun article to read on cost accounting.

Does your business use cost accounting? If they don’t, do they know why?

Pricing a product or service for less can improve the bottom line in some situations. Cost accounting has been widely used in manufacturing companies for decades. Many good non-manufacturing businesses use cost accounting in their business strategy. They blend key business revenue drivers along with the marketing loss leader concept. This blending can be especially important during slow business periods.

Periodically, accountants, auditors, and business organizations should reconsider how these concepts are blended. These concepts can be applied to the business portions of government, colleges, and non-profit organizations.

Variable costs are the costs incurred as business activity changes, such as the extra cost incurred when an additional product unit is sold. The variable cost of a product unit includes labor, materials, utilities, etc. See http://en.wikipedia.org/wiki/Variable_cost

A typical bakery will sell doughnuts at full price on the first day. The second day those same doughnuts are a day old so they are sold at a discount (Day Old Doughnuts). It is better to sell the day old product at a discount than to get no revenue. The objective is to maximize the bottom line. The bakeries will usually at least recover their variable cost on the day old doughnuts, and possibly more, so they can contribute to the fixed cost. The bakeries are also likely to get more repeat business.

At off peak almost all of the expenses are fixed costs. Fixed costs are the costs incurred no matter whether a facility is used or not used. See http://en.wikipedia.org/wiki/Fixed_costs

An organization might need a loss leader in order to improve the overall bottom line. Milk and bread are loss leaders for grocery stores. A loss leader is a product that is sold at less than the fixed cost plus the variable cost. See http://en.wikipedia.org/wiki/Loss_leader The reason this is done is because such products are known to draw in more customers than when there is no loss leader. Thus, they pull in more customers but they more than make it up on the other goods normally sold to these customers. Grocers usually place milk and bread in the rear of the store in order to stimulate impulse buying.

Another key concept is contribution margin. The price charged less the variable cost is the contribution margin. The contribution margin is the amount left over that can be used to cover some or all of the fixed costs. Only after all fixed costs and variable costs are covered can one reach a profitable status. See http://en.wikipedia.org/wiki/Contribution_margin

Some travel websites sell the last few hotel rooms available, or the last airline seats available. The price is often below the fixed cost plus variable cost. Any price above the variable cost will provide a contribution to help cover fixed costs. If a hotel room is empty or an airplane seat is empty, the fixed cost is a charge against revenue for that period. If the room can be sold for anything above the variable cost, the amount above the variable cost goes toward the fixed cost and it reduces the charge to the daily revenue on that day. Furthermore, when the hotel sells more rooms, they are nearly certain to generate more food sales, gift shop sales, bar revenue, and other revenue areas do better. Thus, the hotels improve their bottom line by selling via such routes. The hotels are also likely to get more repeat business.

Products or services that are not key revenue drivers can provide a better rate of contribution margin on each dollar of sales. The discounted price on a key revenue driver product often generates additional sales traffic. Thus, by reducing the product unit price on a key revenue driver at off peak, a business can actually improve their overall profitability, or at least greatly reduce their losses.

Drug stores place the pharmacy in the back of the store. 90% of their profit comes from their front end business. The pharmacy area is what draws the customers into a drug store. The store arrangement causes customers to walk through the areas that provide so much profit. A typical drug store makes $2 to $3 dollars on each prescription. The daily labor cost for a pharmacy might barely match the total daily contribution margin on the prescriptions. One might view the pharmacy as a loss leader that enables the drug store to pick up the profitable front end business.

Many organizations improve their financial position for off peak periods by trying to maximize their contribution margin at off peak. This means that they are willing to accept less profit or even a loss at off peak demand. They are trying to minimize their losses at off peak demand. For example, it is better to accept a small loss on a product unit when the shelf life is short rather than to have a total loss when the product unit has to be thrown away.

Movie theatres have several different prices depending upon day of week and time of day. The key objective is to fill most of the seats, rather than get the most from ticket revenue. The reason is that sales at the concessions stand provide most of the profit. Concession sales are driven by the number of tickets sold. Thus, the discounted matinee pricing makes sense because they fill more seats, and make more profit due to concession sales providing more profit. Matinee ticket prices are usually 50% to 75% less than the price at the peak on a Friday or Saturday evening. The matinee ticket prices are just another loss leader type product. The concession profits from the matinee movie exceed the variable cost and help cover the fixed cost. Thus, the overall movie theatre profitability is higher than if no matinee movie is shown.

The smaller the key revenue driver’s percentage of total revenue, the lower the key revenue driver price can be. The key revenue driver price can be as low as a point between the variable cost and the total cost. The objective should be to maximize the contribution margin during each marketing period without doing greater harm to the long term contribution margin.

Some oil change shops offer quick oil changes at a reduced rate for customers who arrive before 10 a.m. on specified days. This discounted pricing is done because they are not as busy before 10 a.m. They are not likely to price the service below their variable cost. They could price the service between the variable cost and the total cost, which is the variable cost plus the fixed cost. The shop is more likely to price the service somewhere between the regularly posted price and the total cost. A key objective might be to maximize the contribution margin that can be achieved before 10 a.m. This means that the price charged is a balance among customer demand, variable cost, the maximum number of customers likely to be served, and the price the customers are willing to pay for arriving before 10 a.m. The maximum contribution margin will provide the most money to help first cover fixed cost and to improve the long term bottom line.

Cruise line companies will sell rooms or cabins at prices approaching variable cost in order to fill up the ship. The reason is that most of the revenue and profit is not from the accommodations. Those other revenue areas are driven by the occupancy level. The more passengers on board the more money they make. Thus, cruise ship accommodations are a loss leader that pays off for the cruise line.

Sunk costs are past costs that have already been incurred and cannot be recovered. See http://en.wikipedia.org/wiki/Sunk_costs In some cases, the contribution margin for some short periods can approach zero. When the sunk costs are high and the contribution margin is very low for short periods, a business might need to consider reducing a product price to improve the contribution margin during the off peak period.

If a cruise ship cabin is empty for a ten day cruise, the cabin would provide no contribution margin for the entire ten days. Since the sunk cost for the cruise cabin is high, the cruise line would have a better contribution margin by charging any price above the variable cost of the cruise cabin. See http://www.definethat.com/define/337.htm for more on sunk costs.

Las Vegas hotels are much like the cruise ships. Most of their revenue and profit is from areas other than lodging. They miss out on the revenue from those other areas if they fail to have overnight guests. At the depths of the recent recession folks could get a nice Las Vegas hotel room for between $12 and $45. The hotels covered their variable room cost and perhaps some fixed costs. They expected to more than make up for the loss leader elsewhere. Their goal is to maximize profits and minimize losses. Thus, the Las Vegas hotel rooms are a loss leader during off peak periods. In essence, they can afford to lose money on the rooms in order to make more money overall.

Pricing a product or service for less can improve the bottom line in some situations. The smaller the key revenue driver’s percentage of total revenue, the lower the key revenue driver price can be. The key revenue driver price can be as low as a point between the variable cost and the total cost. Accepting a lower price on a business segment can generate more overall business and improve the bottom line.

What drives the revenue areas of your business? If you do not have a loss leader, could you improve your bottom line by having a loss leader?

Does your business use cost accounting? Does your business know the various cost factors? If you do not know your costs and margins, you could be missing out on a golden financial opportunity.

Can less be more? Yes, less can be more.

Copyright © 2010 by Tom Crouch This article may be forwarded via e-mail or fax so long as the copyright is shown. This article may be reprinted or placed on a web site so long as the copyright is shown. All other rights are reserved.

The key editor for this article was

Peter Missen, Principal Auditor

Portsmouth City Council,

United Kingdom

The Single Audit Series - 2011

2011-05-28T05:35:00.000-07:00

The Single Audit Series - 2011

3 Seminars Designed Specifically for Single Auditors

Qualifies for the 24 hours of Yellow Book CPE

3 TOPICS, 3 PRESENTERS, 3 DAYS!

Yellow Book Standards—Leita Hart-Fanta, CPA, CGFM, CGAP
Single Audit Standards—Bill Allen, Jr., CPA
GASB Update—Terry Patton, Ph.D., CPA., CGFM

June 1–3, Phoenix, Black Canyon Conference Center
June 8–10, Fort Worth, Norris Conference Center
June 15–17, Orlando, Springhill Suites Marriott Airport

DAY 1: An Introduction to Yellow Book Standards

The GAO's standards (GAGAS) are currently the most stringent auditing standards on continuing education, independence, and quality control review. OMB Circular A-133 (The Single Audit Requirements) mandates the use of the Yellow Book in conducting audits of significant federal grants, including ARRA funds. Major topics include: Audit plans, audit reports, continuing education, independence, ethics, and quality control.

Objectives:

Define requirements for peer review and quality control
Use the elements of a finding to flesh out an audit issue
Recognize when the yellow book is applicable
Assess auditor independence when conducting non-audit services
Determine compliance with reporting, evidence, planning, and documentation requirements

DAY 2: OVERVIEW A-133 AUDIT

Performing A-133 audits and implementing the new "Risk-Based" audit standards should not be a losing battle and/or result in write downs. Instead, learn how to win the war using effective and efficient audit tools and techniques. Start by reviewing live examples to learn what types of risk exists in A-133 audits. Then move forward as you discover where to look and how to design appropriate tests for proficiently auditing major programs and discovering if misstatements exist.

If you are having working paper issues and/or trouble with A-133 audit forms provided by a third party vendor this session will provide you with some working paper tips and some logical forms and ways to perform a Single Audit. The course will show you what must be done in a single audit to avoid Federal Quality Reviews and when to use Computer Assisted Audit Techniques (CAATs) to increase your proficiency. Major subjects include: Federal awards, including ARRA grants, single audit sampling, SAS 117, the new AICPA audit guide, risk assessment, federal guidance including the compliance supplement, tips for audit efficiency, and data mining.

Objectives:

Locate federal awards guidance and requirements
Assess risk and determining the major programs
Discern significant sections of the Compliance Supplement
Discuss how to proficiently perform an A-133 audit
Use data mining to assist in performing an A-133 audit

DAY 3: GASB Standards and Applications

The GASB has been busy again—issuing several new standards over the last year. When you leave this session, you will be up-to-date on the requirements of the new GASB Standards and what to expect in the near future. Participants will learn the recently issued Standards by working through short simulations, answering implementation questions, and reviewing examples from government’s financial statements.

Major topics include: Changes to governmental fund balance definitions, changes to governmental fund type definitions, the financial instruments omnibus, changes to reporting entity reporting requirements, service concession arrangements, pensions and OPEB, the codification of Pre-November 30, 1989 FASB and AICPA pronouncements

Objectives:

Describe and apply the new governmental fund balance reporting requirements
Define and apply the new governmental fund type definitions
Interpret the financial instruments omnibus
Describe and apply the new reporting entity reporting requirements
Describe and apply the new service concession arrangements reporting requirements
Review financial reporting for pensions and OPEB
Review the codification of Pre-November 30, 1989 FASB and AICPA pronouncements

Who should attend: Auditors seeking to comply with OMB Circular A-133

Program level: Intermediate

Prerequisites: More than one year of auditing experience

Delivery method: Group live

Advance preparation: Review OMB Circular A-133 and Chapters 1–5 ofGAGAS

Recommended CPE credit: 24 hours

William V. Allen, Jr., CPA (The Audit Wizard)Bill is currently President of Making Auditors Proficient, inc (MAP). MAP provides training, technical assistance, monitoring, inspections and other services to local CPA firms throughout the United States. Their specialty and what gives them a unique approach to the various services is their proficiency in logical auditing resulting in effectiveness and efficiency in audits. Bill is a recognized expert in Audits of Governmental and Not-For-Profit Entities as well as Single Audits. He was the Audit Partner for the City of Los Angeles audit from 1985 to 1991. He was also a Partner in a Local Firm in northern California with responsibility for over 50 small and medium sized audit engagements. In addition to his audit practice, Bill performs many peer reviews throughout the country. Bill is also a speaker at many State and National Conferences and is currently serving a third term as a member of the Florida Institute of CPA’s Peer Review Committee. He is also a former member of the AICPA Government Accounting and Auditing Committee. www.billallen.com

Terry Patton, Ph.D., CPA., CGFM, is the Robert Madera Distinguished Professor of Accounting at Midwestern State University in Wichita Falls, Texas, where he teaches governmental accounting and auditing courses. He is the author of numerous articles on governmental accounting; co-author of a leading governmental accounting textbook, Governmental and Nonprofit Accounting, 9th Edition Revised (Pearson-Prentice Hall); and was coauthor of PPC’s Guide to Governmental Financial Reporting Model: Implementing GASB’s No. 34. Previously, Dr. Patton was the Research Manager at the Governmental Accounting Standard Board (GASB). In his eight years at the GASB, he was part of the project team on numerous GASB Standards, including major projects such as GASB Statement No. 34, Basic Financial Statements – Management’s Discussion and Analysis – for State and Local Governments, Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, and Statement No. 53, Accounting and Financial Reporting for Derivatives.

TO REGISTER FOR EVENT:

1. Download and complete registration form
2. Fax or mail as directed on form (include payment if not paying online)

To pay online, click the appropriate button below:

	One-Day Pass
	Two-Day Pass
	Three-Day Pass

SCHEDULE:
Registration: 8 a.m.
Course begins: 8:30 a.m.
Lunch: 11:30 a.m.
Day ends: 5:00 p.m.

A Fun to read Article on Cost Accounting

2011-05-25T11:59:00.000-07:00

Can Less Be More?

http://www.auditnet.org/articles/TC201012.htm

Are Our Heros Taking Advantage of Us?

2011-05-24T12:33:00.000-07:00

2 trillion for the war on terror!

Trillion. Not million, not billion. $2,000,000,000,000 Sunday's paper held an unpleasant number. The U.S. Government spent $2 trillion on its war on terror for the past decade, more than 20% of our national debt of $9.68 trillion. (Bloomberg News)

Yes, I know that my last article praised the military for doing a great job of finally ridding us of Osama bin Laden. But two trillion dollars? I mean, really!

Last night I had dinner with an unusually frank ex-Airforce Sargent, who said the waste and fraud that goes on in the military is intolerable. The 'use it or lose it' mentality of budgeting causes military leaders to spend like there is no tomorrow at the end of the year. Because if they don't spend it, they will lose the funding next year.

He said that he brought this wasteful behavior up to his superiors who were surprised he was complaining. Wasn't he benefitting from having a military job and pension? "Don't mess with a good thing," was their attitude.

I saw this in state government, too. Early in my auditing career, checking for excessive spending in the last quarter was a standard part of our audit procedures. One small court had purchased so much paper and office supplies, that they consumed an employee's office with storage and the employee had to share with another staff person for half of the year.

But back to the military. The Department of Defense is unable and unwilling to prepare a financial statement describing what they do with the money they are appropriated. This refusal means that the federal government financial data will never be accurate. The reason we hear so many different numbers on what our deficit actually is is in part due to this lack of transparency and truth telling.

Yes, I love and appreciate our men and women in uniform. But love doesn't mean they get to run loose with my pocketbook. I see the same 'they are beyond questioning' approaching going on with emergency services and police departments on the local level. Yes, their function is important. But NO, they don't need that additional toy. Just because an expensive high tech toy exists to fight crime and enemies doesn't mean we must have it. Politicians mistakenly treat these guys as untouchable.

Yes, I know everyone else in the world feels this way about government waste. But the big question is, if everyone knows this and everyone dislikes it, why does everyone just shrug their shoulders and play along?

I am reminded of a book I read on forgiveness. This book begins with horrible stories of natural disaster and war and human rights attrocities. But when the aid workers began their counseling with the victims – the victims weren't focused on the big picture and the politics and the desire to change the situation – they were worried about their girlfriends, children, and families. Does the day-to-day in-our-face concerns keep us from making or demanding big changes?

I visited my mother in Poland a decade ago. She was living there for a year teaching English. The Poles have been invaded and mistreated by the communists and the Nazis. The current government system is so oppressive that they don't have time to innovate or think of change or doing anything different. Their day-to-day life is still about basic survival. I left Poland realizing how lucky I am to be in a country that doesn't completely squash me down and take away any motivation I have to achieve.

But as you have seen in prior blog posts – this deficit thing is really worrying me. Our government is consuming more and more and more every time I turn around. This morning, I heard on NPR that the military is going to get $15 billion more in the next budget cycle.

Is the government now working against me. Will I work my ass off so that my children will end up with less than I have? Are we all too busy trying to survive to handle the bigger issues?

Those that we revere and hold up as heros are ripping us off and working the system. That is a big issue - now what are we going to do about it?

Getting Liquid

2011-05-23T18:09:00.000-07:00

Maybe I know too much or worry too much. Or both. But my husband and I recently decided it would be best to be liquid so we sold our house.

It was a very nice house – with beautiful built-ins, granite, spa tub, bla bla bla. 3300 square feet and it was so nice, it sold in 3 days in a down market. Man, was that hard to let go of and move out of. And we lost money on the deal. Serious money. Now we are in a 1500 square foot apartment and most of our ‘stuff’ is in storage.

Why would we do such a crazy thing? Because my husband always thought the house was a mistake and because I have been watching Tracor, Dell and the feds.

My ex-husband worked for Tracor, a defense contractor when he graduated from college. He was so happy to have a job at Tracor as they were one of the largest employers in Austin at the time. Tracor had a lovely campus with 8 buildings, underground parking, on-site cafeteria, and deer running through the campus. The test equipment labs made my engineer husband drool.

But when Clinton came into office, business dried up for Tracor. And because they were run by ex-military men and engineers and they had all of their money tied up in stuff, they were not light on their feet. It took Tracor years to die a painful death. My ex-husband’s best friend Chuck was laid-off and hired back at Tracor 8 times.

Contrast this with Dell. Dell is now one of Austin’s major employers. Dell has maintained $19 billion in cash for a decade. Dell’s buildings and all fixed assets total only 1/3 of a billion dollars. Dell is highly liquid. If things go bad, Dell can survive for long periods of time. And things are not that great for Dell right now. But they can survive a market downturn and some bad decisions and still keep their doors open because of all of that cash.

If you have read Dave Ramsey’s book on personal financial management, he coaches us to be debt free and put a large amount of cash in reserve.

But I was going the opposite way in my personal finances. My inflated ego believed I needed a tricked out house and a fancy car and fancy furnishings. So I bought them. Some of them on credit. Then my husband and I decided that since I travel so much, he should stay home with the kids. Then we decided that my kids should go to private school. Then my husband became uninsurable because of an injury and we are paying triple rates for him… do you see what is going on? I am getting flushed down an American life toilet! And my stress level was intense. And truth be told, all of that tricked out stuff wasn’t making me happy.

I make very good money and love my job, my uninsurable husband, and my kids and their school. I have a great life. The other night, as we were having family movie night in our little apartment, I realized that I was just as content and pleased in the apartment as I was in my crazy big house. We may never buy a house again.

Maybe we are too aware of what is going on at the federal level and with the world economy. We are a nation in serious debt. Inflation is going crazy and I don’t care what the fed’s numbers say about that… I see it when we buy a bag of apples or fill up at the pump.

We are completely debt free right now and have a healthy cash reserve. I feel like Dell – on a much, much smaller scale. I feel like I can weather a few storms. I have corrected my financial trajectory. Now, if I could just keep my American princess ego in check…

Provide for the Common Defense

2011-05-22T11:32:00.000-07:00

From the first line of the Constitution the United States: We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

And today, the Federal Government boldly fulfilled one of its directives and purposes to 'provide for the common defense', by killing Osama bin Laden. Arguably, this is the clearest of the Federal government's responsibilities.

I am not as elated about this event as the young revelers at Time Square. I am a little older and a little less willing to rub victories in our enemies' faces. Osama bin Laden has shaped my life in subtle and not-so-subtle ways. Knowing that I am hated just because of my place of birth, race, and religion is unsettling - no doubt.

The first time I encountered this kind of thinking was as a college student on the UT campus when I heard Lewis Ferricon say that all white people should be eliminated. What? Me?

Hatred appeared again later when bin Laden attacked and destroyed the Wall Street district hotel my husband and I had stayed in just a year before. My husband proposed to me at the Statue of Liberty in 2000. I married on September 1, 2011 (the other 911 as my husband calls it) and 12 days later honeymooned and worked on a Mediterranean Cruise for Western CPE.

I was on the first plane leaving Dallas for Paris after the attack. I was sick with worry, but in Paris, i started to normalize again. The French we encountered could have cared less what American's had experienced just three days before. They were as rude and unaffected as always. And as we visited historic site after historic site, I realized how protected and safe we Americans really were. In Malta, the church we visited was bombed by the Nazis on Sunday morning. In Rome, we saw the ruins of the temples of one of the greatest civilizations in the world. And it helped us all to see how 911 fit into a bigger world history of struggle and hatred and destruction.

Business took me to Manhattan when I was pregnant with my first child. Again, we stayed in the Wall Street district. The first night of my stay, my husband and I were awakened by the fire alarm at 1 a.m.. We were 30 floors up. I have never been so terrified. It ended up being nothing - but terrorism had clearly left its tattoo on my psyche.

Friday, my family watched a silly kids movie that featured the Twin Towers. McCauly Caulkin was on the roof, soaking in the glory of New York City and I put my finger to my mouth to keep my husband from telling the girls about what happened to those towers. We will have to explain it to them soon enough when we visit Manhattan this summer. Or maybe we won't. They might still be too young to find out how far hatred can go.

I'd like to believe that we can all hold hands and 'teach the world to sing in perfect harmony" but that doesn't work well when someone in your love circle would like to see you wiped off the planet.

I am glad that someone powerful who hates me and seeks to destroy me and my family is dead. And for this, I can thank the federal government who fulfilled their mission to provide "for the common defense." Thank you, thank you, thank you.

Governments are Freaky

2011-05-21T08:05:00.000-07:00

So, even after reading last month’s article about the nature of audit work in the government realm, you are still interested in taking governmental clients on? Well, I need to warn you, you are going to have to adjust to a different sensibility and attitude to pull it off.

In Austin, our city motto is “Keep Austin Weird.” We are proud of being a little odd. My uber- conservative in-laws in Lubbock think everyone in Austin is a pot smoking, tie-dye shirt wearing freak. Since I do not smoke pot or wear tie-dye, I guess I’ll just have to remain a simple freak in their eyes. (Wait! Why be simple? Super freak, super freak, we’re super freakin’ yeah!)

And living this town of super freaks means you either work for Dell, the University of Texas, or the State. I work for all three. And man, do those cultures differ! I also work for CPA firms on a regular basis. I have to adjust how I communicate to succeed in each of those environments.

At Dell, I have to talk fast and pack in the learning. They routinely ask me to compress a full-day seminar into an hour. They don’t seem to appreciate stories or jokes because they are all business. In the government realm, I allow for much more interaction and questioning. And government employees really appreciate a good laugh, presumably because they seriously need one!

Staff at CPA firms are often frightened of talking to me because they don’t want to look bad in front of their management. So, I am often unsure if I am going too fast or not! They will laugh along with me in the afternoon only after they verify with their leadership at lunch if laughing is permissible and ensure that someone withclout really did hire me – like on purpose! Government employees are not afraid to speak out and say what is so. It is damn hard to fire them, and many of them know it.

But, before you begin that old saw/myth/put-down about government employees having nowhere else to go, think again. My favorite, off-the-charts brilliant go-to technicians have government careers. Every environment I have taught in has its fair share of employees with dim bulbs. Or maybe the bulb isn’t dim, they just hate being where they are and aren’t engaged, helpful, or willing to learn. I can’t give everyone an IQ test or a motivations quiz before I begin – so I just have to guess what’s up. And I guess that every team includes folks who don’t care or don’t have the mental capacity to care.

And if you think government workers receive low wages, you obviously aren’t taking into account their pension plans and health benefits. My financial planner said his wealthiest client is a city employee. They are set for life in many cases.

So here are a few tips to help you adjust your mindset so you can succeed with your government clients:

· In government, only things that are allowed are pursued. In corporations, folks purposely pursue that which is not expressly disallowed. In government, being a rogue, self-starter who makes your own rules will kill you! In a corporate environment, risk-taking is valued and can make you rich! Governments act at the will of those they serve, and most governments don’t make a move without permission. Bureaucracy and multiple levels of approval keep employees from doing anything radical or foolhardy with the public’s resources. But these extra layers of bureacracy can also slow government staff down to a crawl when it comes to simple decisions. In government, beware the bureaucratic paper pusher! They may not appear to be a mover and a shaker, but they can lock you down and keep you from getting anything done.

· Laws are not road tested until they are operational. When a legislature or governing board passes a law, it is up to the government bureaucrats to implement the law. Even if the law is flawed, creates a ton of work, and has unintended consequences, once the ball starts rolling, it is virtually impossible to stop. So, what does this mean for you? That you might end up auditing some programs that really hurt your political sensibilities. A program will be so outright silly and offensive that you can hardly talk about it with a straight face, and there you will be struggling to remain independent and objective. If you are a member of the Tea Party, auditing government programs might not be a wise gig choice.

· Federal auditors dig, CPA firms skim. I worked with a federal inspector general who routinely spent 6 months on projects and created 80-page long rambling reports. When they got a hold of an issue, they were proud to say they dug and dug until they resolved it (and exhausted everyone in the process!) They did not have to worry about time budgets or expectations of their clients. CPA firms are often exactly the opposite. CPA firms are motivated to get in and get out of an engagement so they can move on and make money somewhere else. CPA firms tend to skim the surface of a variety of subject areas and dig only when absolutely necessary if at all. I had one partner in a CPA firm in California ask me if anyone really wrote up findings out there; he never did (!). Obviously, there is a happy medium between the extremes that some teams are able to strike. This cultural difference can be painful for the CPA firm because these digging feds are one of the customers of the audit. Are the feds ever going to be happy with a skimming approach to auditing? No! They design their audit expectations to be very granular and detailed because that is how they audit. Know this going in and decide whether your firm’s culture can come a little closer to the middle. In other words, you need to dig more to make your government client happy.

· The feds have very high expectations but often don’t make the grade themselves. The federal government makes all sorts of rules for others to follow. The criteria that the auditor must evaluate a federal program against under Single Auditrequirements is legion and intense. But we all have to remember that the federal government still cannot create a financial statement that the GAO can express an opinion on. When you call them, sometimes they can answer your questions and sometimes they can’t. And when they can’t, you are left to interpret law and regulations for yourself. And don’t think that later someone might review your work and decide that you made an erroneous interpretation. And that gets us to my next point…

· Your reports (and maybe your working papers) will be scrutinized by desk reviewers and others. Your auditee may answer to multiple governments – the city, the state, the feds - and each of these governments may review your audit reports. They will check them for quality, and if they are concerned about the quality, they might request to review your working papers. This is a little more involved than auditing Joe’s Manufacturing on behalf of the bank.

· The ultimate customer is not the auditee. On a commercial audit – say of Joe’s Manufacturing, your main client is Joe and the bank. Joe doesn’t necessarily want you airing all of his dirty laundry in an audit report. He wants a clean opinion so he can get a loan. The bank doesn’t want to know about petty issues, they just want some assurance that Joe isn’t lying like a dog on his financial statements. So the guy you are auditing and the guy you are serving are the same or motivated by the same things. In the government realm, the guy you are auditing is not the guy you are serving. One of my favorite quotes from the Yellow Book is “A distinguishing mark of a government auditor is acceptance of responsibility to serve the public interest.” When you are auditing a housing project, your client isn’t the owner of the project, the manager of the project, or even the feds. It is the 3-year-old girl who lives in the project with her single mother. Did I get emotional on you there? Good. That is the mindset that will serve you best when auditing government programs. Righteous, yes. Important work, yes. Very important work. Go ahead, air the dirty laundry, shine light in the dark corners. In the government realm, the auditor may be the only person involved on the project that can and will tell the truth.

Next month, let’s talk about special requirements of performing government audits that often take CPAs aback during my seminars.

Want to know more about Single Audits- try the self-study course, the Single Audit Primer at HTTP:\\WWW.YELLOWBOOK-CPE.COM

253 reads

Single Audit Series 3 day course - one month away!

2011-05-20T20:59:00.000-07:00

The Single Audit Series - 2011

3 Seminars Designed Specifically for Single Auditors

Qualifies for the 24 hours of Yellow Book CPE

3 TOPICS, 3 PRESENTERS, 3 DAYS!

Yellow Book Standards—Leita Hart-Fanta, CPA, CGFM, CGAP
Single Audit Standards—Bill Allen, Jr., CPA
GASB Update—Terry Patton, Ph.D., CPA., CGFM

June 1–3, Phoenix, Black Canyon Conference Center
June 8–10, Fort Worth, Norris Conference Center
June 15–17, Orlando, Springhill Suites Marriott Airport

DAY 1: An Introduction to Yellow Book Standards

Objectives:

Define requirements for peer review and quality control
Use the elements of a finding to flesh out an audit issue
Recognize when the yellow book is applicable
Assess auditor independence when conducting non-audit services
Determine compliance with reporting, evidence, planning, and documentation requirements

DAY 2: OVERVIEW A-133 AUDIT

Objectives:

Locate federal awards guidance and requirements
Assess risk and determining the major programs
Discern significant sections of the Compliance Supplement
Discuss how to proficiently perform an A-133 audit
Use data mining to assist in performing an A-133 audit

DAY 3: GASB Standards and Applications

Objectives:

Describe and apply the new governmental fund balance reporting requirements
Define and apply the new governmental fund type definitions
Interpret the financial instruments omnibus
Describe and apply the new reporting entity reporting requirements
Describe and apply the new service concession arrangements reporting requirements
Review financial reporting for pensions and OPEB
Review the codification of Pre-November 30, 1989 FASB and AICPA pronouncements

Who should attend: Auditors seeking to comply with OMB Circular A-133

Program level: Intermediate

Prerequisites: More than one year of auditing experience

Delivery method: Group live

Advance preparation: Review OMB Circular A-133 and Chapters 1–5 ofGAGAS

Recommended CPE credit: 24 hours

TO REGISTER FOR EVENT:

1. Download and complete registration form
2. Fax or mail as directed on form (include payment if not paying online)

see http:\\WWW.YELLOWBOOK-CPE.COM under Single Audit Series to register!

To pay online, click the appropriate button below:

	One-Day Pass
	Two-Day Pass
	Three-Day Pass

SCHEDULE:
Registration: 8 a.m.
Course begins: 8:30 a.m.
Lunch: 11:30 a.m.
Day ends: 5:00 p.m.

So you want to audit government grants?

2011-05-19T20:16:00.000-07:00

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.

The Top 1%

2011-05-18T14:09:00.000-07:00

This short article in Vanity Fair's latest issue points out that the top 1% of this country control this country and our political leaders:

http://www.vanityfair.com/society/features/2011/05/top-one-percent-20110...

Here is an excerpt: When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it’s tempting to see our growing inequality as a quintessentially American achievement—we started way behind the pack, but now we’re doing inequality on a world-class level. And it looks as if we’ll be building on this achievement for years to come, because what made it possible is self-reinforcing. Wealth begets power, which begets more wealth. During the savings-and-loan scandal of the 1980s—a scandal whose dimensions, by today’s standards, seem almost quaint—the banker Charles Keating was asked by a congressional committee whether the $1.5 million he had spread among a few key elected officials could actually buy influence. “I certainly hope so,” he replied. The Supreme Court, in its recent Citizens United case, has enshrined the right of corporations to buy government, by removing limitations on campaign spending. The personal and the political are today in perfect alignment. Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.

I read this article the same day I got one of those 'pass this around' emails. See what you think of it. And it you like it, share it.

Congressional Reform Act of 2011
1. Term Limits.
12 years only, one of the possible options below..
A. Two Six-year Senate terms
B. Six Two-year House terms
C. One Six-year Senate term and three Two-Year House terms

2. No Tenure / No Pension.
A Congressman collects a salary while in office and receives no pay
when they are out of office.
3. Congress (past, present & future) participates in Social Security.
All funds in the Congressional retirement fund move to the Social
Security system immediately. All future funds flow into the Social
Security system, and Congress participates with the American people.
4. Congress can purchase their own retirement plan, just as all Americans
do.
5. Congress will no longer vote themselves a pay raise. Congressional pay
will rise by the lower of CPI or 3%.
6. Congress loses their current health care system and participates in the
same health care system as the American people.
7. Congress must equally abide by all laws they impose on the American
people.

8. All contracts with past and present Congressmen are void effective
1/1/11.
The American people did not make this contract with Congressmen.
Congressmen made all these contracts for themselves. Serving in Congress
is an honor, not a career. The Founding Fathers envisioned citizen
legislators, so ours should serve their term(s), then go home and back to
work.

Fiscal Responsibility Index from David Walker

2011-05-17T19:11:00.000-07:00

I received this email today from David Walker. Interesting in light of the recent federal government shutdown crisis:

Dear Friends,

After months of hard work in partnership with graduate students from Stanford University, the Comeback America Initiative released its first formal product on March 23 at the National Press Club in Washington, DC: a new fiscal indicator called the Sovereign Fiscal Responsibility Index (SFRI). The SFRI uses a wide range of fiscal, economic and political factors to measure a country’s fiscal responsibility and sustainability. Out of the 34 countries we analyzed, where do you think the United States falls in the rankings?

Here’s a hint: We rank far below countries like Sweden, Australia, India, Brazil, and China. And we’re just barely a notch above countries recently in the headlines for their debilitating fiscal problems, such as Greece and Ireland. It turns out that we rank an embarrassing 28 out of the 34 countries analyzed with respect to the Sovereign Fiscal Responsibility Index. (Australia is #1, and Greece is #34). For a country as strong and respected as the United States, this is simply unacceptable. Major news outlets across the country and the world, including The Wall Street Journal and Agence-France Press, have seized on our findings; now we need our government to get involved.

To view the full list of rankings and find out more about the SFRI, please visit www.tcaii.org. Sign up on our mailing list, and encourage others to do so as well.

Our nation’s leaders claim they’re putting the country back on track with what they call significant spending cuts in the coming years. But in reality, the Titanic is sinking and Congress is arguing over the bar tab. It’s time for us to come up with real fiscal solutions – and you can help by keeping yourselves informed, sharing your knowledge with others, and contacting your local representatives.

All the best,

Dave Walker

Leita Hart-Fanta

Essential Audit Skills and Audit Report Writing in Austin this Fall

Essential Audit Skills and Audit Report Writing in Austin this Fall

Two courses designed specifically for auditors - REGISTER TODAY!

Essential Audit Skills (2-Day Course) – October 24 & 25, 2011

The Art of the Finding – November 14, 2011

Courses will be held at the Thompson Center on the University of Texas campus in Austin, Texas*

Qualifies for Yellow Book CPE hours!

Essential Audit Skills – 2-Day Course

TO REGISTER FOR THIS COURSE:

SCHEDULE: Registration: 8 a.m. Course begins: 8:30 a.m. Lunch: 11:30 a.m. Day ends: 5:00 p.m.

The Art of the Finding

TO REGISTER FOR THIS COURSE:

SCHEDULE: Registration: 8 a.m. Course begins: 8:30 a.m. Lunch: 11:30 a.m. Day ends: 5:00 p.m.

Yellow Book 2011 Internet Version Issued

Peace of mind

the inevitable downgrade

Online Federal Budget "HERO" Game

Rhode Island City files chapter 9 because of pensions

Bankrupt Rhode Island city may default: S&P

Related News

Analysis & Opinion

Related Topics

Internal Auditor Independence

Internal Audit Independence

helpful checklists from the AICPA

CPA firms who don't want to write findings re: grants are missing the point

I have to do what ?*#$@ to audit government grants!?!

Unfunded Obligations Amount to $534K per Household

Can You Take Low Inherent Risk Compliance Items Off of Your Audit Plate?

And here are their responses:

Cost Accounting: Can Less be More?

The Single Audit Series - 2011

The Single Audit Series - 2011

3 Seminars Designed Specifically for Single Auditors

Qualifies for the 24 hours of Yellow Book CPE

3 TOPICS, 3 PRESENTERS, 3 DAYS!

Yellow Book Standards—Leita Hart-Fanta, CPA, CGFM, CGAPSingle Audit Standards—Bill Allen, Jr., CPAGASB Update—Terry Patton, Ph.D., CPA., CGFM

June 1–3, Phoenix, Black Canyon Conference CenterJune 8–10, Fort Worth, Norris Conference CenterJune 15–17, Orlando, Springhill Suites Marriott Airport

DAY 1: An Introduction to Yellow Book Standards

DAY 2: OVERVIEW A-133 AUDIT

DAY 3: GASB Standards and Applications

TO REGISTER FOR EVENT:

SCHEDULE:Registration: 8 a.m. Course begins: 8:30 a.m.Lunch: 11:30 a.m.Day ends: 5:00 p.m.

A Fun to read Article on Cost Accounting

Are Our Heros Taking Advantage of Us?

Getting Liquid

Provide for the Common Defense

Governments are Freaky

Single Audit Series 3 day course - one month away!

The Single Audit Series - 2011

3 Seminars Designed Specifically for Single Auditors

Qualifies for the 24 hours of Yellow Book CPE

3 TOPICS, 3 PRESENTERS, 3 DAYS!

Yellow Book Standards—Leita Hart-Fanta, CPA, CGFM, CGAPSingle Audit Standards—Bill Allen, Jr., CPAGASB Update—Terry Patton, Ph.D., CPA., CGFM

June 1–3, Phoenix, Black Canyon Conference CenterJune 8–10, Fort Worth, Norris Conference CenterJune 15–17, Orlando, Springhill Suites Marriott Airport

DAY 1: An Introduction to Yellow Book Standards

DAY 2: OVERVIEW A-133 AUDIT

DAY 3: GASB Standards and Applications

TO REGISTER FOR EVENT:

see http:\\WWW.YELLOWBOOK-CPE.COM under Single Audit Series to register!

SCHEDULE:Registration: 8 a.m. Course begins: 8:30 a.m.Lunch: 11:30 a.m.Day ends: 5:00 p.m.

So you want to audit government grants?

The Top 1%

Fiscal Responsibility Index from David Walker

Essential Audit Skills (2-Day Course)
– October 24 & 25, 2011

The Art of the Finding
– November 14, 2011

SCHEDULE:
Registration: 8 a.m.
Course begins: 8:30 a.m.
Lunch: 11:30 a.m.
Day ends: 5:00 p.m.

SCHEDULE:
Registration: 8 a.m.
Course begins: 8:30 a.m.
Lunch: 11:30 a.m.
Day ends: 5:00 p.m.

Yellow Book Standards—Leita Hart-Fanta, CPA, CGFM, CGAP
Single Audit Standards—Bill Allen, Jr., CPA
GASB Update—Terry Patton, Ph.D., CPA., CGFM

June 1–3, Phoenix, Black Canyon Conference Center
June 8–10, Fort Worth, Norris Conference Center
June 15–17, Orlando, Springhill Suites Marriott Airport

SCHEDULE:
Registration: 8 a.m.
Course begins: 8:30 a.m.
Lunch: 11:30 a.m.
Day ends: 5:00 p.m.

Yellow Book Standards—Leita Hart-Fanta, CPA, CGFM, CGAP
Single Audit Standards—Bill Allen, Jr., CPA
GASB Update—Terry Patton, Ph.D., CPA., CGFM

June 1–3, Phoenix, Black Canyon Conference Center
June 8–10, Fort Worth, Norris Conference Center
June 15–17, Orlando, Springhill Suites Marriott Airport

SCHEDULE:
Registration: 8 a.m.
Course begins: 8:30 a.m.
Lunch: 11:30 a.m.
Day ends: 5:00 p.m.