7476.1 REV-1 CHG-1

APPENDIX 3

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Single Audit Act of 1984

Questions and Answers

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Office of Inspector General

Office of Audit

May 1994

9/94

PREFACE

The Questions and Answers presented in this document are

based on information gathered during the operation of the

National Review center (NRC), Office of Inspector General

(OIG). The questions presented are those most frequently

asked. In many cases, the answers are based only on the

most typical circumstances and do not take into

consideration the various exceptions that may be present.

They are given as general guidance. Varying

circumstances and clarifying guidance, that may be issued

by the program Assistant Secretaries, could have an

impact on the answers.

INDEX

Pages

A. INDEPENDENT AUDITOR OR AUDITEE REQUEST FOR

INTERPRETATIONS AND/OR PUBLICATIONS . . . . . . . . . . 1-3

B. NEED FOR AUDIT - TYPE AUDIT NEEDED . . . . . . . . . . 4-6

C.AUDIT PERIOD . . . . . . . . . . . . . . . . . . . . . . . 7-9

D.CONTRACTING FOR THE AUDIT - AUDIT COST

\- IA QUALIFICATIONS . . . . . . . . . . . . . . . . . 10-14

E.SCHEDULE OF FEDERAL FINANCIAL ASSISTANCE. . . . . . . . . . 15-17

F.COMPLIANCE SUPPLEMENTS. . . . . . . . . . . . . . . . . . . 18-19

G.COGNIZANT AGENCY. . . . . . . . . . . . . . . . . . . . . . 20-23

H.GENERAL OVERSIGHT . . . . . . . . . . . . . . . . . . . . . 24-26

IAUDIT REPORT: CONTENT - REPORTABLE CONDITIONS

\- AUDIT FINDINGS - AUDIT FOLLOW-UP. . . . . . . . . . 27-31

J.PUBLIC HOUSING AGENCY AUDITS. . . . . . . . . . . . . . . . 32-36

K.COMMUNITY DEVELOPMENT AUDITS. . . . . . . . . . . . . . . . 37-40

Attachment 1 - GAO Standards on Independence

Attachment 2 - OMB Circular A-128

Attachment 3 - OMB Circular A-133

A.INDEPENDENT AUDITOR OR AUDITEE REQUEST FOR INTERPRETATION AND/OR

PUBLICATIONS

A-1 Question - The Independent Auditor (IA) and/or the auditee needs

Single Audit publications and HUD audit guides to perform audits. Do I

refer them to the Regional Inspector General for Audit or the Office of

Inspector General, Headquarters?

Answer - No. HUD and the Inspector General did not and will not provide

publications and related material to the IA/auditee. The IA/auditee
should

obtain this material from the appropriate supplier. The following is a

list of publications requested in the past and the supplier of those

publications.

Item Supplier

Consolidated Audit Guide for Audits Superintendent of Documents

of HUD Programs, Handbook 2000.4 Rev-1 U.S. Government Printing Office

July 1993, Stock #023-000-00805-0 Washington, D.C. 20401

\(202\) 783-3238

Compliance supplement for Single Superintendent of Documents

Audits of State and Local Governments U.S. Government Printing Office

Washington, D.C. 20401

\(202\) 783-3238

Catalog of Federal Domestic Assistance Superintendent of Documents

U.S. Government Printing Office

Washington, D.C. 20401

\(202\) 783-3238

OMB Circulars A-128 and A-133 Office Of Management and Budget

\(202\) 395-7332

Government Auditing Standards Superintendent of Documents

(Yellow Book), Stock #020-000-00243-3 U.S. Government Printing Office

Washington, D.C. 20401

\(202\) 783-3238

Interpretation of Continuing Education Superintendent of Documents

and Training Requirements U.S. Government Printing Office

Stock #020-000-00250-6 Washington, D.C. 20401

\(202\) 783-3238

Questions and Answers on OMB Circular Superintendent of Documents

A-133, Stock #041-001-00374-6 U.S. Government Printing Office

Washington, D.C. 20401

\(202\) 783-3238

1

Audits of State and Local Governmental American Institute of Certified

Units Public Accountants, Inc.

Order Department, P.O. Box 1003

New York, NY 10108-1003

\(212\) 575-6481

Accounting Standards Division American Institute of Certified

Statements of Position (SOP) Public Accountants, Inc.

Order Department, P.O. Box 1003

New York, NY 10108-1003

\(212\) 575-6481

Codification of Statements on Auditing American Institute of Certified

Standards (SAS) Public Accountants, Inc.

Order Department, P.O. Box 1003

New York, NY 10108-1003

\(212\) 575-6481

Statements on Auditing Standards Commerce Clearinghouse, Inc.

4025 W. Peterson Avenue

Chicago, IL 60646

\(800\) 248-3248

Codification of Governmental Accounting Government Accounting Standards

and Financial Reporting Board, Order Department

P.O. Box 30784

Hartford, CT 06130

\(203\) 847-0700, Ext. 10

A-2 Question - IA\'s are requesting copies of the following:

Handbook IG 7476.3 Rev - Instructions for Analysis of General

Fund Cash Balances, November 1984

Handbook IG 7476.3 - Audit Guide for Audits of Public Housing

Agencies, August 1978

Where can they get copies of those publications?

Answer - Copies of these publications cannot be obtained since they were

canceled and are out of print. Those Handbooks were replaced by the
Single

Audit.

2

A-3 Question - IA\'s are requesting various Copies of HUD Handbooks. Can
I

release them to the IA?

Answer - Yes, HUD Handbooks can be provided to IAs based on their
specific

request. You should follow your office policy on who and how the
requested

material should be provided to the IA or provide them with the new HUD

telephone number for requests for HUD publications, (800) 767-7468.

A-4 Question - IA\'s have technical questions on audits. Do I refer the
IA

to the Regional Inspector General for Audit or to OIG Headquarters?

Answer - No. Routing referrals to the Regional Inspector General for
Audit

or to OIG Headquarters are not to be made.

The only time the IA should normally be referred to the Regional
Inspector

General for Audit is when an actual or potential fraud or illegal act is

disclosed during the audit.

Technical questions asked during the last three years involved

interpretations of HUD Handbook procedures, AICPA Audit Guides or

standards, GAO standards and/or the HUD Consolidated Audit Guide. The

following should be followed when technical questions are asked in those

areas.

-Questions on HUD procedures should be answered by the HUD field

office staff consistent with instructions provided to auditees. If

the questions cannot be answered, the HUD staff should either obtain

the information from Headquarters or refer the caller to the

appropriate Headquarters staff person, whichever method is consistent

with current local office policy and/or HUD Headquarters policy for

the specific program.

-Questions on the Consolidated Audit Guide for Audits of HUD Programs

(Handbook 2000.4 REV-1) are to be referred to the Financial Audits

Division, OIG, (202) 401-6851.

-Questions on GAO standards are to be referred to the General

Accounting Office, (202) 512-9321.

-Questions on the AICPA Audit Guide or on AICPA standards are to be

referred to the AICPA, 1-800-272-4272.

-Questions on any OMB publication are to be referred to the Financial

Management Division, Office of Management and Budget, (202) 395-7332

3

B.NEED FOR AUDIT - TYPE AUDIT NEEDED

B-1 Question - When is a Single Audit in accordance with the Single
Audit

Act of 1984 and Office of Management and Budget Circular A-128 required?

Answer - Audits of State or local governments and of Public Housing

Agencies or Indian Housing Authorities that receive \$100,000 or more a
year

in total Federal financial assistance are to be conducted in accordance

with the Single Audit Act requirements.

Note: When we speak of \"total Federal funding\" we mean all direct and

indirect HUD funding as well as funds received from other Federal

agencies.

B-2 Question - What do we tell auditees/IAs when they ask what audit
guide

is to be used for those entities who receive total Federal funding
between

\$25,000 and \$ 100,000 of Federal assistance per year that must be
audited

but do not have to have a Single Audit.

Answer - The entities received total Federal funding between \$25,000
and

\$100,000 a year shall have an audit made in accordance with OMB
Circular

A-128 or in accordance with Federal laws and regulations governing the

programs in which they participate. On May 1, 1986, HUD canceled various

audit guides (Handbooks) since they had become obsolete due to the
passage

of the Single Audit Act of 1984 and the issuance of OMB Circular A-128,

\"Audits of State and Local Governments.\"

As a result of this cancellation, affected entities receiving total
Federal

funding between \$25,000 and \$100,000 must be audited. The scope of the

audit will be in accordance with OMB Circular A-128, paragraph 6 or
using

audit procedures which determines if the entity is in compliance with
laws

and regulations. However, should the recipient elect to have an audit

other than A-128 (OMB Circular A-128, paragraph 4b.), the IA would be

responsible for ensuring adequate coverage of HUD programs in
conformance

with applicable HUD regulations. The American Institute of Certified

Public Accountants (AICPA) issued an industry audit guide in February
1986,

updated as of May 1, 1993, which incorporates the provisions of the Act
and

OMB Circular A-128. The AICPA also issued Statement of Position (SOP)
92-7

(Audit of State and Local Governmental Entities Receiving Federal
Financial

Assistance) that provides the IA guidance in implementing the Single
Audit

requirements as a supplement to the AICPA Audit and Accounting Guide.

4

B-3 Question - Is an entity that receives total Federal assistance of
less

than \$25,000 required to have an audit?

Answer - No. Entities receiving less than \$25,000 are exempt from the

Single Audit Act or any other Federal Audit requirement. However, they
may

be subject to local or state audit requirements, and must maintain
records

in accordance with program regulations, suitable for audit in the event

that HUD OIG performs an audit or the Department elects to contract to
have

an audit conducted.

B-4 Question - A PHA is a non-profit corporation and as such, can an OMB

Circular A-133 audit be performed?

Answer - No. The PHA\'s audit requirements were established by HUD in 24

CFR 44 which states that the audit must be performed in accordance with
the

provisions of the Single Audit Act and OMB Circular A-128.

B-5 Question - What type audit is needed when a PHA owns a multifamily

housing project with a HUD-insured or HUD-held loan?

Answer - An A-128 Single Audit is needed. In addition, the financial

statements and reporting requirements for the multifamily housing
project,

required by HUD Handbook 4370.2 REV-1, Financial operations and
Accounting

Procedures for Insured Multifamily Projects, are to be included in the

report as supplemental financial statements.

The IA should be advised to include in the report statements to the
effect

that the audit was performed in accordance with the provisions of the

Single Audit Act and OMB Circular A-128, and the reporting requirements
of

HUD Handbook 4370.2 REV-1.

5

B-6 Question - In a situation where a Non-Profit entity receives funds

from HUD that require either an A-128 audit or an audit in accordance
with

HUD Handbook 2000.4 REV-1 and also receives funds from other Federal

Agencies that require an A-133 audit, can the Non-Profit entity have
only

one audit performed that satisfies all Federal Agency audit
requirements?

Answer - Yes, an A-128 audit or a HUD Handbook 2000.4 REV-1 audit is to
be

performed on the HUD funds and the Other Federal Agencies program should
be

reviewed using A-133 procedures and reporting requirements. The scope

section of the auditor\'s report opinion should state the audit was

conducted in accordance with OMB Circular A-128 or HUD Handbook 2000.4

REV-1 and the other Federal Agencies programs (name of agency and
program)

was subjected to the test and standards of OMB Circular A-133. This

procedure will result in one audit which will combine all the
requirements

and should be acceptable to all Federal agencies.

B-7 Question - An entity has several programs funded by different
Federal

agencies, is a subgrantee to other entities, and has a locally owned

program. Can this entity issue separate reports for each program
audited?

Answer - Yes, separate reports can be issued, but only one audit is to
be

performed of all the entity\'s activity. When several reports are
issued,

each report must include a paragraph which states the Single Audit
Report

consists of xx reports. Each report, by title, is to be mentioned in the

paragraph. All reports are to be sent to the Federal agencies involved
in

the funding of the entity.

6

C.AUDIT PERIOD

C-1 Question - When can a biennial audit be performed?

Answer - Audits must be made annually unless the state or local
government

has by January 1, 1987, a constitutional or statutory requirement for
less

frequent audits. For those governments, the cognizant agency must permit

biennial audits. It shall also approve requests for biennial audits by

governments which have an administrative policy that call for audits
less

frequent than annual, but only for fiscal years beginning before January
1,

1987\.

C-2 Question - Can the Single Audit of an entity cover more than one
year?

Answer - Yes, on a case by case basis. When an entity is delinquent in

submitting audit reports it might be advantageous to have the audit
cover

the period of delinquency to bring the entity\'s audit requirement
current.

This determination must be made on a case by case basis. If a multi-year

audit is made, the following financial statements are required:

Low Rent Housing

\- Balance sheet at audit date.

\- Income and Expense Statements for each fiscal year.

-Analysis of Surplus for each fiscal year audited or one

statement that shows the transactions for each fiscal year.

-Schedule of Federal Financial Assistance for each fiscal

year.

CDBG

-The only single audit requirement is for the report to

contain a Schedule of Receipts and Disbursements and a

Schedule of Federal Financial Assistance. Therefore, these

schedules are needed for each fiscal year audited.

-Mostly all reports received while the National Review Center

was receiving reports also contained Balance Sheets, Income

and Expense Statements and other statements required by the

auditee. If such statements are to be contained in the

report the following would apply:

\- Balance Sheet at audit date.

\- Income and Expense for each year audited.

\- Other statements for each year audited.

7

C-3 Question - If the fiscal year for the housing authority is different

than the City\'s fiscal year end, how are the financial statements
affected?

Answer - If the housing authority is a separate entity rather than a

component unit of the City, each would issue separate reports with their

own fiscal years end. If the housing authority is a component unit of
the

City, the City would be considered the reporting entity, and the year
end

for audit reporting purposes would be the fiscal year end of the City.

However, the City should incorporate financial statements for the
housing

authority\'s fiscal year ending during the reporting entity\'s fiscal
year.

For example, if the City\'s year end is December 31 and the housing

authority\'s year end is June 30, the City\'s 1993 audit report should

include financial statements for the housing authority for the year
ending

June 30, 1993. If the housing authority\'s fiscal year ends within the

first quarter of the City\'s subsequent year end, it is acceptable to

incorporate that fiscal year of the housing authority instead, if timely

and accurate presentation of the financial statements of the City is not

adversely affected. If the housing authority\'s year end was March 31

instead of June as in the example above, financial statements published
for

the housing authority as part of the City\'s 1993 audit report could be
for

the year ending March 31, 1994 (GASB 2600.113).

C-4 Question - What period should the Single Audit Act cover\--the year
in

which the funds are received or the year the funds are spent?

Answer - The Act\'s criteria for determining whether a government must
have

a single audit are based upon total Federal financial assistance
received.

The level of internal control and compliance auditing work to be
performed

for each program depends upon the expenditures of Federal financial

assistance. Therefore, the Single Audit Act covers the time the entity

received, expended, or otherwise administered Federal financial
assistance

during the year (OMB Circular A-128, paragraph 6b.).

C-5 Question - Will recipients accept single audits of subrecipients if

the fiscal period is different from the recipient?

Answer - Yes. Even though the fiscal years may be different, the primary

recipient is to accept and review the subrecipient\'s audit report as

discussed in paragraph 9 of OMB Circular A-128. The recipient would
record

the receipt and expenditure of funds in its accounting records
(paragraph

8.b.(1)) based on its fiscal year even though the subrecipient\'s fiscal

year is different.

8

C-6 Question - What is the definition of receipts and expenditures for
the

Act?

Answer - Neither the Act nor A-128 require financial statements to be

presented in accordance with Generally Accepted Accounting Principles

(GAAP). If a government entity reports on the cash basis, those reports,

with an appropriate auditor\'s opinion, will satisfy the single audit

requirements. The terms \"received\" and \"expenditures\" should,
therefore,

be interpreted based upon the basis of accounting employed by the

government entity. An entity presenting GAAP reports would define

\"received\" as the point of recognition as revenue in the event of a

monetary transaction, and when the economic transaction took place for a

non-monetary transaction (cooperative agreements, loan guarantees,

insurance, etc.). A cash basis government would define \"received\" as
when

received in cash. Expenditures would follow the same practice, i.e., let

the basis of accounting determine the definition. This practice will
keep

the auditing consistent with the financial statements presented.

9

D.CONTRACTING FOR AUDIT AUDIT COST - IA QUALIFICATIONS

D-1 Question - Are there Contracting requirements under the Single Audit

Act that must be adhered to when procuring the services of an IA?

Answer - Yes. OMB Circular A-128 originally required the procurement

standards of OMB Circular A-102, Attachment O, to be followed when

obtaining the services for a single audit. Attachment O was superseded
by

the \"Common Rule\" which is incorporated these requirements, and is a
part

of HUD CFRs. Basically, the entity is required to have free and open

competition.

D-2 Question - Can state and local governments impose additional audit

requirements on recipients of Federal funds?

Answer - Yes. State and local laws requiring audits are not superseded
by

the Single Audit Act. The single audit requirements are in addition to
the

state and local audit requirements. Therefore, state and local
governments

can impose additional audit requirements. The cost of additional audit

requirements are to be borne by the state or local government.

D-3 Question - What is HUD\'s policy to deal with situations where a

funding source (state or local) is unwilling to have a proper audit
and/or

pay for their portion of the single audit?

Answer - The Single Audit Act provides that no cost may be charged to

Federal assistance programs for audits required by the Act that are not

made in accordance with A-128.

HUD\'s policy is to withhold a percentage of the assistance payments or

suspend Federal assistance when a state or local government refuses to

participate and/or pay for its portion of the audit. The actual sanction

taken would depend on the circumstances involved and HUD policy at that

point in time.

10

D-4 Question - How does an entity distribute the cost of a single audit?

Answer - OMB A-128 allows the cost of the audit to be either direct or

allocated indirect costs. The percentage of costs charged to the Federal

assistance program is not to exceed the percentage that Federal funds

expended represent of total funds expended by the recipient during the

fiscal year unless appropriate documentation demonstrates a higher
actual

cost. State and local governments are required to follow the procurement

standards prescribed by the \"Common Rule\". Circular A-87, \"Cost
Principles

for State and Local Governments,\" requires the costs to be reasonable
and

necessary.

D-5 Question - Will a grant-specific audit be accepted when the
recipient

failed to contract for an A-128 audit?

Answer - No. Grant-specific audits would defeat the intent of the Single

Audit Act.

D-6 Question - Can HUD require a recipient to get another audit to
pursue

A-128 findings?

Answer - No. However; while HUD cannot require a recipient to get
another

audit, the provisions of OMB Circular A-128 do not limit the authority
of

HUD to contract for (and pay for) any additional audits. Such additional

audits may include economy and efficiency audits, program results, and

program evaluations (OMB Circular A-128, paragraph 10). When such audits

are performed, the audit should build upon and not duplicate any of the

Single Audit work performed.

D-7 Question - Can an entity have a \"more detailed\" audit conducted in

addition to a Single Audit?

Answer - Yes. If the entity wants a \"more detailed audit\", they can
have

one performed. However, the cost of that audit cannot be charged to HUD

assisted programs.

11

D-8 Question - If an IA requests HUD to notify all its auditees of the

IA\'s interest in performing audits, should the HUD office notify
entities

it funds of an IA\'s interest in conducting audits?

Answer - No. To notify auditees of the IA\'s interest in conducting
audits

of HUD funded activities could give the appearance that HUD endorses the

use of that IA. The IA should be advised to use the white pages of the

telephone book in the areas they want to conduct audits so they can
express

their interests directly. If the field office has a list of all its

entities, that list can be given to the IA.

D-9 Question - Can an existing one-year contract be amended to have the
IA

perform audits of subsequent years?

Answer - No. The IAs in submitting their proposals will take into

consideration the fact that the engagement will be for one year.
Normally,

the proposal for multiple year audits will be less than the proposal of
a

series of one year audits.

D-10 Question - Can an IA be contracted to perform the current audit and

future audits?

Answer - Yes. The auditee\'s Request for Proposal should specify that
the

proposal is to cover the current audit period and the number of
subsequent

audits. Entering into multi-year contracts with an IA will take
advantage

of an auditor\'s learning curve and reduce costs associated with the
annual

procurement. Perhaps a one year agreement with the option to extend the

agreement for up to five years will have a dual advantage. It will
enable

the IA to propose a price that takes into account the savings to be

realized in subsequent years and saves the entity the cost with
repeating

the selection process.

It is important that the auditee also considers the state laws. Even if

HUD will allow multi-year contracts, if the state law prohibits such

contacts, the auditee must solicit and award single-year contracts or
the

type contract permitted under state law.

D-11 Question - Can an IA request and receive a listing of entities
funded

by HUD?

Answer - Yes, if the field office has such a list available.

12

D-12 Question - Can HUD program staff advise auditees not to use an IA

since the program staff believes the IA does not do adequate audit work?

Answer - No. If the program staff has information which supports that
the

IA\'s work is inadequate, the staff should take the action to issue a

Limited Denial of Participation or take Debarment action. If the staff

needs additional support, the field office manager can share the

information with the appropriate Regional Inspector General for Audit,
who

can provide technical advise and/or assistance.

D-13 Question - For an IA to conduct a Single Audit, what qualifications

are needed?

Answer - An accountant who performs the audit must be a Certified Public

Accountant or a Public Accountant licensed on or before December 31,
1970,

or persons working for a Certified Public Accounting firm or a Public

Accounting firm licensed on or before December 31, 1970. In addition,
all

personnel substantially engaged in performance of the audit must meet

Continuing Professional Education requirements established by GAO and
the

firm must have undergone an external quality control review within three

years prior to conducting the audit.

D-14 Question - Is it the auditee\'s or HUD\'s responsibility to assure
an

IA has a state license to perform audits?

Answer - It is the auditee\'s responsibility, not HUD\'s, to assure that
the

IA is licensed in the state where the audit is performed. All states
have

licensing requirements for IA\'s residing and practicing within their
state.

In addition, many state\'s impose additional requirements on
out-of-state

IA\'s. The auditee should be aware of the applicable requirements when

soliciting and evaluating proposals and awarding contracts for audits.

D-15 Question - If an IA has not performed an audit of HUD programs can
a

HUD funded entity disqualify the IA from bidding on their audit?

Answer - No. The IA must possess adequate professional proficiency for
the

tasks required. The auditor in accepting the engagement must ensure that

they have the skills necessary to perform the specific type audit. The

fact that an IA has never performed an audit of a HUD funded entity is
not

a valid basis for disqualification.

13

D-16 Question - Can a fee accountant of an entity perform an audit of
that

entity?

Answer - To respond to this question, we have to determine if the audit

involves HUD insured multifamily projects or only involves Public
Housing

and/or Community Development activity.

\- Public Housing and/or Community Development Activity

Auditees/auditors are to follow the GAO Government Auditing

Standards (Yellow Book) in determining independence. Attachment

1 to these Questions and Answers is a copy of the related GAO

Government Auditing Standards. Paragraph 15 requires IA\'s to

follow the AICPA code of professional ethics, the code of

professional conduct of the state board with jurisdiction over

the practice of the IA and the audit organization and the

personal and external impairments included in the GAO standards.

Basically, the GAO and AICPA code of professional ethics will

allow an IA to be the fee accountant and the auditor of an entity

as long as the IA does not make management judgements which will

effect the management of the entity. When questions are raised

in this area, the auditee/auditor should describe, in a written

document, the activities/responsibility of the fee accounting

work and obtain an opinion from the State Board of Public

Accountancy on the independence issue.

\- Activities Involving HUD Insured Multifamily Projects

An IA cannot be the fee accountant and the auditor for the same

entity. This is prohibited by HUD in its procedures contained in

HUD Handbook 4370.2, Chapter 3. The handbook states that the IA

must have no business relationships with the auditee except for

the performance of the audit, accounting systems work and tax

preparation.

D-17 Question - Does HUD have a model form contract that can be provided

to auditees and IAs?

Answer - HUD does not have a model form contract. However, HUD did have
a

model form for PHA/IHA audits, but that contract was contained in a

Handbook that was canceled. Some entities have updated that contract for

Single Audit purposes. See Question J-7 for additional information.

14

E.SCHEDULE OF FEDERAL FINANCIAL ASSISTANCE (SFFA)

E-1 Question - What funds are to be reported on the SFFA?

Answer - All Federal funds are to be reported on the SFFA. The auditee

should distinguish on the SFFA between direct funds received and
indirect

funds passed-down from other agencies.

E-2 Question - What is the basis for defining \"receives\" Federal
financial

assistance?

Answer - Generally this means an entity has \"received\" Federal
financial

assistance when it has received cash, or it has incurred reimbursable

expenditures under a Federal assistance program.

For the purpose of OMB Circular A-128, the receipt of Federal financial

assistance shall be when the related assets or revenues are recorded in
the

financial statements of state and local governments in accordance with

generally accepted accounting principles.

For non-monetary transactions such as loan guarantees or insurance
programs

receipt of these Federal financial assistance programs will be
considered

to coincide with the award of the Federal assistance.

E-3 Question - What is the definition of \"major\" programs?

Answer - To correctly respond to the question one must determine which

audit requirement the auditee or IA is following, OMB Circular A-128 or
OMB

Circular A-133.

Major program is defined by OMB Circular A-133, as an individual award
or a

number of awards in a category or Federal assistance or support for
which

total expenditures are the larger of three percent of total Federal
funds

expended or \$100,000.

Major program is defined by OMB Circular A-128, as an individual award
or a

number of awards in a category or Federal assistance or support for
which

total expenditures are the larger of three percent of total Federal
funds

expended or \$300,000.

15

E-4 Question - Are non-major programs to be included on the SFFA?

Answer - Yes, however, the IA must clearly identify all major and
non-major

programs, including those completed or terminated during the audit
period.

E-5 Question - Is it necessary to show the catalog number for each
Federal

assistance program on the SFFA?

Answer - Yes, if a number exists and is identified in the Catalog of

Federal Domestic Assistance. If a program or grant has not been assigned
a

catalog number, it shall be identified in the SFFA under the caption
\"Other

Federal Assistance.\"

E-6 Question - What are \"pass-through\" grant numbers and should they
be

used on the SFFA?

Answer - \"Pass-through\" grant numbers are numbers assigned to Federal
funds

given to the entity by another recipient of Federal funds (Primary

Recipient). In this case, the entity is also a subrecipient to that
other

entity. Since the report will be used by the awarding entity, the

\"pass-through\", numbers should be shown since they will help in the

identification of those funds provided by the primary recipient.

E-7 Question - Should program income be shown on the SFFA and, if so,

where?

Answer - Yes. Income received as a result of the Federal financial

assistance program should be included in the SFFA as receipts or revenue

recognized under the appropriate program.

E-8 Question - Should all state and local funds be listed on the SFFA?

Answer - No. The only state and local funds that must be shown on the
SFFA

are indirect Federal assistance. If the state or local government pass

down Federal assistance funds to an entity, the entity is to include
those

funds as \"pass-through\" funds from the state or local government as

applicable.

16

E-9 Question - How should Federal guarantee, loan or insurance programs

which are operated by the governmental entity, but do not involve a
current

Federal outlay, be shown on the Schedule of Federal Domestic Assistance
and

how should they be used in determining the program\'s status as a major

program?

Answer - The existence and value of Federal guarantee, loan or insurance

programs at the end of the fiscal year should be disclosed in a footnote
to

the SFFA. Any interest subsidy, or administrative costs allowance
received

during the fiscal year under a loan or loan guarantee program should be

included in the SFFA.

Generally, the total amount of expenditures of Federal financial
assistance

included in the Schedule is the basis for applying the criteria in the

attachment to A-128 for determining major Federal assistance programs.

However, for a loan or loan guarantee program the total value of new
loans

during the fiscal year plus the balance of loans for previous years for

which the government is at risk and any interest subsidy, cash or

administrative costs allowance received, should be used to determine if

that program is also a major Federal assistance program. One exception
to

this is the Guaranteed Student Loan Program. Institutions of higher

education that are not lenders should use the value of new loans made

during the year.

If based on the above, it is determined that a loan or loan guarantee

program is a major program, this determination should not effect the

identification of major programs using the criteria applicable to the
SFFA.

However, on occasion, including a large loan program in the base used to

determine major program may distort the base. Therefore, if the number
of

programs determined to be major is significantly affected by the
inclusion

of a guarantee loan program in total Federal assistance the auditor
should

use his/her judgment as to whether the guarantee program should be
included

when determining which other programs are major.

E-10 Question - If an entity participates in a loan guarantee program

which has no expenditures during the period under audit (pursuant to the

Single Audit Act and OMB Circular A-128), what procedures, if any, are

required of the auditor?

Answer - For major Federal assistance programs that do not have

expenditures during a specific period, the auditor should annually
perform

a study and evaluation of the established internal controls. This study

could include tests to determine that loan recipients were eligible

beneficiaries, that necessary review and award procedures were performed

relative to loans, and that loans are being repaid and a subsequent loan
is

made under the loan guarantee program. Also, the auditor should test

procedures to determine that the entity is in compliance with the

appropriate laws and regulations. For non-major programs, a study and

evaluation would normally not be performed if the major programs make up
at

least 50 percent of the total Federal expenditures.

17

F.COMPLIANCE SUPPLEMENT

F-1 Question - What is the \"Compliance Supplement for Single Audits of

State and Local Governments?\"

Answer - It is a document that sets forth the major compliance
requirements

that should be considered in single audits for certain Federal programs.

It supplements OMB Circular A-128, \"Audits of State and Local
Governments.\"

F-2 Question - What is in the Compliance Supplement?

Answer - It is broken into three parts, an introduction, General

Requirements and requirements covering agency programs, referred to as

Specific Requirements. Basically the requirement is explained followed
by

suggested audit procedures.

F-3 Question - What are General Requirements?

Answer - General Requirements are statutory and regulatory requirements

applicable to mostly all Federal assistance programs. They involve

significant national policies for which failure to comply could have a

national impact on an auditee\'s financial statements including those

prepared for Federal programs. The audit of these requirements shall be

included as a part of every A-128 Single Audit that involves Federal

financial assistance even if the auditee does not have any major
programs.

The General Requirements are: Political Activity, Davis-Bacon Act, Civil

Rights, Cash Management, Relocation Assistance and Real Property

Acquisition, Federal Financial Reports, Allowable Costs/Cost Principles,

Drug-Free Workplace Act, and Administrative Requirements.

18

F-4 Question - What are Specific Requirements?

Answer - Specific Requirements are specific to programs that provide
over

90 percent of the Federal aid to State and local governments. For each

program, the following is provided: Objectives of the program; a brief

description of how the program operates; and the major compliance

requirements, including Code of Federal Regulations (CFR) or statutory

reference where additional information for the requirement can be
obtained.

The requirements are organized into five categories: (1) types of
service

allowed or unallowed; (2) eligibility; (3) matching, level of effort or

earmarking requirements; (4) reporting requirements; and, (5) special
tests

and provisions. Federal agencies have determined that, in general, not

complying with those requirements might materially affect the program.

Each requirement is accompanied by suggested audit procedures that can
be

used to test for compliance.

The HUD programs and the audit procedures have been established by HUD

Headquarters Assistant Secretaries and the Inspector General.

F-5 Question - Are IAs required to make the review using the audit

procedures for program compliance requirements in the Compliance

Supplement?

Answer - For major and/or nonmajor programs the use of the Compliance

Supplement is not mandatory. However, the Federal Government recommends

its use for identifying the compliance requirements to be tested. The

requirements contained in the Compliance Supplement are those that
Federal

program officials and the Inspectors General have identified as being
the

minimum requirement for their programs. However, the auditor is

responsible for ensuring that specific requirements which are modified

because of changes in laws or regulations are included in the audit

procedures. IAs should apply professional judgement and use any
procedures

that they choose to decide the extent of reviews and tests performed.
The

procedures used by the IA (those contained in the Compliance Supplement,

extended procedures or alternate procedures) are to be documented in the

IA\'s working papers.

F-6 Question - What are the IA\'s audit responsibilities when the
auditee

has a major program but the program is not included in the Compliance

Supplement?

Answer - For those programs not contained in the Compliance Supplement,
it

is the IA\'s responsibility to ascertain compliance requirements. If the

HUD program manager has information assembled on the program\'s
compliance

requirements, they should share this information with the IA. If not,
the

IA should be advised to research the statutes, Code of Federal
Regulations

and agreements governing the individual program. The IA should apply

professional judgement in designing and applying the audit program to be

used in performing the audit tests.

19

G.COGNIZANT AGENCY

G-1 Question - When is HUD the cognizant agency for a state or local

government unit?

Answer - HUD is the cognizant agency only if that government unit has
been

specifically identified by the Office of Management and Budget (OMB).
The

government unit may be a state, city, state agency, county, town, local

agency or Indian tribe. The most current listing of Federal agencies and

their related recipients is identified in the Federal Register, Part V,

page 552, OMB, dated January 6, 1986. A listing was previously provided
to

your office which we have updated based on changes made. OMB will assign

cognizant agencies for states and their subdivisions and larger local

governments and their subdivisions. OMB Circular A-128, Audits of State

and Local Governments (paragraph 11a.), states that smaller governments,

not assigned a cognizant agency, will be under the general oversight of
the

Federal agency that provides the most funds whether directly or
indirectly.

G-2 Question - How much time should the cognizant agency allow the
auditee

to send the report to Federal agencies?

Answer - Distribution of the reports is required within 30 days after

completion, but no later than one year from the end of the audit period

(OMB Circular A-128, paragraph 13f.). The cognizant agency can extend
the

date; however, all possible efforts should be made for a timely
issuance,

i.e., within 30 days. Should HUD grant an extension, the official
granting

the extension must advise the Single Audit Clearinghouse. Otherwise the

Single Audit Clearinghouse will notify Congress if the report is not

received at the time designated. The address is:

Single Audit Clearinghouse

Bureau of the Census, Data Preparation Division

1201 East Tenth Street

Jeffersonville, Indiana 47132

20

G-3 Question - If HUD is the cognizant agency, must HUD review the cost

allocation plan?

Answer - Yes. The January 6, 1986 cognizant assignment list makes each

designated Federal agency responsible for both cost allocation and
audit.

A memorandum from OMB entitled \"Overhead Costs,\" dated June 25, 1986,

states in part that Federal departments and agencies shall require local

governments for which they are responsible to submit cost allocation
plans

(central cost allocation plans and departmental indirect cost proposals)

for review and approval. OMB is expected to issue further instructions
at

a later date. OMB Circular A-87 discusses the principles for determining

the allowable costs.

G-4 Question - What are the responsibilities of the cognizant agency for

follow-up of findings contained in single audit reports?

Answer - The responsibilities for HUD management as cognizant agency are

basically the same as the responsibilities for any other audit report,

i.e., oversee the resolution of HUD program-related significant audit

findings. Additionally, HUD is to oversee the resolution of findings

affecting more than one Federal agency. These issues are referred to as

cross-cutting issues (see OMB Circular A-128, paragraph 11b.(7) and
(14)).

OMB Circular A-50 establishes the responsibilities for audit follow-up.

Also, HUD Handbook 2000.6 REV, Audits Management System, describes

operating procedures for the audit follow-up process. If dollars are

involved in cross-cutting issues, HUD is responsible for the resolution
of

the HUD dollars. The entity should be advised of the dollars HUD will be

responsible to resolve and the entity should be advised to contact other

Federal agencies involved to determine how dollars affecting those
agencies

are to be resolved.

G-5 Question - If OMB has assigned a cognizant agency for a state or
local

government unit, can this designation be changed at the request of the

assignee and/or another Federal agency, and if so, what procedures are
to

be followed?

Answer - Yes. Although OMB discouraged reassignments initially,

reassignments are accepted when evidence demonstrates that a
reassignment

is beneficial to all parties concerned. Federal Register, Vol. 51, No.
3,

page 552, dated January 6, 1986, states that \"Federal agencies assigned

cognizance under this notice shall remain cognizant for a period of
three

years.\" Once an agreement is reached a letter confirming that each of
the

three parties involved agrees should be sent to OMB for final
disposition.

If HUD does not have any funds awarded to the entity and funding is not

anticipated OMB should be advised of your desire to change the cognizant

assignment. Your request should contain adequate justification. You are

to continue your cognizant responsibility until OMB makes the
reassignment.

21

G-6 Question - When HUD is the cognizant agency, who notifies the other

agencies when there are cross-cutting findings?

Answer - Each agency receives a copy of the report and is responsible to

resolve their findings. When cross-cutting findings are involved, HUD
will

work to achieve final action. We do not believe it is necessary to
notify

other Federal agencies when final action occurs. Normally, the next
audit

is issued within a short time after final action and either the finding

will not be in that report or a comment on the finding status will be

included in the Prior Audit Finding Section of the current report.

G-7 Question - If another Federal agency is cognizant and processes a

report which does not meet the Single Audit Act requirements, what is
HUD\'s

responsibility and how does HUD assure proper coverage of its programs?

Answer - The HUD Program Office should notify the cognizant agency and
note

their concerns and the need for correction of the current report through

revision or obtaining supplemental information. It is the cognizant

agency\'s responsibility to obtain correction of the report.

G-8 Question - Will HUD follow-up on the resolution of findings
affecting

HUD programs when the auditee is a subrecipient of the HUD funds?

Answer - No. The primary recipient is responsible for ensuring that

corrective action is taken on subrecipient audit findings (OMB Circular

A-128, paragraph 9). HUD is responsible for monitoring the primary

recipients to ensure compliance with the requirements of paragraph 9.

G-9 Question - Who is responsible for tracking HUD audit findings?

Answer - HUD program staff are responsible for tracking and resolving

significant audit findings related to HUD programs.

22

G-10 Question - May a local government question the assignment of a

particular agency as its cognizant agency, and to whom may it appeal?

Answer - Yes. Local governments may appeal their assigned agency to OMB.

G-11 Question - When HUD is the cognizant agency for an entity where the

preponderance of funding from HUD is all indirect, what is the

responsibility of the Department?

Answer - The Department\'s basic responsibility is to provide guidance
to

the entity, if requested. The A-128 report should be submitted by the

entity (subrecipient) to the entity providing them the direct funding.

State or local governments providing \$25,000 or more of Federal
assistance

to subrecipients are required to determine if the audit report meets

Circular A-128 requirements.

23

H.GENERAL OVERSIGHT

H-1 Question - When does HUD have general oversight responsibility of a

local government or other entity?

Answer - OMB Circular A-128, Audits of State and Local Governments

(paragraph 11a.), states that smaller governments, not assigned a
cognizant

agency, will be under the general oversight of the Federal agency that

provides the most funds whether directly or indirectly.

HUD has general oversight responsibilities when the following situations

exist:

-OMB has not specifically designated a Federal agency to be the

cognizant agency for the local government; and

-The preponderance of direct Federal financial assistance provided

to the recipient is from HUD. HUD-OIG made a determination that

only direct funds will be considered even though the Circular

calls for direct and indirect.

-The entity is a housing authority that is not an integral entity

of the local government and HUD provides direct funding.

H-2 Question - What does General Oversight mean to those Agencies that

have only general oversight responsibility of Single Audit Act reports?

Answer - Where OMB has not identified the cognizant agency for a Federal

assistance recipient, the Federal agency that has contributed the

preponderance of funds would have general oversight. OMB has not defined

the responsibilities of a general oversight agency and the general

oversight agency can assume whatever responsibilities they desire.

Additionally, we may not know HUD has the preponderance of funds since
HUD

may not know the amount of funds provided to the entity by other Federal

agencies during the audit period and, therefore, would be unaware that
HUD

is the general oversight agency. It has been our policy not to act as

general oversight agency unless a report is received which indicates HUD

has provided the most direct funds or the recipient makes the request to

HUD in advance.

24

H-3 Question - When a Federal agency has general oversight

responsibility, should that agency follow-up and resolve
\"cross-cutting\"

findings that affect other Federal programs?

Answer - Yes. The Federal agency with general oversight responsibility

will be expected to follow-up and oversee the resolution of
\"cross-cutting\"

findings. (See Question H-5 for the exception).

H-4 Question - Can state and local governments that have not been
assigned

a Federal cognizant agency by OMB be required to determine which Federal

agency will provide general oversight?

Answer - Yes. The state or local government is responsible for
identifying

the Federal agency when a cognizant agency has not been established by
OMB.

The state or local government has the data necessary to make the

determination and not the Federal agency.

H-5 Question - If HUD has accepted general oversight for an agency with
a

preponderance of funding from HUD, and all Federal funding is indirect,

what is HUD\'s responsibility concerning HUD program findings and

cross-cutting findings?

Answer - The findings concerning the HUD programs are the responsibility
of

the pass-through agency (recipient). The cross-cutting findings are the

recipient\'s responsibility and are to be resolved by the recipient.

However, ultimately HUD program staff must ensure that the recipient has

satisfactorily performed its oversight responsibilities and this could
be

accomplished as a part of its monitoring activity.

H-6 Question - If oversight of an agency is another Federal agency\'s

responsibility due to preponderance of funds, what is HUD\'s
responsibility?

Answer - HUD program staff have the responsibility to receive copies of

reports and take action to resolve significant findings affecting HUD

programs. In addition, they should answer questions concerning HUD

programs.

25

H-7 Question - When HUD has general oversight for an entity with

preponderance of funding from HUD and Federal funding is all indirect,
what

is the responsibility of the Department?

Answer - The Department\'s basic responsibility is to provide guidance
to

the entity, if requested. The A-128 report should be submitted by the

entity (subrecipient) to the entity providing them the direct funding.

State or local governments providing \$25,000 or more of Federal
assistance

to subrecipients are required to determine if the audit report meets

Circular A-128 requirements.

26

I.AUDIT REPORT: CONTENT - REPORTABLE CONDITIONS - AUDIT FINDINGS -

AUDIT FOLLOW-UP

I-1 Question - What is required in the Single Audit Report?

Answer - The Single Audit Report contains the Following:

\(1\) A report on an examination of the general purpose or basic

financial statements of the state or local government (entity) as

a whole, or the department, agency, or establishment covered by

the audit (referred to as the accountant\'s report). This report

includes an opinion on the entity\'s financial position.

\(2\) A report on internal accounting control based solely on a

study and evaluation made as a part of the audit of the general

purpose or basic financial statements.

\(3\) A report on compliance with laws and regulations that may

have a material effect on the financial statements.

\(4\) A report on supplementary schedules of the entity\'s Federal

financial assistance program, showing total expenditures for each

Federal financial assistance program (this may be combined with

\(1\) above).

\(5\) A report on internal controls (accounting and

administrative) used in administering Federal financial

assistance programs (this may be combined with (2) above).

\(6\) A report on compliance with laws and regulations identifying

all findings of noncompliance and ineligible or unsupported costs

(this may be combined with (3) above).

\(7\) A report on fraud, abuse, or illegal acts, or indications of

such acts, when discovered (a written report is required).

Normally this report is issued separately.

Other questions on the Audit Report that are unique to HUD\'s PHA/IHA

are discussed in section J and those unique to HUD\'s CDBG program are

discussed in section K of these Questions and Answers.

27

I-2 Question - Does the Single Audit act and/or OMB require GAAP
Financial

Statements to be included a Single Audit Report?

Answer - No. The Single Audit Act only requires that the audit report

contain the normal financial statements used by the entity. In some
cases,

the entity\'s financial statements are prepared in accordance with
Generally

Accepted Accounting Principles (GAAP). Further discussion on this issue
as

it relates to the PHA/IHA is contained in section J of these Questions
and

answers.

I-3 Question - Can the HUD Field Office require the IA to include

information in the audit report that is needed by that field office in
the

monitoring of the entity (local requirements)? Can the field office

\"reject\" the report if it is not included?

Answer - No and No. The Entity not HUD contracts with the IA to perform

the audit and only those needs established by the Act, the office of

Management and Budget and HUD Headquarters are to be included in the
audit

and related report. When a field office finds that they need additional

information in the report (local requirements), that need should be

communicated to Headquarters so that need can be evaluated on a
Nationwide

basis and if appropriate, the Single Audit Requirements changed.

I-4 Question - Is it true that the IA must report all instances of

noncompliance found regardless of the amount involved?

Answer - Yes. OMB Circular A-128 states that the audit shall be made up
of

at least, among other things, \"a summary of all instances of
noncompliance;

and an identification of total amounts questioned, if any, for each
Federal

assistance award, as a result of noncompliance.\" (See paragraph 13 of
the

OMB Circular A-128 and Chapter 21 of the AICPA audit and accounting
guide,

\"Audits of State and Local Governmental Units\" and GAO Standards,
Chapter 5

paragraph 5-5 and footnote 4).

I-5 Question - What is a reportable condition?

Answer - A reportable condition is a matter coming to the auditors\'

attention relating to significant deficiencies in the design or
operation

of the internal control structure that, in their judgment, could
adversely

affect the entity\'s ability to record, process, summarize, and report

financial data consistent with the assertions of management in the

financial statements.

28

I-6 Question - What is a material weakness?

Answer - A material weakness is a reportable condition in which the
design

or operation of the specific internal control structure elements does
not

lower the risk that errors or irregularities in amounts that (1) would
be

material in relation to the financial statements being audited may occur

and (2) would not be detected within a timely period by employees in the

normal course of performing their assigned functions.

I-7 Question - How should audit findings, repeated from the prior audit

report, be handled in the current audit report?

Answer - We believe to address the question, one must determine if:

(1)the condition is the same and whether or not the auditee is in

the process of taking the agreed upon action; or

(2)the condition is the same and the auditee refuses to take the

recommended action; or

(3)the condition got worse (more ineligible costs expended, etc.)

even though the recommended action was completed; or

(4)the condition got worse and the recommendations were not

implemented.

If (1) or (2) exist, the IA can report the conditions in the prior audit

finding section of the report. If (3) or (4) exists, the IA should
report

the conditions under the current finding section of the report. The

finding should identify the questioned/ineligible costs and/or condition
by

report period. If the recommended action from the prior report was
taken,

the IA should include that information in the finding and include new

recommendations which should correct the deficiencies noted.

Other conditions could exist; however, those conditions would probably
be

some version of the four listed. If there is any doubt, the IA should be

advised to include the finding in the current finding section of the

report.

29

I-8 Question - Should the IA include findings from HUD Monitoring
Reports

in their audit report?

Answer - The extent of disclosure depends on the following.

Two conditions we found to exist:

(1)the IA in performing the audit test disclosed the same or similar

conditions; and

(2)the IA testing did not disclose the condition but they became

aware of the condition from reviewing the auditees correspondence

and/or was provided the HUD Monitoring Report by the auditee.

In case of (1) above, if the auditor found the condition based on the
audit

testing, the finding should be fully developed and included as a current

finding. The IA should make reference to the fact that the condition was

also included in HUD\'s Monitoring Report.

In case of (2) above, findings contained in the HUD Monitoring Report
are

not required to be identified in the current audit report. If the IA

includes these in the audit report, they should be clearly identified as
to

their source. However, if the findings identified in the monitoring
report

are so pervasive that it is believed that the IA should have identified

those conditions, HUD program officials may want to discuss the report
with

the RIGA to have him/her consider the case for a QCR.

I-9 Question - Is the IA required to include the Corrective Action Plan
in

the audit report?

Answer - No. The auditee is responsible for preparing and submitting the

Corrective Action Plan as required by OMB Circular A-128 paragraph 13d.

The plan can either be submitted separately with the report or as is
done

in some cases, the auditee may provide the plan to the IA who includes
it

in the audit report even though the IA is not required to do so. The

method used in submitting the plan is left up to the auditee.

I-10 Question - Must the IA comment on all prior audit findings?

Answer No. GAO Standards (Yellow Book) requires that the auditor\'s
report

should disclose the status of known but uncorrected significant or
material

findings and recommendations from prior audits that effect the current

audit objectives. IAs are not required to report on findings that were

resolved, although many IAs include such information in their report. We

have recommended that information on findings contained in the prior
audit

report, that have been resolved during the audit period, be included in
the

current report indicating that they have been resolved. However, we
cannot

require such reporting.

30

I-11 Question - Does the IA only have to follow-up on prior IA reported

findings?

Answer - No. The IA is to follow-up on all findings contained in audit

reports issued during the audit period. These reports can be issued by

another public accountant or by local, state or Federal government

auditors.

I-12 Question - What is a cross-cutting finding?

Answer - A cross-cutting finding is a finding that affects more than one

agency or program.

I-13 Question - What is HUD\'s responsibility on cross-cutting findings?

Answer - Technically, there are two categories of cross-cutting
findings,

one only effects HUD and the other effects both HUD and other Federal

agencies.

-HUD only - This normally is a finding which involves CPD funds,

Housing funds, Assisted Housing funds, and/or other HUD funding.

The office that receives the report should determine if other HUD

funding is involved.

When more than one type HUD funding is involved, the action to be

taken by the HUD staff should be coordinated with all HUD program

offices involved in the finding. It would be best for one HUD

program office to follow-up and control the resolution of the

finding; however, if each office decides to work with the auditee

to resolve their portion of the finding, the auditee should be

provided information on the method that will be used.

-HUD and other Federal agencies - Two situations can exist.

First, HUD has Cognizant or General Oversight responsibility or

second, another agency has that responsibility.

(1)If HUD has Cognizant or General Oversight responsibility,

HUD is to follow-up on the procedural aspects of the finding

to final action. If Questioned or Ineligible cost exists,

HUD is to only follow-up on the HUD dollars and the other

agency dollars should be followed-up by the other Federal

agency.

(2)If another Federal agency has the Cognizant or General

Oversight responsibility HUD should only follow-up on HUD

dollars and/or any finding reporting deficiencies in the HUD

program and/or recommended action directed specifically to

HUD.

31

J.PUBLIC HOUSING AGENCY AUDITS

J-1 Question - How does the Single Audit Act affect the frequency of PHA

audits?

Answer - Certain requirements in the Act and Circular A-128 immediately

affect PHAs and IHAs. Among these requirements is that single audits
must

be made annually unless the state or local government has adopted, by

January 1, 1987, a constitutional or statutory requirement for less

frequent audits. For those governments (including PHAs and IHAs), HUD
will

permit biennial audits, covering both years, if the government so
requests.

HUD will also honor requests for biennial audits of PHAs that have
existing

policy requiring biennial audits in effect on the date of the enactment
of

the Single Audit Act, but only for fiscal years beginning before January
1,

1987\. Such requests must be accompanied by a copy of the constitutional
or

statutory requirement or board resolution which adopted the policy.
State

law may require audits to be conducted annually. In those states, HUD

cannot honor requests by PHAs for biennial audits. HUD staff should
check

with the HUD Field Office Counsel to determine state audit requirements.

J-2 Question - What is the justification for omitting a housing
authority

from the single audit of a local or state government?

Answer - The Single Audit Act requires state or local governments that

receive \$100,000 or more a year in Federal funds to have an audit made.

However, the Act allows the state or local government to determine what

level of government unit(s) is to be included in the audit. Generally, a

housing authority in most cases (for single audit purposes) is
considered

an independent entity and, therefore, requires a separate audit. In any

case, those government units which are not included in the local or
state\'s

single audit, but receive Federal financial assistance will still be

required to submit a single audit of their own if their Federal
assistance

is \$100,000 or more.

J-3 Question - Are all housing authorities considered separate entities

and is HUD always the cognizant agency?

Answer - No. Not all housing authorities are entities separate and

distinct from the local government jurisdiction. However, in most cases

they are separate. HUD only assumes general oversight responsibilities
for

the housing authorities, not cognizant responsibility, unless cognizance
is

assigned by OMB.

32

J-4 Question - Can closeout audits of actual development and
modernization

costs, etc., be conducted outside of the single audit?

Answer - No. For HUD to require closeout audits, actual development and

modernization cost audits separate and distinct from the single audit
would

defeat the intent of the Single Audit Act. PHAs/IHAs are instructed to

complete and certify to the actual cost upon project completion and
submit

the certification to HUD. The reports are certified to by the PHA/IHA
and

can be included in the audit\'s scope as the IA is required to perform
tests

to assure the reports contain accurate and reliable data (Handbook

7476.1,Rev-1, paragraph 12a).

J-5 Question - Who is responsible for notifying the IA when a
certificate

of actual modernization or development cost statement is to be included
in

the audit scope?

Answer - The PHA/IHA is responsible to include this activity as a part
of

the solicitation of an IA. Statements of actual modernization or

development costs cannot be required to be included in single audit
reports

unless they are required by the auditee. If so, they should be included
as

supplemental statements in the report. Even if the statements are not

included in the report, the IA is required to include expenditures,

incurred during the audit period, in the Schedule of Federal Assistance.

Further, as part of the single audit scope, the auditor should review
the

Actual Development Cost Certificate (ADCC) and the Actual Modernization

Cost Certificate (AMCC) where material. The PHA is responsible for

assuring the auditor has the ADCCs and AMCCs for review. Unless the

non-Federal auditor states otherwise in the audit report, the ADCC and
AMCC

should be considered acceptable.

J-6 Question - May HUD still require that the audit report be submitted

within 120 days after the close of the PHA\'s fiscal year?

Answer - No. The Single Audit Act requires local governments to submit

their audit report to the applicable Federal agencies within 30 days
after

the report is issued but no later than 1 year after the end of the audit

period unless an extension is approved by the cognizant agency. Although

HUD may not require a time frame other than that established by the Act,

the PHA has the authority to stipulate the completion date in its
contract

with the auditor which can be more or less than the 120 days.

We have found that IAs have taken advantage of the one-year submission

requirement by advising PHAs/IHAs that audits need not be completed for
12

months after the fiscal year end date, giving the IA additional time to

work the audit in his/her workload. IAs and auditees are using dates

ranging from six months to one year, from the fiscal year date, as the
date

the report is to be given to the auditee. PHAs/IHAs should be encouraged

to obtain more timely audits from the IAs to benefit the PHA/IHA in

executing their financial management responsibilities.

33

J-7 Question - May entities continue to use the old form, Model Form of

Proposal and Contract Between Public Housing Agency and Independent

Accountant for Audit Services when contracting for IAs to perform audit

services under the Single Audit Act?

Answer - Yes. The old form \"Model Form\", may be used, at the option of
the

PHA/IHA, so long as it is consistent with the requirements of the Single

Audit Act and does not impose any requirements not anticipated by the

Single Audit Act. It should be noted that the old model form contract

would need to be modified to require the audit to be conducted in

accordance with the Single Audit Act and Circular A-128, instead of the
old

audit guide.

J-8 Question - How are the audit costs to be allocated to a PHA/IHA when

the PHA/IHA is included in a local government\'s single audit?

Answer - The audit costs should be allocated to the PHA/IHA in the same

manner the local government allocates the costs to other Federal
assistance

programs. The audit costs may be considered a direct cost or an
allocated

indirect cost, determined in accordance with the provisions of Circular

A-87, \"Cost Principles for State and Local Governments.\" Generally,
the

percentage of costs charged to Federal assistance programs for a single

audit shall not exceed the percentage that Federal funds expended
represent

of total funds expended by the recipient during the fiscal year. The

percentage may be exceeded, however, if appropriate documentation

demonstrates higher actual cost.

J-9 Question - Should Section 8 new construction projects managed by a

PHA/IHA be included in the scope of the single audit?

Answer - Basically, all activity of the auditee is to be included in the

single audit. The degree of inclusion of the project will depend on

several factors which need to be evaluated on a case-by-case basis,
e.g.,

ownership, nature of agreements involved (HAP Contract, ACC, bond

indenture, etc.), contractual audit requirements in addition to single

audit requirements, etc. Some of these factors may result in additional

audit coverage over that required by the single audit, such as HUD\'s

multifamily insured projects (see question B-5).

34

J-10 Question - If a PHA/IHA is considered an integral part of a local

government for audit purposes, but has a different year end than the
local

government, how can HUD use the PHA/IHA\'s incomplete financial data

resulting from the Single Audit?

Answer - The PHA/IHA\'s financial data would not be incomplete, because
the

local government would incorporate the financial data from the
PHA/IHA\'s

fiscal year end into the local government\'s audit report. Although the

Governmental Accounting Standards Board encourages component units to
have

the same year end as the reporting entity, it recognizes that this is
not

always possible. When the fiscal year end of the component unit and the

local government differ, the year end for audit reporting purposes would
be

the fiscal year end of the local government. However, the local
government

should incorporate financial statements for the PHA/IHA\'s fiscal year

ending during the local government\'s fiscal year. For example, if the

local government\'s year end is December 31 and the PHA/IHA\'s year end
is

June 30, the local government\'s 1993 audit report should include
financial

statements for the PHA/IHA for the year ending June 30, 1993. If the

PHA/IHA\'s fiscal year ends within the first quarter of the local

government\'s subsequent year end, it is acceptable to incorporate that

fiscal year of the PHA/IHA instead, if timely and accurate presentation
of

the financial statements of the local government is not adversely
affected.

If the PHA/IHA\'s year end was March 31 instead of June as in the
example

above, financial statements published for the PHA/IHA as part of the
local

government\'s 1993 audit report could be for the year ending March 31,
1994

(GASB 2600.113).

J-11 Question - If a PHA/IHA is considered an integral part of a local

government, is it necessary for the PHA/IHA to change the Low-Income

Housing Program fiscal year to coincide with the local government\'s
fiscal

year?

Answer - No. While it is not necessary for the PHA/IHA to change the

fiscal year in its ACC, such a change would probably be less burdensome
for

the PHA/IHA, HUD, the local government and the auditor. The financial

statements required by HUD should still be forwarded to HUD at the
required

time.

J-12 Question - Are Annual contributions toward PHA/IHA debt reduction

considered HUD contributions for determining the Federal general
oversight

agency?

Answer - Yes. Although they are not direct payments to the PHA/IHA, HUD

contributions for debt service should be included as HUD financial

assistance in determining the general oversight agency for those local

governments not assigned a cognizant agency by OMB.

35

J-13 Question - What financial statements must be included in Single
Audit

Act reports for PHA/IHAs?

Answer - The Single Audit Act does not state just what financial
statements

are required. However, the act requires all audit reports to contain the

normal financial statements used by the entity. Certified financial

statements for PHA/IHAs, would generally include the following (Handbook

7476.1, Rev-1, paragraph 12a):

\- Balance Sheet

\- Statement of Income and Expense

\- Analysis of Surplus

J-14 Question - Are the certified statements contained in Question J-13

required if state law and/or City law requires the PHA/IHA to submit

financial statements in accordance with Generally Accepted Accounting

Principles (GAAP)?

Answer - Yes. In the instances where GAAP statements are required, the

statements mentioned in Question J-13 are to be included as supplemental

schedules in the audit report. When supplemental schedules are included
in

the report the IA would have to perform appropriate tests for the
purpose

of rendering an opinion on those schedules. The opinion by the IA on the

financial statements would also extend to these schedules.

J-15 Question - Is the Schedule of Federal Financial Assistance (SFFA)

needed in the audit report when the entity only has Low-Rent Housing

activity?

Answer - Yes.

36

K.COMMUNITY DEVELOPMENT AUDITS

K-1 Question - Are all subrecipients required to have a single audit?

Answer - No. Subrecipients receiving less than \$25,000 are not required
to

have a single audit. Subrecipients receiving between \$25,000 and
\$100,000

in total Federal financial assistance a year are required to have an
audit

under OMB Circular A-128 or OMB Circular A-133. Any entity receiving

funding of \$100,000 or more is to have a single audit. In lieu of a

separate audit, a subrecipient may be audited as a component of the

recipient, e.g., airport authority, water district, etc.

The primary recipient could require the subrecipient to have a Single
Audit

as a part of the funding agreement regardless of the amount of Federal

funds the recipient received.

K-2 Question - When UDAG agreements contain specific language that a
final

audit is required, is this a sufficient basis to require an audit, in

addition to the single audit?

Answer - No. It is the intent of the Single Audit Act to preclude grant

specific audits from being conducted and that the single audit be
performed

in its place. Grants between audits should be closed out subject to the

next single audit.

K-3 Question - What is the role of the state agency that is
administering

the Small Cities State-Block program?

Answer - The state agency administering the Small Cities State-Block

program has specific responsibilities for monitoring small cities

(subrecipients) as spelled out in OMB Circular A-128, paragraph 9.

37

K-4 Question - Will the grantee\'s cost allocation plan be audited?

Answer - Although there is no specific requirement that the cost
allocation

plan be audited as part of the single audit, the non-Federal auditor
would

be required to address the propriety of the cost allocation plan if it
has

a material effect on the financial statements or it was involved in
prior

material findings that remain unresolved. If this is the case, the
auditor

should ascertain that the cost allocation plan was approved, determine
that

it is reasonable, and examine the supporting documentation. Basically,
the

auditor should make the necessary tests to determine that the indirect

costs recorded were proper and reasonable and are in accordance with an

approved cost allocation plan.

K-5 Question - Are nonprofit organizations (subgrantees) considered

subrecipients for Single Audit Act purposes?

Answer - It depends. Yes, if the subgrantee is a state or local

government. In which case, the primary recipient is responsible for

ensuring that any required audit is completed using OMB Circular A-128.

No, if the subgrantee is other than a state or local government. In this

case, the primary recipient is responsible for monitoring its
subgrantees

and including the use of the Federal assistance by subgrantee in its
single

audit, or requiring a separate audit from the subgrantee using OMB
Circular

A-133.

K-6 Question - Can closeout audits of specific grants still be obtained?

Answer - No. The requirements of the Single Audit Act take precedent
over

any previous Federal audit requirement of state and local governments.
The

only exception is that governments may omit the hospital and higher

education institutions from the single audit. In those cases, OMB
Circular

A-133 should be used. However, a Federal agency can make any additional

audits which are necessary to carry out its responsibilities under
Federal

law and regulation. In this case, the Federal agency would have to

contract and pay for any additional audits. If the auditee contracted
for

such audits without HUD approval, the cost of the audit cannot be
charged

to the HUD assisted program.

38

K-7 Question - Does the Single Audit Act apply to subrecipients and to

contracts awarded by prime recipients?

Answer - Yes. The Single Audit Act applies equally to subrecipients and
to

prime recipients. However, the Single Audit Act does not apply to

commercial contractors engaged by state and local governments. The

governmental entities should use their own procedures in deciding when
and

how to audit their commercial contracts.

K-8 Question - Will subrecipients be audited at the same time and by the

same auditor conducting the single audit of the prime recipient?

Answer - Not necessarily. One of the monitoring functions of the prime

recipient is to assure that its subrecipients comply with the Single
Audit

Act. While subrecipients may obtain their own audits, and for periods
not

necessarily coinciding with the prime recipient\'s fiscal year, such
audits

will serve the intent of the Act.

K-9 Question - Under the State Community Development Block Grant
Program,

the state agency acts for HUD in receipt and review of its subrecipient

audits. If, due to the preponderance of Community Development Block
Grant

funds, the state acts as the monitoring agency, does it then assume the

responsibility of coordinating review or clearance of the audit with
other

Federal agencies, including HUD?

Answer - No. State agencies are only responsible for assuring that their

subrecipients implement and comply with the Single Audit Act. If the

subrecipient receives all its Federal assistance indirectly, the state
has

the responsibility to review and clear the audit. If the state\'s

subrecipient receives other Federal assistance directly from a Federal

agency, the state does not have the responsibility of coordinating
review

or clearance of the audit with the other Federal agencies. When this

occurs, the state\'s subrecipient is also considered a directly funded

primary recipient. As a practical matter, the states should coordinate

their efforts with the Federal general oversight or direct funding
agency.

39

K-10 Question - What is the Department\'s responsibility, if any, when
HUD

provides the preponderance of funding to a city through: (a) the

state-administered Small Cities program; and (b) an urban county\'s

Community Development Block Entitlement Program?

Answer - (a) If all Federal funding is indirect, the Department\'s basic

responsibility is to provide technical advice and guidance, if
requested.

The state, as the primary recipient, is responsible for carrying out

certain monitoring functions (OMB Circular A-128, paragraph 9).

\(b\) If any direct Federal funding is involved, the Department may have

general oversight responsibility for the city\'s single audit.

40

Attachment 1

GAO Standards on Independence

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Chapter 3

General Standards

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\(2\) If the work requires extensive review of

computerized systems, the staff or consultants to the

staff should include persons with computer audit

skills.

\(3\) If the work involves review of complex engineering

data, the staff or consultants to the staff should

include persons with engineering skills.

\(4\) If the work involves the use of nontraditional

audit methodologies, the staff or consultants to the

staff should include persons with the necessary

skills.

e\. The following qualifications are needed for

financial audits that lead to an expression of an

opinion:

\(1\) The auditor should be proficient in the appropriate

accounting principles and standards and in government

auditing.

\(2\) The public accountants engaged to conduct

audits should be: (a) licensed certified public

accountants or persons working for a licensed certified

public accounting firm or (b) public accountants

licensed on or before December 31, 1970, or

persons working for a public accounting firm

licensed on or before December 31, 1970. /2

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Independence 11. The second general standard for government auditing is:

In all matters relating to the audit work, the

audit organization and the individual auditors,

whether government or public, should be free

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

2

Accountants and accounting firms meeting these

licensing requirements should also comply with the

applicable provisions of the public accountancy law and

rules of the jurisdiction(s) where the audit is being

conducted and the jurisdiction(s) in which they are

licensed.

Page 3-4

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\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Chapter 3

General Standards

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

from personal and external impairments to

independence, should be organizationally

independent, and should maintain an independent

attitude and appearance.

12\. This standard places responsibility on the

auditor and the audit organization to maintain

independence so that opinions, conclusions,

judgments, and recommendations will be

impartial and will be viewed as impartial by

knowledgeable third parties.

13\. Auditors should consider not only whether they

are independent and their attitudes and beliefs

permit them to be independent, but also whether

there is anything about their situation that

might lead others to question their

independence. All situations deserve

consideration because it is essential not

only that auditors are, in fact, independent

and impartial, but also that knowledgeable

third parties consider them so.

14\. Government auditors, including hired

consultants and internal experts and

specialists, need to consider three general

classes of impairments to independence

\-- personal, external, and organizational.

If one or more of these impairments affect an

auditor\'s ability to do the work and report

findings impartially, the auditor should either

decline to perform the audit, or in those

situations when the auditor cannot decline to

perform the audit, the impairment(s) should be

reported in the scope section of the audit

report. In addition, in cases when the

auditors are employees of the audited entity,

that fact should be reflected in a prominent

place in the audit report.

15\. Nongovernmental auditors also need to consider

those personal and external impairments that

might affect their ability to do their work and

report their findings impartially. If their

ability is adversely affected, they should

decline to perform the audit. Public

accountants should also follow the AICPA code

Page 3-5

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\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Chapter 3

General Standards

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

of professional ethics, the code of professional

conduct of the state board with jurisdiction over

the practice of the public accountant and the

audit organization, and the personal and external

impairments included in this statement.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Personal 16. There are circumstances in which auditors may not

Impairments be or may not be perceived to be impartial.

The audit organization is responsible for having

policies and procedures in place to help

determine if auditors have any personal impairments.

Managers and supervisors need to be alert

for personal impairments of their staff members.

Auditors are responsible for notifying the appropriate

official within their audit organization if they

have any personal impairments. These impairments

apply to individual auditors, but they may also

apply to the audit organization. Personal impairments

may include, but are not limited to, the

following.

a\. Official, professional, personal, or financial

relationships /3 that might cause the auditor to

limit the extent of the inquiry, to limit

disclosure, or to weaken or slant audit findings

in any way.

b\. Preconceived ideas toward individuals, groups,

organizations, or objectives of a particular

program that could bias the audit.

c\. Previous responsibility for decision-making or

managing an entity that would affect current

operations of the entity or program being audited.

d\. Biases, including those induced by political or

social convictions, that result from employment in,

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

3

When auditing state and local governments, the

public accountant should be familiar with AICPA

Professional Ethics Interpretation 101-10.

This interpretation establishes specific rules on

financial relationships that impair the public

accountant\'s

independence.

Page 3-6

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\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Chapter 3

General Standards

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

or loyalty to, a particular group, organization, or

level of government.

e\. Subsequent performance of an audit by the same

individual who, for example, had previously

approved invoices, payrolls, claims, and other

proposed payments of the entity or program being

audited.

f\. Concurrent or subsequent performance of an

audit by the same individual who maintained the

official accounting records. /4

g\. Financial interest, direct or substantial indirect,

in the audited entity or program.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

External 17. Factors external to the audit organization may

Impairments restrict the audit or interfere with an auditor\'s

ability to form independent and objective opinions and

conclusions. For example, under the following

conditions an audit may be adversely affected and the

auditor may not have complete freedom to make an

independent and objective judgment.

a\. Interference or influence external to the audit

organization that improperly or imprudently limits

or modifies the scope of an audit.

b\. Interference external to the audit organization

with the selection or application of audit

procedures or in the selection of transactions to be

examined.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4

For example, an individual performs a substantial

part of the accounting process or cycle, such as

analyzing, journalizing, posting, preparing

adjusting and closing entries, and preparing the

financial statements, and later the same individual

performs an audit. In instances in which the

auditor acts as the main processor for

transactions initiated by the audited entity, but

the audited entity acknowledges responsibility

for the financial records and financial

statements, the independence of the auditor is not

necessarily impaired.

Page 3-7

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\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Chapter 3

General Standards

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

c\. Unreasonable restrictions on the time allowed to

competently complete an audit.

d\. Interference external to the audit organization in

the assignment, appointment, and promotion of

audit personnel.

e\. Restrictions on funds or other resources provided

to the audit organization that would adversely

affect the audit organization\'s ability to carry out

its responsibilities.

f\. Authority to overrule or to influence the auditor\'s

judgment as to the appropriate content of an audit

report.

g\. Influences that jeopardize the auditor\'s continued

employment for reasons other than competency or

the need for audit services.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Organizational 18. Government auditors\' independence can be affected

Independence by their place within the structure of the government

entity to which they are assigned and also by

whether they are auditing internally or auditing

other entities.

Internal 19. A federal, state, or local government audit

Auditors organization, or an audit organization within other

government entities, such as a government college,

university, or hospital, may be subject to

administrative direction from persons involved

in the government management process. To help

achieve organizational independence, the audit

organization should report the results of their

audits and be accountable to the head or deputy

head of the government entity and should be

organizationally located outside the staff or

line management function of the unit under audit.

20\. Auditors should also be sufficiently removed from

political pressures to ensure that they can conduct

Page 3-8

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\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Chapter 3

General Standards

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

their audits objectively and can report their findings,

opinions, and conclusions objectively without

fear of political repercussion. Whenever feasible,

they should be under a personnel system in which

compensation, training, job tenure, and advancement

are based on merit.

21\. If the above conditions are met, and no personal or

external impairments exist, the audit staff should

be considered organizationally independent to audit

internally and free to report objectively to top

management.

22\. When organizationally independent internal auditors

conduct audits external to the government

entity to which they are directly assigned, they may

be considered independent of the audited entity and

free to report objectively to the head or deputy

head of the government entity to which assigned.

External 23. Government auditors employed by audit organizations

Auditors whose heads are elected and legislative auditors

auditing executive entities may be considered

free of organizational impairments when auditing

outside the government entity to which they are

assigned.

24\. Government auditors may be presumed to be independent

of the audited entity, assuming no personal

or external impairments exist, if the entity is:

a\. A level of government other than the one to

which they are assigned (federal, state, or local).

b\. A different branch of government within the

level of government to which they are assigned

(legislative, executive, or judicial).

25\. Government auditors may also be presumed to be

independent, assuming no personal or external

Page 3-9

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Chapter 3

General Standards

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impairments exist, if the audit organization\'s head

is:

a\. Elected by the citizens of their jurisdiction.

b\. Elected or appointed by a legislative body of the

level of government to which they are assigned and

report the results of their audits to and are

accountable to the legislative body.

c\. Appointed by the chief executive but are confirmed

by, report the results of their audits to, and

are accountable to a legislative body of the level of

government to which they are assigned.

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Due 26. The third general standard for government auditing

Professional is:

Care

Due professional care should be used in conducting

the audit and in preparing related reports.

27\. This standard places responsibility on the auditor

and the audit organization to follow all applicable

standards in conducting government audits.

Auditors should use sound professional judgment in

determining the standards that are applicable to the

work to be conducted, and therefore should be

followed. Situations may occur where government

auditors are not able to follow an applicable

standard and are not able to withdraw from the audit.

In these situations, the auditors should disclose in

the scope section of their report, the fact that an

applicable standard was not followed, the reasons

therefor, and the known effect not following the

standard had on the results of the audit. The

auditors\' determination that certain standards do not

apply to the audit should be documented in the

working papers.

28\. Exercising due professional care means using sound

judgment in establishing the scope, selecting the

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Attachment 2

OMB Circular A-128

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Office of Management and Budget Circular A-128 (4/12/85)

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Attachment 3

OMB Circular A-133

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Office of Management and Budget Circular A-133 (3/16/90)

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