Understanding an External Federal Financial Statement Audit
Understanding an External Federal Financial Statement Audit Bryan Nelms, CPA, CISA Objectives Introduction Why is a Financial Statement Required? Audit Objectives Audit Process Audit Outcomes Keys to a Successful Audit
Questions? 2 Introduction Founded in 1985, Kearney & Company, P.C. (Kearney) has a 30-year history of proven success Over 700 staff members One of the 40 largest Certified Public Accounting (CPA) firms in the United States 5th largest CPA firm supporting the Federal Government Kearney has provided financial management support to: Every Cabinet-level Department 24 Chief Financial Officers (CFO) Act agencies More than 30 major independent agencies
Consistently ranked a Best Place to Work 3 What is an Audit? An independent, objective, fact-based, nonpartisan assessment of the stewardship, performance, and cost of government policies, programs, and operations. - U.S. Government Accountability Office (GAO) 4 Organizational Roles Related to Government Auditing
GAO - Issues auditing standards for all governmental audits. GAOs Government Auditing Standards, or Yellow Book provides standards for conducting financial and performance audits AICPA - The American Institute of Certified Public Accountants prescribes the generally accepted auditing standards (GAAS) that form the underlying foundation of the Government Auditing Standards . The AICPAs Statements on Auditing Standards (SAS) OMB - prescribes detailed policies and procedures to be applied in audits of federal executive branch departments, agencies, and their activities in Bulletins and Circulars. OMB also issue audit requirements for state, local and not-for-profit entities receiving federal financial assistance Office of the Inspector General - Develop agency-based audit and investigation policies, standards, and approaches maintaining close
relationships with GAO and the Congress. The IG Act of 1978 provides IGs with the authority to conduct all agency audit activities 5 CFO Act 1990 Chief Financial Officers (CFO) Act Signed into law in 1990, intended to improve the Federal Governments financial management Gives the Office of Management and Budget (OMB) greater authority over Federal financial management Outlines standards for financial performance and disclosure requirements Created the CFO position for 23 Federal departments and agencies
6 FASAB The Federal Accounting Standards Advisory Board (FASAB) is a standards-setting authority, which was created to guide and recommend the appropriate accounting standards for the Federal Government Established in 1990 in response to the passing of the CFO Act Obtained generally accepted accounting principles (GAAP) designation in 1999 by the American Institute of Certified Public Accountants (AICPA) FASAB is the Federal version of Financial Accounting Standards Board (FASB) or Governmental Accounting Standards Board (GASB) 7 OMB Circular A-136
OMB Circular A-136 Guidance and regulations provided by OMB for agency- and Government-wide financial reporting Establishes a central point of reference for all Federal financial reporting guidance for Executive Branch departments, agencies, and entities required to submit audited financial statements, interim financial statements, and Performance and Accountability Reports (PAR) or Agency Financial Report (AFR) under the CFO Act Users of A-136 Agencies Auditors Congress OMB GAO 8
Federal Financial Statements Similar to commercial requirements, the preparation of the annual financial statements for Federal entities is the responsibility of agency management The basic financial statements, as stated in OMB Circular A-136, comprise: Balance Sheet Statement of Net Costs (SNC) Statement of Changes in Net Position (SCNP) Statement of Budgetary Resources (SBR) Statement of Custodial Activity (SCA), when applicable Statement of Social Insurance (SOSI), when applicable Statement of Changes in Social Insurance Amounts (SCSIA), when applicable Related note disclosures 9
Agency Financial Report (AFR) The AFRs submitted by Federal entities summarize the activities of the agency for a specific fiscal year (FY) The AFR includes: All major Federal financial statements and statement footnotes An analysis and summary of the past FY from the agencys leadership All other information deemed necessary for the agencys stakeholders The AFR is similar to the annual report released by most commercial entities. Its goal is to provide information, including financial data, to stakeholders in an easily useable format 10
Agency Financial Report (AFR) Contents Agency Head Message Letter signed by the Agency Head Agency mission, goals, and accomplishments An assessment of financial information Managements Discussion and Analysis
(MD&A) Provides description of results Easy to read Presents summary information Financial Section CFO Letter Auditors Report Financial
Statements and Notes Other Information (OI) Schedule of Spending Management challenges All other pertinent info 11 Auditors Objectives
Express an opinion as to whether the entitys financial statements and related footnotes, taken as a whole, are fairly presented in all material respects and in accordance with U.S. Generally Accepted Accounting Principles (GAAP) Report on the entitys internal control over financial reporting Report on entitys compliance with applicable laws and regulations and other matters 12 Planning Phase
Planning Phase Establish an understanding with the client Understand the entitys Operations Initial financial analysis o Perform preliminary analytics o Establish materiality o Identify significant accounts, applications/systems, laws and regulations Identify risk factors (internal/external) 13 Internal Control Phase Internal Control Phase Identify control objectives Understand information systems
Identify and understand relevant control activities o Walkthroughs o Questionnaires o Interviews Determine the nature, extent, and timing of Control Tests o Risk assessments o Test of Design 14 Testing Phase Testing Phase Design and perform tests and evaluate results o Internal Control Testing Determine the operating effectiveness of the control activity o Substantive Testing (Balance Testing) Tests for misstatements in
accounting records Test of Details Analytics 15 Reporting Phase Reporting Phase - Evaluate misstatements o Notification of Finding and Recommendation (NFR) - Reassess materiality and risk - Independent Auditors Report and opinion types o Unmodified o Modified: Qualified Adverse Disclaimer
- Management Representation Letter and Legal Representation Letter - Management Letter 16 Keys to a Successful Audit Communication and Flexibility Key Financial Processes and Controls are Identified and Documented Give Attention to the Control Environment Fulfill Audit Requests Timely and Accurately Early Identification and Response Lessons Learned
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