Recent efforts by the General Accounting Office (GAO), the Office of Management and Budget (OMB), and the AICPA to improve the quality of compliance audits have resulted in a flurry of new requirements and guidance. For example, the AICPA recently issued three exposure drafts of proposed guidance for compliance audits that total over 250 pages. The first exposure draft describes proposed revisions to SAS 63, "Compliance Auditing Applicable to Governmental Entities and Other Recipients of Governmental Financial Assistance." The second exposure draft, "Audits of State and Local Governmental Entities Receiving Federal Financial Assistance," addresses single audits (audits in accordance with OMB Circular A-128), which are the third basic type of engagement covered in SAS 63. The third exposure draft, "Audits of Not-for-Profit Organizations Receiving Federal Awards," provides guidance on the "twin" of Circular A-128, OMB Circular A-133, Audits of Institutions of Higherher Education and Other Nonprofit Institutions.
Revisions to SAS 63
SAS 63 provides guidance on compliance auditing responsibilities in three basic types of engagements:
* Audits in accordance with generally accepted auditing standards;
* Audits in accordance with Government Auditing Standards, commonly reffered to as the "Yellow Book;" and
* Single audits, which are in accordance with OMB Circular A-128, Audits of State and Local Governments.
Even though SAS 63 was only issued a few years ago, recent developments occurred that required changes to the guidance provided in the statement. The exposure draft, issued in April, proposes certain changes to conform the SAS to recently issued federal requirements, such as the revised Compliance Supplement for State and Local Governments and the newly issued Circular A-133. For example, when finalized, revised SAS 63 will include a new section that describes the auditor's responsibilities under Circular A-133. Another proposed change is to add guidance on what the auditor should do if he or she finds out that the entity being audited is subject to additional audit requirements. Other changes were editorial in nature, such as certain minor wording changes in the illustrative audit reports.
Guidance on A-133 Audits
Circular A-128 was issued in 1985 to implement the Single Audit Act and many auditors are already familiar with its requirements. The revised SAS 63 states that the guidance presented in the statement about Circular A-128 audits is "generally applicable to audits in accordance with OMB Circular A-133." However, there are differences between the circulars. The revision points out two significant differences: the definition of a major program and the communication of immaterial findings.
Major Program Definitions. Both circulars distinguish between "major" and "nonmajor" federal programs. What constitutes a major program is based upon the relative size of the entity's federal programs. Any program that doesn't meet the definition of a major program is a nonmajor program. Whether a program is major or nonmajor dictates the type of audit work and reports required.
Under Circular A-128, a major program is defined as the larger of 3% of total federal expenditures or $300,000. Circular A-133 defines a major program as one in which federal expenditures total the larger of 3% of total federal funds expended or $100,000. By changing the fixed dollar amount from $300,000 to $100,000, Circular A-133 lowers the threshold of what qualifies as a major program.
Immaterial Findings. Circular A-133 permits, but doesn't require, immaterial noncompliance to be described in the audit reports. However, immaterial noncompliance, if not included in the audit reports, is required by Circular A-133 to be communicated to management in a separate letter, which is in turn submitted to the appropriate federal agency by the organization.
Report on General Requirements. …