Compliance Standards and Government Entities

By Hull, Rita P. | The National Public Accountant, March 1990 | Go to article overview

Compliance Standards and Government Entities


Hull, Rita P., The National Public Accountant


Compliance Standards and Government Entities

In 1985, when a study conducted by the General Accounting Office revealed a significant number of substandard audits of federal financial assistance programs, the American Institute of Certified Public Accountants established a task force to make recommendations for improving the quality of engagements involving expenditures of taxpayers' money. Two years later this task force issued a report which recommended that the Auditing Standards Board (ASB) issue a statement on auditing standards for government audits. The result of this recommendation was SAS No. 63, "Compliance Auditing Applicable to Governmental Entities and Other Recipients of Governmental Financial Assistance," which was released in April 1989. The purpose of this article is to provide the reader an overview of the requirements of SAS 63.

SAS 63 provides standards for testing and reporting on compliance with federal, state, and local laws and regulations concerning financial assistance received by state and local governments as well as nonprofit organizations in engagements under (1) generally accepted auditing standards, (2) government auditing standards, and (3) the Single Audit Act of 1984. Because the auditor's responsibility varies depending upon the type of engagement, it is important that accountants involved in governmental audits as well as those entities receiving governmental financial assistance have a basic understanding of the following standards:

Generally Accepted

Auditing Standards

The responsibility for designing an audit to provide reasonable assurance that financial statements are not materially misstated due to violations of laws and regulations having a direct, material effect on financial statement amounts was previously addressed in SAS No. 54, "Illegal Acts by Clients," and SAS No. 53, "The Auditor's Responsibility to Detect and Report Errors and Irregularities," and is merely reaffirmed in SAS 63. What is new in SAS 63 is specific guidance on how to audit governmental entities or those entities receiving financial assistance from the government.

Some laws and regulations have a direct, material effect on an entity's financial statements even when the entity is not legally obligated to prepare the statements in accordance with generally accepted accounting principles. For example, if construction workers on a federally financed project are paid an hourly rate less than the minimum established by the Secretary of Labor, this constitutes a violation of the Davis-Bacon Act and directly affects the payroll amounts in the entity's financial statements.

SAS 63 emphasizes the importance of planning the engagement. The auditor is required to obtain a clear understanding of possible effects of laws and regulations on an entity's financial statements. To accomplish this, the auditor should begin by asking management to identify relevant laws and regulations. To assess the reliability of management's identication, SAS 63 suggests certain procedures which include (1) discussing these laws and regulations -- and obtaining written representation that these laws and regulations have been identified--with the entity's chief financial officer, grant administrators, or legal counsel; (2) reviewing relevant portions of both related agreements and minutes of the appropriate legislative body; and (3) making inquiries of the appropriate audit oversight organizations and of the program administrators of the government entities providing the grants.

As part of the planning process, the auditor should study the internal control structure. The auditor should then use this knowledge of the control environment to assess the risk that material misstatements may exist in the financial statements. In doing so, the auditor should keep in mind that controls over government assistance are frequently decentralized; thus, frequent monitoring is necessary if the controls are to be relied upon. …

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