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Peer Review Guide > Common Engagement Deficiencies >  Specialized Engagements

Audits Subject to Government Auditing Standards and OMB A-133:

• Required report for internal control and compliance is not issued.
• Failure to include proper A-133 reports.
• Failure to submit (or errors in the preparation of) the Data Collection Form for Reporting on Audits of States, Local Governments, and Non-Profit Organizations.
• Major programs are not properly identified.
• Required compliance testing is not performed or documented.
• Particular funds are not properly accounted for.
• Audit documentation does not adequately describe the nature and results of compliance tests.
• Audit documentation does not include the additional requirements for documentation required by Government Auditing Standards.
• Compliance and control tests, including sampling applications, are not adequately designed to support the reports issued.
• Compliance tests do not incorporate guidance contained in the OMB Circular A-133 Compliance Supplement.
• Management representation letter is not appropriately tailored to include additional representation required by Circular A-133.
• Report on financial statements does not refer to reports on internal control and compliance.
• Government Auditing Standards CPE requirements are not met.
• Work programs not tailored for specific federal awards programs.
• Auditor used inadequate or outdated reference material related to the engagements performed.
• GAAP requirements for the classification, accounting, and reporting for particular funds and for disclosures were not followed.
• The auditor's report was not qualified for GAAP departures.
• The auditor’s consideration of the entity’s internal control was inadequately documented.
• Government Auditing Standards audit documentation requirements were not met.
• The required Government Auditing Standards reports for internal control or compliance were not prepared or were not referred to in the report on the financial statements.
• The auditor failed to document the subsequent events review.
• The management representation letter did not follow the requirements of SAS No. 85, Management Representations, as amended.
• The audit report for financial statements prepared in accordance with GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis—for State and Local Governments, does not indicate the responsibility taken for Required Supplemental Information or Management’s Discussion and Analysis.
• Financial statements prepared in accordance with GASB Statement No. 34 do not include all required financial statements.

Audit Quality Problems Noted With OMB Circular A-133 Audits

Reviews performed by federal Offices of Inspectors General (OIGs) have found a significant number of errors by auditors who failed to correctly determine major programs. These errors are related to the basic requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and may be indicative of other audit deficiencies. The following are some of the more serious problems that the OIGs will be taking action on, including referrals for substandard work:

• Failure to audit as major programs Type A programs not qualifying as low-risk. OMB Circular A-133 requires a Type A program to be audited as a major program unless it qualifies as a low risk program. For a program to be considered low risk, it must, among other criteria, have been audited as a major program in at least one of the two most recent audit periods. The OIGs noted that many errors were made by auditors in applying this criteria. No auditor judgment is permitted in evaluating this historical two-year look back criteria, and the reason why a Type A program was not audited in the prior two audit periods is irrelevant. The OIGs found that errors often occurred when a Type A program was not audited in the first year it became a Type A program (e.g., a new program or a program that had previously been Type B).
  
• Failure to audit Type A programs as major because of errors made in determining the Type A/Type B program dollar threshold. OMB Circular A-133 includes criteria for determining the dollar threshold for Type A programs. Any program that does not meet this criteria is considered a Type B program. No rounding is permitted for this threshold. The OIGs found that some auditors made mathematical computation errors in determining the threshold and some erroneously based calculations on interim rather than final federal awards expended amounts.
  
• Failure to audit all programs included in a cluster of programs. Clusters are defined in Part V of the Compliance Supplement and should be considered as one program in determining major programs. The OIGs noted that there were a significant number of errors made by auditors in identifying programs as part of a program cluster.
  
• Failure to meet the percentage-of-coverage requirement in Circular A-133, section .520(f). The percentage-of-coverage requirement is applied as the last step in the risk-based approach and must always be met. At least one program must always be audited as a major program. The OIGs found significant errors in the reviewed audits' compliance with the percentage-of coverage requirement.

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Common Interest Realty Associations (CIRAs):

• Accounting policy for common property is lacking (necessary even if no capitalized property on the balance sheet).
• Certificates of deposits are often classified as cash, but should generally be classified as investments (since maturities are usually longer than three months).
• Required supplemental information is not presented and the accountant’s report does not disclose the departure.
• Required supplemental information is presented, but the accountant’s report does not indicate that this information has been compiled or reviewed.

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Not-for-Profit Organizations:

• Failure to identify a voluntary health and welfare organization as such an organization.
• Failure to use a functional presentation style for a statement of activities (i.e., SFAS 117) when revenue includes significant public support.
• Failure to present a statement of cash flows.
• Failure to present net assets and changes in net assets into unrestricted, temporarily and permanently restricted asset classes, when restricted or permanently restricted assets are present.
• Incorrect classification of contributions as unrestricted, temporarily restricted or permanently restricted.
• Inadequate audit procedures to support the statement of functional expenses.
• Improper accounting for restricted contributions.
• Classification of investment earnings as an increase in temporarily or permanently restricted net assets when the donor did not specify a restriction on the earnings. 
• Improper accounting for costs of activities that include fund-raising.
• Misclassification of board-designated net assets as restricted net assets.
• Omission in the audit report of a reference to summarized prior year information when details about changes in net assets by net asset categories is not presented for the comparative period.

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Employee Benefit Plans:

• Inadequate or incomplete testing of participant data.
• Inadequate testing of investments, particularly when held by outside entities.
• Failure to properly report on a limited-scope engagement.
• Improper use of limited scope exemption because investments were held by a financial institution did not qualify for such an exemption.
• Inadequate consideration of prohibited transactions.
• Incomplete description of the plan or its provisions.
• Inadequate or missing disclosures related to investments.
• Inadequate or missing disclosures related to participant data.
• Required supplemental schedules do not include all necessary information required by ERISA and DOL.
• Inadequate documentation of  tests performed on participant data.

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Personal Financial Statements:

• Failure to provide estimated tax liability on the difference between fair market value and tax basis of assets and liabilities.
• Failure to report a GAAP departure for assets recorded at cost.
• Inadequate disclosure of the methods used to determine estimated current values.
• Inadequate disclosure of assets and operating activities of investments in closely-held businesses.

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Construction Contractors:

• Failure to adequately describe the accounting policies and methods used for recognizing construction contract revenue and construction in progress.
• Use of improper recognition methods for recording construction in process.
• Improper classification or inadequate disclosure related to billings, costs and estimated earnings for contracts in progress.
• Netting significant billings in excess of earned revenue against costs in excess of billings.
• Use of a net presentation for billings in excess of costs and estimated earnings (a liability) and costs and estimated earnings in excess of billings (an asset) related to uncompleted contracts.

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Other Comprehensive Basis of Accounting (OCBOA) Engagements:

Reference sources:

• AU § 623
• AU § 9623.88-.93
• AR § 9100.41-45
• TIS § 1500.04-.05
• AICPA’s Preparing and Reporting on Cash- and Tax-Basis Financial Statements

Common Reporting Deficiencies:

• Failure to state the basis of accounting, in a report on a compilation with substantially all disclosures omitted, when required to do so.
• Failure to state, when required, that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles.
• Failure to appropriately modify the report to reflect financial statement titles.

Common Presentation Deficiencies: A financial statement presentation deficiency exists when a financial statement element is included that is not appropriate for the basis of accounting under which the financial statements are prepared. Common deficiencies include:

• Inclusion of financial statement elements not appropriate for the basis of accounting.
• Financial statement titles that are not appropriate for the basis of accounting.

Common Disclosures Deficiencies:

• General rule: Disclosure requirements for OCBOA financial statements are not significantly different from those in GAAP financial statements. SSARS No. 7 amended the compilation and review standards by referring to SAS No. 62 (AU § 623.09-.10) when the accountant is evaluating the adequacy of disclosures prepared in conformity with an other comprehensive basis of accounting. The Auditing Standards Board articulated, beginning at section AU 9623.88 of Professional Standards, its interpretation for evaluating the adequacy of disclosure in OCBOA financial statements.
• Inadequate description of the basis of accounting and how it differs from GAAP. An example would be disclosure of nontaxable income and nondeductible expenses related to a financial statement prepared on an income basis of accounting or disclosure of modifications made to the cash basis of accounting.
• Inadequate disclosure related to financial statement elements that are the same or similar to items in GAAP-based financial statements. Examples include disclosure about depreciation, long-term debt or equity, if those items are present.
• Inadequate disclosure about matters not specifically identified on the face of the financial statements. Examples include disclosure of: related party transactions, restrictions on assets or equity, subsequent events and uncertainties.

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Peer Review Guide > Common Engagement Deficiencies >  Specialized Engagements

Updated: April 17, 2005