Auditing and Assurance

You are auditing a local government and have detected possible violations of contract provisions that could indirectly affect the financial statements. Do you need to report this possible violation?

As provided by GAO (Yellow Book) chapter 4 on Field Work Standards for Financial Audits, Auditors must provide reasonable assurance and ensure misstatements are detected, leading to unearthing violations of grant agreements and contract provisions. These violations may have a material impact on financial information crucial to the audit objective.

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In case some specific information pulls the auditors’ attention that provides enough evidence of material violations of grants and contracts agreements, the engagement team should undertake audit procedures that are directed specifically to ascertain if such violations occurred. Auditors should then determine how much such actions impact the financial statements and how other aspects of audits will be affected by such breaches of contracts.

It is the auditor’s responsibility to provide a reasonable assurance of ensuring that non-compliance with contracts and grant terms is detected. GAO (2007) states that non-compliance is broader than illegal acts. It is in addition to unlawful acts and violations of grants and contract agreements. According to General Accounting Standards (GAP), auditors have the same responsibility to detect material misstatements that arise from any other non-compliance as they perform for detecting illegal acts of non-compliance.

Your most recent audit of a local governmental agency indicates that the projected revenue stream for the upcoming year will not be sufficient to sustain the agency. What should you do?

According to GAO chapter one, Use and Application of GAGAS, to ascertain projected revenue stream, Performance audits have to be undertaken; these are audits that provide assurances after sufficient evaluation and accumulation of enough evidence against stated criteria, among others, performance audit undertaken to ensure objective analysis to ensure that the management and any other person with governance responsibility use such information towards improving general performance and operations cost, the cost is reduced, and facilitating the decision making by the responsible parties.

According to Auditing Standard No. 12, paragraph 47, it is a requirement for auditors to perform an analytical procedure as part of the risk assessment procedure relating to revenue if auditors gather enough evidence that raises doubt on the ability of the organization to increase enough revenue sufficient to sustain the agency. Auditors may communicate in a GAGAS audit the details of significant uncertainties and concerns regarding the fiscal sustainability of the government agency beyond a year of the financial statement date. These uncertainties arise due to several factors, such as poor budgeting, revenue projection formulas, and poor fiscal policies of the government agency.

Your current year’s audit uncovers a mistake in management’s reporting included in the prior year’s issued financial statements. What should you do?

In case the current year’s audit report uncovers mistakes in management reports on prior year financial statements that were issued, the auditor should make a statement advising the management to make a corrective action and ensure appropriate disclosures are made in their reports; this is when the auditor believes and has sufficient evidence that the below conditions exist;

There exists a misstatement in previously issued reports.
The misstatement is material or could be reasonably material.

According to GAGAS, auditors are responsible for performing the below procedures to ensure the reports are reinstated, and the management mistakes are corrected.

Assesses the opportuneness and suitability of management’s divulgence and activities to decide and redress misquotes in already issued financial statements
report on restated financial statements and
report directly to appropriate officials when the audited entity does not take the necessary steps.

References

GAO (2007) “Government Auditing Standards” Retrieved from: https://www.gao.gov/new.items/d07731g.pdf

Auditing Standard No. 13 (2010) “The Auditor’s Responses to the Risks of Material Misstatement” https://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_13.aspx

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Question

Auditing and Assurance

Based on the information provided in the Government Auditing Standards issued by the GAO (Yellow Book), document your response for each of the following items. The submitted assignment should consist of one paragraph for each question. Be sure to reference the appropriate Yellow Book section you used as the basis for your response, and refer to APA guidelines for proper presentation and citing concerns.

Auditing and Assurance

You are auditing a local government and have detected possible violations of contract provisions that could indirectly affect the financial statements. Do you need to report this possible violation?
Your most recent audit of a local governmental agency indicates that the projected revenue stream for the upcoming year will not be sufficient to sustain the agency. What should you do?
Your current year’s audit uncovers a mistake in management’s reporting included in the prior year’s issued financial statements. What should you do?

GAO Yellow Book: