How will recent changes in auditing standards impact government entities?
By Jeffrey B. Winter, CPA & Ted Williamson, CPA
Finance officers for government entities are keenly aware of the impact that recently issued accounting standards will have on their organizations. Many, however, are not aware that the oversight bodies that establish auditing standards have also been active, and the new pronouncements they have put forth also will have an impact on public entities.
Auditing standards govern the way independent auditors do their jobs, including how they go about performingtest work and what documentation they are required to prepare and retain in their work papers. Several recent revisions to auditing standards also will have consequences for both the auditor and auditee. These include changes to the language contained within the financial statement opinion, the engagement letter and the management representation letter; increased interaction between government auditors and the auditors for component units; and revised regulations regarding the types of non-audit services that might be performed for government entities.
The American Institute of Certified Professional Accountants issued SAS 122, Clarification and Recodification, which is effective for audits of financial statements with December 31, 2012 year-ends. These revised standards, or “clarity” standards, enhance the primary government’s auditor’s responsibilities in instances where a component unit of the primary government is audited by another firm. The primary government’s auditor is to now contact the component unit auditor during the planning phase of the audit to verify the component unit auditor’s independence and competency and to communicate other matters of audit significance.
At the conclusion of the audit, in addition to obtaining the component unit auditor’s report, the primary government’s auditor must ascertain any uncorrected audit adjustments, internal control comments, fraud or other significant matters identified by the component unit auditor. For many governmental entities, it is likely that the primary government’s auditor and the component unit’s auditor have not had this level of interaction in the past. Thus, the personnel of the governmental entity may need to make introductions and facilitate communication between the two. The clarity standards have also resulted in changes to the standard wording of the financial statement opinion, including the addition of section headings within the opinion.
Additionally, the Government Accountability Office also issued a revised version of its Government Auditing Standards relating to auditor independence. In particular, the criteria for determining whether an auditor may provide non-audit services to a client and still be independent for purposes of the financial statement audit has changed. Beyond the listing of non-audit services that are impermissible, the Standards now adopts a new conceptual framework that auditors must apply when determining whether a non-audit service will impair independence. A common example of a non-audit service would be the preparation of a government’s financial statements. When non-audit services are performed governmental entities will be required to acknowledge within the signed engagement letter and representation letter that they have the skills, knowledge and expertise necessary to accept responsibility for the output of any non-audit services.
There will be a variety of changes to the manner in which audits will be conducted for governmental entities with December 31, 2012 fiscal year ends, and these changes will have tangible consequences for the auditee. Thus, if you are responsible for the financial reporting of a governmental entity, you should discuss the implications of these changes with your auditor.
About the authors:
Jeff Winter is the Partner-in-Charge of RubinBrown’s Public Sector Services Group. Contact: [email protected]
Ted Williamson is a manager in RubinBrown’s Public Sector Services Group. Contact [email protected]